Question

1. In a 2-good (food and cloth) specific-factors (Ricardo-Viner) model, find the impact in a small economy of an increase in its overall supply of labour on the following:

a. The equilibrium wage rate

b. The return to cloth-specific capital, KC

c. The return to food-specific capital, KF

d. The output of food and cloth You may assume that relative prices are fixed by trade and so remain unchanged in this exercise.

Answer 1

Richardo-Viner Model:- This model also known as the specific factors model, is used in international trade theory. This model was later developed by Ronald Vones (1971).

In this model, one factor of production is assumed to be “specific” to a particular industry. A specific factor is one that is fix in an industry or is immobile between industries in response to changes in market conditions.

Assumptions:-

1. ‘K’ or capital is used in industry 1 only.

2. ‘L’ or land is used in industry 2 only.

3. Labor is mobile.

4. Perfect competitive market,

5. The economy produces two goods using three factors of production.

Example:- Two goods -> food and cloth.

Impact of an increase in its overall supply of labour:-

1. The equilibrium of wage rate change from E0 to E1.

2. The return to cloth-specific capital, KC increases.

3. The return to Food-specific capital, KF decreases.

4. The output of food ‘d’ decreases and the output of cloth increases.