Specific Factors Model A. Assumptions B. Diminishing returns and the PPF C. The...

Specific Factors Model

A. Assumptions

B. Diminishing returns and the PPF

C. The allocation of labor between sectors

- wage equalization

D. Graphical representation of returns to labor and

returns to the fixed factor

E. Winners and losers from trade

Solutions

Expert Solution

A. The specific factor model assumes that an economy produces two goods using two factors of production, 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. That is, it is completely immobile. The second factor, labor, is assumed to be freely and costlessly mobile between the two industries. Because capital is immobile, one could assume that the capital in the two industries are different, or differentiated, and thus are not substitutable in production. Under this interpretation, it makes sense to imagine that there are really three factors of production: labor, specific capital in industry one, and specific capital in industry two.it deals with two goods and three factors.Examples of specific factors: climates, soil, skilled workers in sericulture and the car industry.

B. An increase in the price of the exportable increases its output.Diminishing Returns: Marginal product of labor (or any other input) declines as more is employed. ? PPF is concave to the origin!

C. If labor productivities are different in the two countries (due to differences in weather, capital or infrastructure), free trade will not equalize wage rates. However, due to diminishing marginal returns, marginal product of labor decreases with employment. Free trade equalizes output prices, but not wages.

E. The clear winners and losers in this model are distinguishable by industry. As in the immobile factor model, the factor specific to the export industry benefits while the factor specific to the import-competing industry loses.

An increase in the price of a good increases the rent of the specific factor in that industry.

(Image copied from third party for reference)

Rahul Sunny answered 1 year ago

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