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Specific factors(1) - ECO 364 Topic 3 The Speci c Factors...

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ECO 364 - Topic 3 The Speci c Factors Model Kunal Dasgupta Dasgupta (UofT) Speci c factors model 1 / 26
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Road map 1 Motivation 2 The Model 3 Earnings of mobile factor(s) 4 Earnings of speci c factor(s) 5 Gains from Trade 6 Applications Dasgupta (UofT) Speci c factors model 2 / 26
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Motivation What Ricardo showed A country gains from trade by exporting goods and services in which it has comparative advantage. Labor, which is the only factor of production and is perfectly mobile across sectors, experiences an increase in welfare due to trade. Dasgupta (UofT) Speci c factors model 3 / 26
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Motivation Winners and Losers from Trade Even a country like the U.S., which is committed to the principles of free trade, limits import of textiles, sugar, steel and other commodities. In the real world, there are more than one factor of production, with each factor earning a di erent income. Opposition to trade trade arises because trade changes the income distribution within a country. Dasgupta (UofT) Speci c factors model 4 / 26
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Motivation Winners and Losers from Trade There are two reasons why international trade has a strong impact on the distribution of income within a country: Factors cannot move immediately or costlessy from one sector to another - a short run consequence of trade. A change in the composition of goods produced by a country alters the demand for factors, thereby a ecting their price - a long run consequence of trade. In this topic, we examine the rst reason. Dasgupta (UofT) Speci c factors model 5 / 26
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The Model Basics Three factors - Land, Capital and Labor. Land is speci c to agriculture. Capital is speci c to manufacturing. Labor is mobile across the two sectors. Dasgupta (UofT) Speci c factors model 6 / 26
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The Model Diminishing returns Dasgupta (UofT) Speci c factors model 7 / 26
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The Model Production Possibility Frontier Every allocation of labor across the two sectors corresponds to a combination of agricultural and manufacturing output ( Q A ; Q M ).
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