Question

URGENTLY NEEDED

3. Assume that there are two sectors, manufacturing and farming. There are three productive factors, labor, capital and land. Labor is employed in both sectors and is freely mobile between them. Capital is used only in manufacturing and land only in farming.

(i) Which factors are variable and which are specific?                     

(ii) Suppose that Malaysia has endowment of 200 capital and 2000 land, and Korea has 600 capital and 1200 land. Identify the pattern of trade in both countries. Discuss the effect on wages and the incomes of capital and land owners in both countries.                           

Answer 1

i). A factor which can be employed in any sector is called a variable factor. The variable factor moves across sectors. In this question, because labor can be employed in both the sector and can move across sectors, labor is the variable factor.

A factor which can be employed only in a certain sector only is called the specific sector. Here, capital and land are the specific sectors. Capital is specific to the manufacturing sector and land is specific to farming sector.

ii). Because manufacturing uses capital intensively, manufacturing goods are capital intensive goods.

Similarly land is used intensively in farming, hence, farming is land intensive good.

Also, we are given that Malaysia has endowment of 200 capital and 2000 land whereas Korea has 600 capital and 1200 land. This indicates that Malaysia has relative abundance of land resource while Korea is relatively capital abundant.

According to the Hecksher Ohlin model of international trade, an economy will export the good that uses the factor that the country has abundantly, intensively in the production of the good. In other words, a capital abundant country will export the good that uses capital intensively.

Thus, using the given information, we can say that, Malaysia being a land abundant country will export the land intensive good, that is farming good and will import manufacturing goods. Similarly, Korea being a capital abundant country will export the capital intensive good, that is manufacturing goods and will import farming good.

According to the specific factors model, the factors specific to the import competing sector will lose out due to trade/ will face reduction in income/returns. The specific factor in the export competing sector will gain. The variable factor in the economy will see an increase in wage/income bit the real affect is ambiguous due to the purchasing power of export good falls (because price of export good rises after trade) and purchasing power of import good rises.

Hence, we can say that, in Malaysia, land owners will gain, capital owners will lose income. The labor may be better or worse off depending on their consumption bundle, but will definitely experience wage increase.

Similarly, in Korea, capital owners will be better off/gain, land owners will lose/be worse off and impact on labor is ambiguous despite wage increase (dependent upon their consumption bundle).