Specific factors model

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Specific factors model

Содержание

2. Chapter Organization Introduction The Specific Factors Model International Trade in the Specific Factors Model Income Distribution
3. Introduction If trade is so good for the economy, why is there such opposition? Two main
4. The Specific Factors Model The specific factors model allows trade to affect income distribution. Assumptions of
5. The Specific Factors Model (cont.) Cloth produced using capital and labor (but not land). Food produced
6. The Specific Factors Model (cont.) How much of each good does the economy produce? The production
7. The Specific Factors Model (cont.) The production function for food gives the quantity of food that
8. Production Possibilities How does the economy’s mix of output change as labor is shifted from one
9. Fig. 4-1: The Production Function for Cloth
10. Production Possibilities (cont.) The shape of the production function reflects the law of diminishing marginal returns.
11. Fig. 4-2: The Marginal Product of Labor
12. Production Possibilities (cont.) For the economy as a whole, the total labor employed in cloth and
13. Production Possibilities (cont.) Use a four-quadrant diagram to construct production possibilities frontier in Figure 4-3. Lower
14. Fig. 4-3: The Production Possibility Frontier in the Specific Factors Model
15. Production Possibilities (cont.) Why is the production possibilities frontier curved? Diminishing returns to labor in each
16. Production Possibilities (cont.) Opportunity cost of producing one more yard of cloth is MPLF/MPLC pounds of
17. Prices, Wages, and Labor Allocation How much labor is employed in each sector? Need to look
18. Prices, Wages, and Labor Allocation (cont.) The demand curve for labor in the cloth sector: MPLC
19. Prices, Wages, and Labor Allocation (cont.) Figure 4-4 represents labor demand in the two sectors. The
20. Prices, Wages, and Labor Allocation (cont.) The two sectors must pay the same wage because labor
21. Fig. 4-4: The Allocation of Labor
22. Prices, Wages, and Labor Allocation (cont.) At the production point, the production possibility frontier must be
23. Fig. 4-5: Production in the Specific Factors Model
24. Prices, Wages, and Labor Allocation (cont.) What happens to the allocation of labor and the distribution
25. Prices, Wages, and Labor Allocation (cont.) When both prices change in the same proportion, no real
26. Fig. 4-6: An Equal-Proportional Increase in the Prices of Cloth and Food
27. Prices, Wages, and Labor Allocation (cont.) When only PC rises, labor shifts from the food sector
28. Fig. 4-7: A Rise in the Price of Cloth
29. Fig. 4-8: The Response of Output to a Change in the Relative Price of Cloth
30. Fig. 4-9: Determination of Relative Prices
31. Prices, Wages, and Labor Allocation (cont.) Relative Prices and the Distribution of Income Suppose that PC
32. Prices, Wages, and Labor Allocation (cont.) Owners of capital are definitely better off. Landowners are definitely
33. Trade and Relative Prices The relative price of cloth prior to trade is determined by the
34. Fig. 4-10: Trade and Relative Prices
35. International Trade in the Specific Factors Model (cont.) Gains from trade Without trade, the economy’s output
36. International Trade in the Specific Factors Model (cont.) The economy as a whole gains from trade.
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Chapter Organization
Introduction
The Specific Factors Model
International Trade in the Specific Factors Model
Income

Distribution and the Gains from Trade
Political Economy of Trade: A Preliminary View
International Labor Mobility
Summary

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Introduction
If trade is so good for the economy, why is there

such opposition?
Two main reasons why international trade has strong effects on the distribution of income within a country:
Resources cannot move immediately or costlessly from one industry to another.
Industries differ in the factors of production they demand.

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The Specific Factors Model
The specific factors model allows trade to affect

income distribution.
Assumptions of the model:
Two goods, cloth and food.
Three factors of production: labor (L), capital (K) and land (T for terrain).
Perfect competition prevails in all markets.

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The Specific Factors Model (cont.)
Cloth produced using capital and labor (but

not land).
Food produced using land and labor (but not capital).
Labor is a mobile factor that can move between sectors.
Land and capital are both specific factors used only in the production of one good.

