3-SpecificFactors

3-SpecificFactors - Polit ical Economy of I nst it ut ions...

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Click to edit Master subtitle style 2/22/10 Lecture 3: Specific Factors Model Krugman and Obstfeld CH 3,4 Magee et al. Political Economy of Institutions: Trade
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2/22/10 Two Factors Ricardian model One factor – labor Hecksher-Ohlin Two factors: labor and land Both mobile
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2/22/10 Specific Factors Only L is mobile T is fixed in F production K is fixed in M Production
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2/22/10 The production function for manufactures is given by QM = QM ( K , LM ) where: QM is the economy’s output of manufactures K is the economy’s capital stock LM is the labor force employed in manufactures The production function for food is given by QF = QF ( T , LF ) where: QF is the economy’s output of food The Specific Factors Model
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2/22/10 The full employment of labor condition requires that the economy-wide supply of labor must equal the labor employed in food plus the labor employed in manufactures: LM + LF = L The Specific Factors Model
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2/22/10 QM = QM ( K , LM ) The Production Function for Manufactures The Specific Factors Model Labor input, LM Output, QM
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2/22/10 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.
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