Chapter 4
Specific Factors and Income Distribution
1 Chapter Organization
The Specific Factors Model
Box: What Is a Specific Factor?
Assumptions of the Model
受力分析图 Production Possibilities
Prices, Wages, and Labor Allocation
Relative Prices and the Distribution of Income
International Trade in the Specific Factors Model
Income Distribution and the Gains from Trade
The Political Economy of Trade: A Preliminary View
Income Distribution and Trade Politics
Ca Study: Trade and Unemployment
International Labor Mobility
Ca Study: Wage Convergence in the Age of Mass Migration
Ca Study: Foreign Workers: The Story of the GCC
爱国的英语Summary
APPENDIX TO CHAPTER 4: Further Details on Specific Factors
Marginal and Total Product
逝去的爱 Relative Prices and the Distribution of Income
2 Chapter Overview
In Chapter 3, the Ricardian model of trade was introduced with labor as the single factor of production exhibiting constant returns to scale. Although informative, this model fails to highlight the obrved opposition to free trade. In this chapter, the Specific Factors model is prented to gain a better understanding of the distributional effects of trade. After trade, the exporting industry expands, while the import competing industry shrinks. As a result, the factor specific to the exporting industry gains from trade, while the factor specific to the import competing industry los from trade. However, the aggregate gains from trade are greater than the loss.
The Specific Factors model assumes that there is one factor that is mobile between ctors (commonly thought of as labor) and production factors that are specific to each ctor. The chapter begins with a simple economy producing two goods: cloth and food. Cloth is produced using labor and its specific factor, capital. Food is produced using labor and its specific factor, land. Given that capital and labor are specific to their respective industries, the mix of goods produced by a country is determined by share of labor employed in each industry. The key difference between the Ricardian model and the Spe
cific Factors model is that in the latter, there are diminishing returns to labor. For example, production of food will increa as labor is added, but given a fixed amount of land, each additional worker will add less and less to food production. 周国平作品
As we assume that labor is perfectly mobile between industries, the wage rate must be identical between industries. With competitive labor markets, the wage must be equal to the price of each good times the marginal product of labor in that ctor. We can u the common wage rate to show that the economy will produce a mix of goods such that the relative price of one good in terms of the other is equal to the relative cost of that good in terms of the other. Thus, an increa in the relative price of one good will cau the economy to shift its production toward that good.
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With international trade, the country will export the good who relative price is below the world relative price. The world relative price may differ from the domestic price before trade for two reasons. First, as in the Ricardian model, countries differ in their production technologies. Second, countries differ in terms of their endowments of the factors specific
to each industry. After trade, the domestic relative price will equal the world relative price. As a result, the relative price in the exporting ctor will ri, and the relative price in the import competing ctor will fall. This will lead to an expansion in the export ctor and a contraction of the import competing ctor.
炸年糕Suppo that after trade, the relative price of cloth increas by 10 percent. As a result, the country will increa production of cloth. This will lead to a less than 10 percent increa in the wage rate becau some workers will move from the food to the cloth industry. The real wage paid to workers in terms of cloth (w/PC) will fall, while the real wage paid in terms of food (w/日照灯塔PF写作心得) will ri. The net welfare effect for labor is ambiguous and depends on relative preferences for cloth and food. Owners of capital will unambiguously gain becau they pay their workers a lower real wage, while owners of land will unambiguously lo as they now face higher costs. Thus, trade benefits the factor specific to the exporting ctor, hurts the factor specific to the import competing ctor, and has ambiguous effects on the mobile factor. Despite the asymmetric effects of trade, the overall effect of trade is a net gain. Stated differently, it is theoretically possib
le to redistribute the gains from trade to tho who were hurt by trade and make everyone better off than they were before trade.
Given the positive net welfare effects, why is there such opposition to free trade? To answer this question, the chapter looks at the political economy of protectionism. The basic intuition is that the though the total gains exceed the loss from trade, the loss from trade tend to be concentrated, while the gains are diffud. Import tariffs on sugar in the United States are ud to illustrate this dynamic. It is estimated that sugar tariffs cost the average person $7 per year. Added up across all people, this is a very large loss from protectionism, but the individual loss are not large enough to induce people to lobby for an end to the tariffs. However, the gains from protectionism are concentrated among a small number of sugar producers, who are able to effectively coordinate and lobby for continued protection. When the loss from trade are concentrated among politically influential groups, import tariffs are likely to be en. Ohio, a key swing state in U.S. presidential elections and a major producer of both steel and tires, is ud as an example to illustrate this point with both Presidents Bush and Obama supporting tariffs on steel an
d tires, respectively.