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The Specific Factors Model (cont.)
How much of each good does the

economy produce?
The production function for cloth gives the quantity of cloth that can be produced given any input of capital and labor:
QC = QC (K, LC) (4-1)
QC is the output of cloth
K is the capital stock
LC is the labor force employed in cloth

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The Specific Factors Model (cont.)
The production function for food gives the

quantity of food that can be produced given any input of land and labor:
QF = QF (T, LF) (4-2)
QF is the output of food
T is the supply of land
LF is the labor force employed in food

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Production Possibilities
How does the economy’s mix of output change as labor

is shifted from one sector to the other?
When labor moves from food to cloth, food production falls while output of cloth rises.
Figure 4-1 illustrates the production function for cloth.

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Fig. 4-1: The Production Function for Cloth

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Production Possibilities (cont.)
The shape of the production function reflects the law

of diminishing marginal returns.
Adding one worker to the production process (without increasing the amount of capital) means that each worker has less capital to work with.
Therefore, each additional unit of labor adds less output than the last.
Figure 4-2 shows the marginal product of labor, which is the increase in output that corresponds to an extra unit of labor.

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Fig. 4-2: The Marginal Product of Labor

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Production Possibilities (cont.)
For the economy as a whole, the total labor

employed in cloth and food must equal the total labor supply:
LC + LF = L (4-3)
Use these equations to derive the production possibilities frontier of the economy.

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Production Possibilities (cont.)
Use a four-quadrant diagram to construct production possibilities frontier

in Figure 4-3.
Lower left quadrant indicates the allocation of labor.
Lower right quadrant shows the production function for cloth from Figure 4-1.
Upper left quadrant shows the corresponding production function for food.
Upper right quadrant indicates the combinations of cloth and food that can be produced.

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Fig. 4-3: The Production Possibility Frontier in the Specific Factors Model

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Production Possibilities (cont.)
Why is the production possibilities frontier curved?
Diminishing returns to

labor in each sector cause the opportunity cost to rise when an economy produces more of a good.
Opportunity cost of cloth in terms of food is the slope of the production possibilities frontier – the slope becomes steeper as an economy produces more cloth.

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Production Possibilities (cont.)
Opportunity cost of producing one more yard of cloth

is MPLF/MPLC pounds of food.
To produce one more yard of cloth, you need 1/MPLC hours of labor.
To free up one hour of labor, you must reduce output of food by MPLF pounds.
To produce less food and more cloth, employ less in food and more in cloth.
The marginal product of labor in food rises and the marginal product of labor in cloth falls, so MPLF/MPLC rises.

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Prices, Wages, and Labor Allocation
How much labor is employed in each

sector?
Need to look at supply and demand in the labor market.
Demand for labor:
In each sector, employers will maximize profits by demanding labor up to the point where the value produced by an additional hour equals the marginal cost of employing a worker for that hour.

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Prices, Wages, and Labor Allocation (cont.)
The demand curve for labor in

the cloth sector:
MPLC x PC = w (4-4)
The wage equals the value of the marginal product of labor in manufacturing.
The demand curve for labor in the food sector:
MPLF x PF = w (4-5)
The wage equals the value of the marginal product of labor in food.

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Prices, Wages, and Labor Allocation (cont.)
Figure 4-4 represents labor demand in

the two sectors.
The demand for labor in the cloth sector is MPLC from Figure 4-2 multiplied by PC.
The demand for labor in the food sector is measured from the right.
The horizontal axis represents the total labor supply L.

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Prices, Wages, and Labor Allocation (cont.)
The two sectors must pay the

same wage because labor can move between sectors.
If the wage were higher in the cloth sector, workers would move from making food to making cloth until the wages become equal.
Or if the wage were higher in the food sector, workers would move in the other direction.
Where the labor demand curves intersect gives the equilibrium wage and allocation of labor between the two sectors.

