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

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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 MPL  a 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 MPL  a 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 MPK  aM 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 MPK  aM 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