Chapter 3: Specific Factors Model 8. How does the specific factors model differ
ID: 1139662 • Letter: C
Question
Chapter 3: Specific Factors Model 8. How does the specific factors model differ from the Ricardian model? (list at least 3 for full points) Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile between sectors. If there is an increase in the amount of capital, holding the prices of agricultural and manufacturing goods constant, what happens to the equilibrium nominal wage rate and labor allocation? What happens to the rental rate of capital? What happens to the rental rate of land? 9. 10. Suppose that land is specific to corn, capital is specific to automobiles, labor is mobile between sectors, and payments are as follows: Automobiles: Sales revenue 300; payments to labor 200; payments to capital 100 Corn: Sales revenue 200; payments to labor 140; payments to land 60 Holding the price of automobiles constant, suppose the increase in the price of corn is 20% and the increase in the wage is 10%. What is the impact of this on the rental of land and the rental of capital?Explanation / Answer
answer:
RICARDIAN MODEL
1.) Ricardian Model assumes that there are two countries, producing two goods, using one factor of production, usually labor i.e it is a 2 good 1 factor model .
2.) Labor is the one factor of production used to produce each of the goods. The factor is homogeneous and can freely move between industries.
3.) Trade not affected by endowments like land or capital
4.) this model focuses on comparative advantage. the country which has a comparative advantage in producing a good will export that good to other country and thus both the country will benefit by producing and exporting the good in which they have comparative advantage.
5.) Free(er) trade generates overall gains( Ricardian Model result). However, in reality, trade generates winners and losers. We do not see this in the Ricardian model.hence, the need arised for a better and more realistic model. The reason we did not see losses in the Ricardian model is that labor is the only factor of production here. The Specific-factors model allows for more factors of production, thus allowing for winners and losers from trade.
SPECIFIC FACTOR MODEL
1.) It is a 2 good , 3 factor model .
2.)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. Thus there are three factors of production: labor, specific capital in industry one, and specific capital in industry two.
3.) Trade is affected a lot by the endowments of land and capital.
4.) The model suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms.
5.) allows for winners and loosers from trade which ricardian model do not allow.
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