Specific Factor Flashcards
(24 cards)
implied that international trade
makes every individual better off.
The Ricardian model
Two main reasons why international trade has strong
effects on the distribution of income within a country:
- Resources cannot move immediately or costlessly from
one industry to another. - Industries differ in the factors of production they use
allows trade to affect
income distribution.
specific factors model
Assumptions of the Specific factor model:
Two goods, cloth and food.
Three factors of production: labor (L), capital (K) and land (T
for terrain).
Perfect competition prevails in all markets.
Cloth produced using capital and labor (but not land).
Food produced using land and labor (but not capital).
Labor is a mobile factor that can move between sectors.
Land and capital are both specific factors used only in the
production of one good
In specific factor model, there are two specific factors ________ which are permanently tied to particular sectors
(land and
capital)
The production function is
upward-sloping and what shape
concave
The shape of the production
function reflects the law of
diminishing marginal
returns.
Adding one worker to the production process (without increasing the amount of
capital) means that each worker has less capital to work with
law of
diminishing marginal
returns
Because of the ________, each additional unit
of labor adds less output
than the last.
law of
diminishing marginal
returns
The marginal product of labor therefore _________ as more
labor is used.
declines\
Why is the production possibilities frontier curved?
- Diminishing returns to labor in each sector cause the opportunity
cost to rise when an economy produces more of a good - Opportunity cost of cloth in terms of food is the slope of the
production possibilities frontier – the slope becomes steeper as an
economy produces more cloth.
T or F
In each sector, employers will minimize profits by demanding labor
up to the point where the value produced by an additional hour
equals the marginal cost of employing a worker for that hour.
F_maximize
T or F
The two sectors must pay the same wage because labor can
move between sectors.
T
If the wage were higher in the
cloth sector, workers would
move from making cloth to
making food until the wages
become equal
F_ move from making food to
making cloth
T or F
At the production point,
the production
possibility frontier must
be tangent to a line
whose slope is minus
the price of cloth
divided by that of food.
T
What happens to the allocation of labor and
the distribution of income when the prices of
food and cloth change?
Two cases:
1. An equal proportional change in prices
2. A change in relative prices
When both prices
change in the same
proportion, ______
changes occur.
no real
The wage rate (w) rises
in the same proportion
as the prices, so real
wages (i.e., the ratios
of the wage rate to the
prices of goods) are
________
unaffected
What will happen to the real incomes of
capital owners and
landowners when an equal proportional change in prices happen
The real incomes of
capital owners and
landowners also remain
the same
When only PC
rises, labor shifts from the
food sector to the
cloth sector what will happen to the output of cloth and food
Cloth output Rises
Food output falls
T or F
The wage rate (w)
does not rise as much
as PC
T
What is the economic effect of this price increase on the
incomes of the following three groups?– Workers, owners of capital, and owners of land
Owners of capital are definitely better off.
* Landowners are definitely worse off.
* Workers: cannot say whether workers are better or worse
off:
Trade benefits the factor that is specific to the ______ of each country, but hurts the factor that is specific
to the ______
export sector, import-competing sectors.
Trade has ambiguous effects on
mobile factors
