Question

For questions below consider the following specific factors model. Vietnam and Thailand produce beans and trucks. Labor is the mobile factor (i.e. labor is used in the production of both goods). The specific factor for beans is land, and the specific factor for trucks is capital. Under the closed-economy equilibrium the relative price of beans with respect to trucks is lower in Thailand than in Vietnam (i.e. under closed economy PbeansThailand/PtrucksThailand < PbeansVietnam/PtrucksVietnam).

For questions (10)~(11) below, assume that as Vietnam goes from closed economy to free trade, the price of trucks remains unchanged, and the price of beans decreases by 10%.

(10). The nominal wage decreases by more than 10% in Vietnam. True or False?

(11). The rental rate of capital increases in Vietnam. True or False?

Answer 1

The specific factor model was put forward by Jacob Viner. As the name of the model suggests, unlike other models specific factor model requires the assumption of one factor of production to be specific for the production of the said product.

ASSUMPTIONS:

1. The two factors of production used are labour and capital. Of these labour is perfectly mobile between the industries while capital is specific to the production of each product.

2. Capital is immobile.

3. Three factors of production are assumed , labour, capital specific to the production of X and capital specific to the production of Y.

In the above question Vietnam and Thailand produce beans and truck. The specific factor to beans is land and specific factor to truck is capital.

Let X=beans Y= truck

Let the price of Beans in Thailand be P_XT

Price of Beans in Vietnam = P_XV

Price of truck in Thailand= P_YT

Price of truck in Vietnam= P_YV

Under closed country equilibrium it has been given that relative price of beans with respect to trucks is lower in Thailand to the relative price of trucks in Vietnam.

P_XT/P_YT<P_XV/P_TV

This means that the production technique is more efficient in Thailand than in Vietnam as the relative price of beans with respect to truck is greater in Vietnam than in Thailand.

With Vietnam opening trade barriers, it will specialise in the production of beans as it has comparative advantage over the Vietnam in the same and it will export trucks from Vietnam when the barriers are opened and there is no change in the price of trucks.

this will eventually increase the opportunity cost of Vietnam as it moves from the production of beans and Truck to the production of only trucks.

11. False. With the prices of trucks remaining unchanged and prices of beans going down by 10%, the relative price of trucks will increase and demand and nominal wage rate of labour will only increase in Vietnam. As the production of trucks increase more labour will move from beans production to truck production. Basically, it will have an ambigous effect on the country's mobile factor.

12. False. With less labour being used in the production of beans in Vietnam with the same amount of land available for the same which is a specific factor to the production of beans, the real return on rental land falls.