Lecture 4 : the Specific Factors model
Where do we see the distributive conflict in the specific factors model ?
We see it between the owners of the specific capital in the two sectors.
What is the implication of a rise in wage that is less than proportional to the rise in the price ?
Workers gains in terms of the other good but lose in terms of the good that has a higher price
What is the effect of an equal proportional increase in the prices of both sectors
1. Both labor demand curves ship up in proportion to the rise in prices 2. Wages rate rises in the same proportion 3. Allocation of labor does not change
Why can we not have complete specialization in the specific factors model ?
Because if all labor were to leave one sector, the marginal product of labor of this sector would be very high and it would be profitable to bring back some labor into the sector.
Why are there diminishing marginal product of labor ?
Because the other factors of production are fixed
Why does the opportunity cost equal the relative price
Because we make the assumption of perfect competition which implies that the price is equal to the marginal cost = wage
What is the cause of the comparative advantage ?
Differences in factor endowements
In the specific factor model what creates comparative advantage even with identical technologies for the two countries ?
Differences in factor endowment
How are the owners of the factor that is used in the prod. of the good that has now a higher price affected ?
They are unambiguously better off
What about the purchasing power of the wage ?
It can go either way depending on the relative weights of the two goods in the consumer's basket of consumption
How is the trade price compared to home and foreign ?
It is higher than home but lower than foreign. At home they will consume more of the good that they do not have a comparative advantage in because the other one has a higher price now.
How do we see graphically that home as a comparative advantage ?
Its relative supply is to the right of the relative supply of foreign
Should trade be restricted because of the distributive conflict ?
No because overall gains so possible compensation and there is usually a political bias (lobbies..)
How are the owners of the factor that is NOT used in the production of the good that has now a higher price affected ?
They are unambiguously worse off as the quantity of factors used does not change but the rate of returns of these factors falls
In what land is used ?
Only in the production of agricultural goods
In what is capital used ?
Only in the production of manufacturing goods
How does the small economy equilibrium differ from the autarky equilibrium ?
Opening up to trade induces an increase in the relative price. The relative supply of the world differ from the one of home because of differences in technology or resources.
What side do workers take in the distributive conflict ?
They may side with either, depending on their consumption pattern.
What is the efficiency/equilibrium condition in the specific factors model ?
The equality of values of marginal products
How does trade affect the equilibrium for a 2 country case ?
The equilibrium is in between the autarkic ones.
What does that mean in terms of relative prices that home has a comparative advantage ?
The relative prices for home is lower than for foreign
What is the condition of profit maximization in each sector ?
The wage equals the price times the marginal productivity of labour we call it the value of marginal product of labor
How are workers affected ?
The wage rises but less than in proportion to the rise of the price of the good.
What are the added assumptions for the specific factors model ?
There are 3 factors of production : labour is mobile between sectors and capital and land are immobile and sector specific
What are the effects of trade (rise in relative price in the more productive good) on labor allocation
There is an increase in the labor demande curve and output in the sector where there is the comparative advantage
What would be the implications of two countries with identical technologies in the ricardian model ?
There would be no difference in autarkic relative price so no comparative advantage and no reason for trade.
As there is more labour in one sector the marginal productivity of labour of this sector ...
falls and the marginal productivity of the other sector rises
The marginal rate of transformation equals
the marginal productivity of labour of the sector on the vertical axis over the MPL of the sector on the horizontal axis, which is the relative price
The ratio of the two marginal productivities of labor for each sector gives
the opportunity cost of the sector on the vertical axis to get one more unit of the good in the horizontal axis
The relative supply is an increasing function of...
the relative price
