Chapter 4: Specific factors and Income Distribution

studied byStudied by 77 people
5.0(2)
Get a hint
Hint

The specific factors model

1 / 17

flashcard set

Earn XP

Description and Tags

18 Terms

1

The specific factors model

Assumes an economy that produces 2 goods and where labour (the mobile factor) can move freely between these two industries. Some resources are fixed (specific) and can only be used for production in ONE of the industries.

New cards
2

Production functions

The book example uses 3 factors, Capital (K), Labour (L), and Land (T) One good (cloth, C) only uses labour, but not land and food use land, but not capital.

The production function (for cloth) is given by: Q_c=Q_c(K,L_c) The production function (for food) is given by: Q_f=Q_f(T,L_c)

Where Lc+Lf=L

<p>The book example uses 3 factors, Capital (K), Labour (L), and Land (T) One good (cloth, C) only uses labour, but not land and food use land, but not capital.</p><p>The production function (for cloth) is given by: Q_c=Q_c(K,L_c) The production function (for food) is given by: Q_f=Q_f(T,L_c)</p><p>Where Lc+Lf=L</p>
New cards
3

Diminishing returns to scale

If only one resource is increased (let's say L) without increasing the other (K), the output per unit of input will increase less and less as more workers have less to work with

<p>If only one resource is increased (let&apos;s say L) without increasing the other (K), the output per unit of input will increase less and less as more workers have less to work with</p>
New cards
4

Marginal Product of Labour (MPL)

the output generated by increasing the input of labour by one

New cards
5

Slope of PP curve

given by =-MPLf/MPLc (when it is food in terms of cloth) the opportunity cost of marginal labour productivity

New cards
6

wage rate of labour

given by MPL_i*P_i=w_i employers will hire up until this point if the price decreases, more workers hired

New cards
7

Allocation of labour

knowt flashcard image
New cards
8

Equilibrium

Where the the slope of the curve equals =-Pi/px

<p>Where the the slope of the curve equals =-Pi/px</p>
New cards
9

Equal-proportional increases in prices

wages increase, but labour allocation stays the same

<p>wages increase, but labour allocation stays the same</p>
New cards
10

Changes in relative prices

Labour moves from one sector to another

<p>Labour moves from one sector to another</p>
New cards
11

The relationship between output and relative prices

knowt flashcard image
New cards
12

Determination of relative prices

knowt flashcard image
New cards
13

Who gains from trade in the specific factors model?

The factor specific to the sector whose relative price increases is definitely better off.

The factor specific to the sector whose relative price decreases is definitely worse off.

The change in welfare for the mobile factor is ambiguous.

New cards
14

Trade and relative prices

For trade to take place:

Free trade P ≠ autarky P

in free trade, Home will export the good where the relative prices have increased and will export the good where the relative price have decreased

<p>For trade to take place:</p><p>Free trade P ≠ autarky P</p><p>in free trade, Home will export the good where the relative prices have increased and will export the good where the relative price have decreased</p>
New cards
15

Aggregate gains from trade

In absence of trade, the output, Q, must equal the consumption (demand), Di = the demand for a good.

Qi=Di

Free trade allows different consumption patterns. But a country CAN NOT spend more than they earn. The value of production must be equal

Pi * Di + Px * Dx = Pi * Qi + Px * Qx

can be rearranged to show the imports of "i" in an open economy when demand exceeds production. The budget constraint equation is rewritten from the equation above:

Di - Qi = (Px/Pi) x (Qx/Dx)

A country must export more of the other good to afford the imports:

(Px/Pi) x (Qx/Di)

shows the relative price of the export good and the amount that exceeds own consumption

<p>In absence of trade, the output, Q, must equal the consumption (demand), Di = the demand for a good.</p><p>Qi=Di</p><p>Free trade allows different consumption patterns. But a country CAN NOT spend more than they earn. The value of production must be equal</p><p>Pi * Di + Px * Dx = Pi * Qi + Px * Qx</p><p>can be rearranged to show the imports of &quot;i&quot; in an open economy when demand exceeds production. The budget constraint equation is rewritten from the equation above:</p><p>Di - Qi = (Px/Pi) x (Qx/Dx)</p><p>A country must export more of the other good to afford the imports:</p><p>(Px/Pi) x (Qx/Di)</p><p>shows the relative price of the export good and the amount that exceeds own consumption</p>
New cards
16

Budget constraint slope

=-(Px/Pi)

New cards
17

Losers from trade

The immobile factor owners in the (now) import-industry

Real world: Low-skilled workers in developed countries have a hard time transitioning into high-skilled labour that is demanded in their export industry. The people who are losing from trade, will protest it >< winners are less vocal

→ Solution? safety net for low-skilled workers

New cards
18

International labour mobility

knowt flashcard image
New cards

Explore top notes

note Note
studied byStudied by 3 people
Updated ... ago
5.0 Stars(1)
note Note
studied byStudied by 10 people
Updated ... ago
5.0 Stars(1)
note Note
studied byStudied by 13 people
Updated ... ago
5.0 Stars(1)
note Note
studied byStudied by 10 people
Updated ... ago
5.0 Stars(1)
note Note
studied byStudied by 48 people
Updated ... ago
5.0 Stars(4)
note Note
studied byStudied by 3 people
Updated ... ago
4.0 Stars(1)
note Note
studied byStudied by 30 people
Updated ... ago
5.0 Stars(1)
note Note
studied byStudied by 44 people
Updated ... ago
5.0 Stars(1)

Explore top flashcards

flashcards Flashcard85 terms
studied byStudied by 9 people
Updated ... ago
5.0 Stars(1)
flashcards Flashcard61 terms
studied byStudied by 467 people
Updated ... ago
4.4 Stars(9)
flashcards Flashcard20 terms
studied byStudied by 5 people
Updated ... ago
5.0 Stars(1)
flashcards Flashcard86 terms
studied byStudied by 12 people
Updated ... ago
5.0 Stars(1)
flashcards Flashcard60 terms
studied byStudied by 20 people
Updated ... ago
5.0 Stars(1)
flashcards Flashcard85 terms
studied byStudied by 45 people
Updated ... ago
5.0 Stars(1)
flashcards Flashcard69 terms
studied byStudied by 18 people
Updated ... ago
5.0 Stars(1)
flashcards Flashcard32 terms
studied byStudied by 218 people
Updated ... ago
5.0 Stars(2)