Question

Set up the specific factors model with assumptions and conclusions

Answer 1

Specific Factors Model:

Model is used to give the justification for workers migration from rural to urban areas.

There are two sectors in the economy. Labor is mobile factor and other factors are specific which cannot move across industries.

Assumptions:

- Labor is mobile

- Perfectly Competitive Market

- Two specific factors: Capital And Land

- 2*3 economy where 2 goods are produced using 3 factors of production

- Given wages and prices

- PPF shows increasing opportunity costs.

Conclusions:

- Relative to the labor quantity, every country or industry differs in terms of the amount of specific factor used in each industry. Consequently, the return to capital will vary across industry depending upon the price change.

- increase in the good's price leads to rise in the rental value of the specific factor

- Free trade allows the industry or the export sector to gain as it increases the returns to the factor which is specific to the industry

- Price increase for exported good and price decrease in imported good will result in higher real wages to worker and the rental rate will rise in export industry and will fall in the import industry