4_3150_sf07

# 4_3150_sf07 - The Specific-Factors Model The...

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The Specific-Factors Model Econ 3150 York U 1 The SPECIFIC-FACTORS MODEL 1. Assumptions 2. Autarky Equilibrium 3. Trade: Increase in P x 4. Increase in Endowment of Specific Factor 5. Increase in Endowment of Mobile Factor

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The Specific-Factors Model Econ 3150 York U 2 The H-O model assumes that factors are perfectly mobile between the sectors. It may be true in the long run, but in the short run it is not a reasonable assumption. E.g. capital used in textile industry is different from capital used in auto industry. Workers need time to get some relevant education before they can move to a different sector. The Specific-Factors model assumes that 1 factor is fixed or immobile in the short run. E.g. capital (or skilled labour as skill acquisition requires time) is fixed in its sectoral usage for some time. Unskilled labour is perfectly mobile between sectors. The Specific-Factors model is similar to the H-O model except it assumes that 1 factor is fixed in the short run. Why we are interested in making this assumption: In the long run all factors are perfectly mobile => the H-O model gives long-run predictions of effects of trade. The Specific-Factors model gives short-run predictions. We already know who gains and who loses in the long run. But we want to weigh long-run effects against the short-run gains and losses.
The Specific-Factors Model Econ 3150 York U 3 1. Assumptions 1. 2 commodities X,Y 2. 2 factors K,L L- homogeneous factor, can be used by X or Y sector, gets wage w K- is sector specific, i.e. fixed in each industry: y x S R , , get rents r and s y x y x L L L S R + = 3. H, F have CRS production function 4. H, F have homogeneous identical preferences Alternative interpretation of the model: 2 goods X and Y, 3 factors y x S R L , , 2. Autarky Equilibrium Factor markets are perfectly competitive in equilibrium firms pay each factor value of its marginal product &

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The Specific-Factors Model Econ 3150 York U 4 Industry X: r MPR p w MPL p x x x x = = ; Industry Y: s MPS p w MPL p y y y y = = ; Demands for labour in each sector are y y x x MPL p MPL p , . w – wage rate is the same in X, Y sectors (otherwise labour would flow into a sector with a higher wage). Returns to capital r, s can differ in the short run. Using y y x x MPL p MPL p w = = We can determine equilibrium wages and employment. P x , P y , y x S R L , , are all given: ( ) ( ) x y y x x x L L S MPL p L R MPL p - = , ,
Econ 3150 York U 5 => can solve for labour demand in each sector L x and L y and wage w . x

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4_3150_sf07 - The Specific-Factors Model The...

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