1
Q
Assumptions of specific factor model (part 1)
A
- Perfect competition
- 2 countries
- 2 goods
- 3 production factors
- goods are produced
- Full employment
2
Q
Assumptions of specific factor model (part 2)
A
- Constant supply of Labour in each country
- Wages (W) and rentals (for capital RK and land RT ) are the same across the 2 sectors within a country
- Labour is subject to diminishing returns:
3
Q
Assumptions of specific factor model (part 3)
A
- (Marginal Product of Labour) is decreasing in Manufacturing and Agriculture
- Constant returns to scale for capital and Land
- factor mobility
- production requirements
4
Q
2 countries
A
Home (H) and Foreign (F) marked with *
5
Q
3 factors of production
A
labour (L), Land (T) and Capital (K)
6
Q
2 goods
A
- Agricultural good (QA ) is labour intensively produced
- Manufactured good (QM ) which is capital intensively produced
7
Q
Manufacturing (M) requires
A
-1) Labour (L) and 2) Capital (K)
8
Q
Agriculture (A) requires:
A
1) Labour (L) and 2) Land (T)
9
Q
Factor mobility
A
- Labour (L) is a mobile factor between sectors
- Capital (K) is a factor specific to Manufacturing (not mobile)
- Land (T) is a factor specific to Agriculture (not mobile)
10
Q
Rental on capital (RK )
A
Payments to capital/K = PM x QM - W x LM
11
Q
Rental on land (RT )
A
RT = payment to land/ K = (PM x QM - W X LA) / T
12
Q
Rentals relate to marginal products (of M and A) as follows
A
- RK = PM ·MP K M
- RT = PA ·MP TA.
13
Q
Figure 1 (Graph)
A
14
Q
Figure 2 (Graph)
A
15
Q
Figure 3 (Graph)
A
16
Q
Figure 1 (Strategy)
A
- Migration happens when W > W*
- immigration increase labour supply
- immigrants absorbed by both sectors
- more by agriculture
- for simplicity only P x MPL(a) moves
17
Q
Figure 2 (Strategy)
A
- increase in labour supply drives down MPL(a)
- Wage = Pa x MPL(a)
- Effect on domestic labour force
- Effect on land and capital owners
18
Q
Figure 3 (Strategy)
A
- Analyse graph
- Summarise
Labour Economics
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