Question

why it not optimal to specialize in production of only one good in 'Specific Factors Model'?

Answer 1

The specific factor model assumes that an economy produces only two goods using two factors of production available in the economy (capital and labor) , in a perfectly competitive market . One of the two factors of production, typically capital, is assumed to be specific to a particular industry and the other factor typically labor is mobile and required in both industries .

It is assumed that Marginal product of labor (or any other input) declines as more is employed . Hence the PPF is concave to the origin ( rising opportunity cost of production ) .

Unlike in the Ricardian model, labor is shared between the two industries in this model . Thus, the specific factors model explains why a country produces a product and also imports it , so it not optimal to specialize in the production of only one good because then the requirement for input in the other indurstry becomes nil . For instance, the US produces but also imports oil in large amounts from the Middle Eastern countries . The exact output mix that a country should produce depends on the prices .