ECON 202 Chapter 4: Chapter 4.1

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Why would countries limit trade if it's mutually beneficial? Because the effect of trade on the
distribution of income within that country
The Ricardian model suggests that all individuals within a country are better off and no effect on the
distribution of income but that's not the case
One: resources cannot move immediately or without cost from one industry to another
Two: industries differ in the factors of production they demand. A shift in the mix of goods in a
country will reduce the demand for some factors of production and increase for others
For these two reasons, trade benefit a nation as a whole but hurts significant groups within the
Two main reasons why international trade has strong effects on distribution of income
In this chapter, we focus on the short
-
run consequences of trade on the income distribution when
factors of production cannot move without cost between sectors
This model like the Ricardian model assumes two goods in an economy and can allocate labour
supply between then.
Unlike the Ricardian model, the specific factors allows for the existence of factors of production
besides labour.
Labour is a
mobile factor
that can move between sectors, other factors are
specific
and only used
in one sector.
In some countries, economists think of factor specificity not as a permanent condition but as
a matter of time.
e.g. specific machines used for specific industries obviously cannot switch but overtime, it
would be possible to redirect investment from these industries and all machines will be
considered capital.
In the model developed in this chapter, we assume two factors of production, land and capital,
that are permanently tied to particular sectors of the economy.
The specific factors model
An economy can produce cloth and food with labour (L), capital (K), and land (T for terrain)
Cloth is produced with L and K
Food is produced with L and T
L is therefore a
mobile factor
and land and capital are
SPECIFIC
only to be used in the production
of one good
Qc is the quantity of cloth, K is the capital stock, Lc is the labour force employed in cloth
Production function
tells the quantity of cloth that can be produced given any input of capital and
labour
For food, the equation is
The labour employed for the economy must equal total L
Assumptions of the model
To see the economy's PPF, we only see how the mix of output changes as labour is shifted from
one sector to the other
Production possibilities
Chapter 4
-
specific factors and income distribution
January 11, 2018
11:48 AM
ECON 231 Page 1
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Document Summary

Chapter 4 - specific factors and income distribution. Because the effect of trade on the distribution of income within that country. The ricardian model suggests that all individuals within a country are better off and no effect on the distribution of income but that"s not the case. Two main reasons why international trade has strong effects on distribution of income. One: resources cannot move immediately or without cost from one industry to another. Two: industries differ in the factors of production they demand. A shift in the mix of goods in a country will reduce the demand for some factors of production and increase for others. For these two reasons, trade benefit a nation as a whole but hurts significant groups within the country in the short run. In this chapter, we focus on the short-run consequences of trade on the income distribution when factors of production cannot move without cost between sectors.

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