Chapter 3 Specific Factors and Income Distribution
Chapter 3 ▪ Specific Factors and Income Distribution
Chapter Organization Introduction The Specific Factors Model International Trade in the Specific Factors Model Income Distribution and the gains from Trade The Political Economy of Trade: A Preliminary View Summary Appendix: Further Details on Specific Factors Copyright C 2003 Pearson Education, Inc Slide 3-2
Copyright © 2003 Pearson Education, Inc. Slide 3-2 ▪ Introduction ▪ The Specific Factors Model ▪ International Trade in the Specific Factors Model ▪ Income Distribution and the Gains from Trade ▪ The Political Economy of Trade: A Preliminary View ▪ Summary ▪ Appendix: Further Details on Specific Factors Chapter Organization
Introduction Trade has substantial effects on the income distribution within each trading nation a There are two main reasons why international trade has strong effects on the distribution of income Resources cannot move immediately or costlessly from one industry to another Industries differ in the factors of production they demand a The specific factors model allows trade to affect income distribution Copyright C 2003 Pearson Education, Inc Slide 3-3
Copyright © 2003 Pearson Education, Inc. Slide 3-3 Introduction ▪ Trade has substantial effects on the income distribution within each trading nation. ▪ There are two main reasons why international trade has strong effects on the distribution of income: • Resources cannot move immediately or costlessly from one industry to another. • Industries differ in the factors of production they demand. ▪ The specific factors model allows trade to affect income distribution
The Specific Factors Model Assumptions of the model Assume that we are dealing with one economy that can produce two goods, manufactures and food There are three factors of production; labor(L), capital(K)and land(T for terrain) Manufactures are produced using capital and labor(but not land) Food is produced using land and labor(but not capital) Labor is therefore a mobile factor that can be used in either sector Land and capital are both specific factors that can be used only in the production of one good Perfect Competition prevails in all markets Copyright C 2003 Pearson Education, Inc Slide 3-4
Copyright © 2003 Pearson Education, Inc. Slide 3-4 ▪ Assumptions of the Model • Assume that we are dealing with one economy that can produce two goods, manufactures and food. • There are three factors of production; labor (L), capital (K) and land (T for terrain). • Manufactures are produced using capital and labor (but not land). • Food is produced using land and labor (but not capital). – Labor is therefore a mobile factor that can be used in either sector. – Land and capital are both specific factors that can be used only in the production of one good. • Perfect Competition prevails in all markets. The Specific Factors Model
The Specific Factors Model How much of each good does the economy produce? The economy 's output of manufactures depends on how much capital and labor are used in that sector This relationship is summarized by a production function The production function for good X gives the maximum quantities of good X that a firm can produce with various amounts of factor inputs For instance, the production function for manufactures (food) tells us the quantity of manufactures(food) that can be produced given any input of labor and capital (land) Copyright C 2003 Pearson Education, Inc Slide 3-5
Copyright © 2003 Pearson Education, Inc. Slide 3-5 • How much of each good does the economy produce? – The economy’s output of manufactures depends on how much capital and labor are used in that sector. • This relationship is summarized by a production function. • The production function for good X gives the maximum quantities of good X that a firm can produce with various amounts of factor inputs. – For instance, the production function for manufactures (food) tells us the quantity of manufactures (food) that can be produced given any input of labor and capital (land). The Specific Factors Model