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Specific-Factor Model: Understanding the Effects of Globalization on Labor and Capital, Lecture notes of International Trade Union Law

An introduction to the Specific-Factor Model, a trade theory that relaxes the assumptions of the Ricardian model. The model explores the implications of having more than one factor of production and immobile factors across sectors. It discusses the potential winners and losers in international trade and the impact on labor wages and returns to capital and land.

Typology: Lecture notes

2021/2022

Uploaded on 09/27/2022

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Lecture 3a:
Specific-factor Model
Thibault FALLY
C181 International Trade
Spring 2018
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Lecture 3a:

Specific-factor Model

Thibault FALLY

C181 – International Trade

Spring 2018

  • CHAPTER 2: Ricardian model:
    • Only one factor of production: labor
    • Labor is mobile across sectors  Everyone gains from trade The next model relaxes these assumptions:
  • CHAPTER 3: But what if:
    • We have more than one factor of production?
    • What if these factors are NOT mobile across sectors?  Then there may be losers and winners! (unequal effects of globalization)

Setup

  • Two countries: Home and Foreign.
  • Two sectors: Manufacturing and Agriculture
  • Manufacturing uses labor and capital
  • Agriculture uses labor and land.

1 Setup of Factor-Specific Model

Setup

  • Two countries: Home and Foreign.
  • Two sectors: Manufacturing and Agriculture
  • Manufacturing uses labor and capital
  • Agriculture uses labor and land.
  • Diminishing returns for labor in each industry: The marginal product of labor declines if the amount of labor used in the industry increases.

1 Setup of Factor-Specific Model

Production function with Constant Returns to Scale:

  • Manufacturing output: such that:

Y  F ( K , L )

1 Setup of Factor-Specific Model

F (  K , L )   F ( K , L )

Production function with Constant Returns to Scale:

  • Manufacturing output: such that:
  • This implies decreasing returns to scale if we focus on one input: 
  • In each industry:

Y  F ( K , L )

1 Setup of Factor-Specific Model

F ( K , L )  F ( K ,  L ) F (  K , L )   F ( K , L ) F ( K , L )   F ( K , L )

L

MPL

Example of production function:

  • Manufactures:
  • Agriculture: 1 / 3 2 /^3 A A A

Y  a T L

1 / 3 2 /^3 M M M

Y  a K L

1 Setup of Factor-Specific Model

Example of production function:

  • Manufactures:
  • Agriculture:  Marginal product of Labor: 1 / 3 2 /^3 A A A

Y  a T L

  1 / 3 3 2 M M M MPLa K L 1 / 3 2 /^3 M M M

Y  a K L

  • MPL in Manufactures:
  • MPL in Agriculture: ^ ^ 1 / 3 3 2 A A A MPLa T L

1 Setup of Factor-Specific Model

Example of production function:

  • Manufactures:
  • Agriculture:  Marginal product of Capital and Land: 1 / 3 2 /^3 A A A

Y  a T L

1 / 3 2 /^3 M M M

Y  a K L

  • MPK in Manufactures:
  • MPT in Agriculture:   2 / 3 3 1 MPKaM LM K   2 / 3 3 1 MPT a L T A A

1 Setup of Factor-Specific Model

Example of production function:

  • Manufactures:
  • Agriculture:  Marginal product of Capital and Land: 1 / 3 2 /^3 A A A

Y  a T L

1 / 3 2 /^3 M M M

Y  a K L

  • MPK in Manufactures: Decreases with
  • MPT in Agriculture: Decreases with   2 / 3 3 1 MPKaM LM K   2 / 3 3 1 MPT a L T A A

1 Setup of Factor-Specific Model

M K L T LA

A)

C)

D)

B)

How does it look like in this case? Production Possibility Frontier:

If one worker moves from A to B (i.e. from Ag to Manufacturing): Change in Q A

= - MPL

A Change in Q M

= + MPL

M PPF Slope of PPF reflects the opportunity cost of manuf. output:

Slope of PPF reflects the opportunity cost of manuf. output: If one worker moves from A to B: Why does the slope increase? MPL A increases and MPL M decreases PPF

Slope of PPF Why does the slope increase from point A to B?

  • Slope equals MPL A

/MPL

M

  • As LA decreases, MPLA increases
  • As L M increases, MPL M decreases  Hence the ratio increases!

1 Setup of Factor-Specific Model