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Fig. 4-4: The Allocation of Labor

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Prices, Wages, and Labor Allocation (cont.)
At the production point, the production

possibility frontier must be tangent to a line whose slope is minus the price of cloth divided by that of food.
Relationship between relative prices and output:
-MPLF/MPLC = -PC/PF (4-6)

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Fig. 4-5: Production in the Specific Factors Model

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Prices, Wages, and Labor Allocation (cont.)
What happens to the allocation of

labor and the distribution of income when the prices of food and cloth change?
Two cases:
An equal proportional change in prices
A change in relative prices

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Prices, Wages, and Labor Allocation (cont.)
When both prices change in the

same proportion, no real changes occur.
The wage rate (w) rises in the same proportion as the prices, so real wages (i.e., the ratios of the wage rate to the prices of goods) are unaffected.
The real incomes of capital owners and landowners also remain the same.

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Fig. 4-6: An Equal-Proportional Increase in the Prices of Cloth and

Food

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Prices, Wages, and Labor Allocation (cont.)
When only PC rises, labor shifts

from the food sector to the cloth sector and the output of cloth rises while that of food falls.
The wage rate (w) does not rise as much as PC since cloth employment increases and thus the marginal product of labor in that sector falls.

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Fig. 4-7: A Rise in the Price of Cloth

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Fig. 4-8: The Response of Output to a Change in the

Relative Price of Cloth

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Fig. 4-9: Determination of Relative Prices

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Prices, Wages, and Labor Allocation (cont.)
Relative Prices and the Distribution of

Income
Suppose that PC increases by 10%. Then, the wage would rise by less than 10%.
What is the economic effect of this price increase on the incomes of the following three groups?
Workers, owners of capital, and owners of land

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Prices, Wages, and Labor Allocation (cont.)
Owners of capital are definitely better

off.
Landowners are definitely worse off.
Workers: cannot say whether workers are better or worse off:
Depends on the relative importance of cloth and food in workers’ consumption.

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Trade and Relative Prices
The relative price of cloth prior to trade

is determined by the intersection of the economy’s relative supply of cloth and its relative demand.
Free trade relative price of cloth is determined by the intersection of world relative supply of cloth and world relative demand.
Opening up to trade increases the relative price of cloth in an economy whose relative supply of cloth is larger than for the world as a whole.

International Trade in the Specific Factors Model

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Fig. 4-10: Trade and Relative Prices

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International Trade in the Specific Factors Model (cont.)
Gains from trade
Without trade,

the economy’s output of a good must equal its consumption.
International trade allows the mix of cloth and food consumed to differ from the mix produced.
The country cannot spend more than it earns:
PC x DC + PF x DF = PC x QC +PF x QF

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International Trade in the Specific Factors Model (cont.)
The economy as a

whole gains from trade.
It imports an amount of food equal to the relative price of cloth times the amount of cloth exported:
DF - QF = (PC / PF) x (QC – DC )
It is able to afford amounts of cloth and food that the country is not able to produce itself.
The budget constraint with trade lies above the production possibilities frontier in Figure 4-11.

Specific factors model

Содержание

Chapter OrganizationIntroductionThe Specific Factors ModelInternational Trade in the Specific Factors ModelIncome

IntroductionIf trade is so good for the economy, why is there

The Specific Factors ModelThe specific factors model allows trade to affect

The Specific Factors Model (cont.)Cloth produced using capital and labor (but

The Specific Factors Model (cont.)How much of each good does the

The Specific Factors Model (cont.)The production function for food gives the

Production PossibilitiesHow does the economy’s mix of output change as labor

Fig. 4-1: The Production Function for Cloth

Production Possibilities (cont.)The shape of the production function reflects the law

Fig. 4-2: The Marginal Product of Labor

Production Possibilities (cont.)For the economy as a whole, the total labor

Production Possibilities (cont.)Use a four-quadrant diagram to construct production possibilities frontier

Fig. 4-3: The Production Possibility Frontier in the Specific Factors Model

Production Possibilities (cont.)Why is the production possibilities frontier curved?Diminishing returns to

Production Possibilities (cont.)Opportunity cost of producing one more yard of cloth

Prices, Wages, and Labor AllocationHow much labor is employed in each

Prices, Wages, and Labor Allocation (cont.)The demand curve for labor in

Prices, Wages, and Labor Allocation (cont.)Figure 4-4 represents labor demand in

Prices, Wages, and Labor Allocation (cont.)The two sectors must pay the