additional

• Specific Factors Model developed by Paul Samuelson and Ronald Jones
• Assumes an economy that produces two goods and can allocate its labor supply between the two sectors
• Allows for the existence of factors of production besides labor
• Imagine an economy that can produce two goods: manufactures and food
• Manufacturers are produced using capital and labor, while food is produced using land and labor
• Production Possibilities
• The more labor employed in the production of manufactures, the larger the output due to diminishing returns
• Assumptions of the Specific Factors Model
• Two commodities X and Y
• Two countries A and B with land, labor, and capital as factors
• Land is specific to the production of X commodity, capital is specific to the production of Y, and labor is used in the production of both X and Y commodities
• Conditions of perfect competition in commodity and factor markets
• Marginal physical product of labor diminishes as the input of labor is increased
• Identical production techniques and consumer preferences in the two countries
• International Trade in the Specific Factors Model
• Trade effects on welfare of countries like Japan and America
• Trade requires differences in relative prices of manufactures due to demand or supply variations
• Resources and Relative Supply
• Countries with more capital and less land tend to produce a high ratio of manufactures to food
• Trade and Relative Prices
• Integrated world economy production is the sum of national outputs of goods
• World's relative supply and price of manufactures lie between national pre-trade prices
• The Political Economy of Trade: Optimal Trade Policy
• Government aims to maximize welfare by making representative individuals as well off as possible
• Trade politics often favor those who want trade limited over those who want it extended
• Heckscher-Ohlin Model
• Developed by Eli Heckscher and Bertil Ohlin, assumes labor and capital used to produce two final goods
• Assumes variation in factor proportions across and within industries
• Ratio of capital to labor in production process is the capital-labor ratio
• Shows how changes in supply and demand in one market affect factors and national markets
• Four main theorems: Heckscher-Ohlin, Stolper-Samuelson, Factor-Price Equalization, Rybczynski
• Aggregate economic efficiency increases with free trade in the Heckscher-Ohlin model
• ·       Manufacturers are produced using capital and labor (but not land).

   

  QM=QM(K,LM)

   

  ·       Food is produced using land and labor (but not capital).

   

  QF = QF(T,LF)
• 1. The table below shows the production possibilities of two countrim, the Philippines and China, of two goods, Coconut and Tupperware, given a fixed amount of resources.CountryCoconutsTupperwarePhilippines441829China53Which country has the absolute advantage in coconuts and which has the absolute advantage in Tupperware?b. Calculate Philippines" opportunity cost of coconuts in terms of Tupperwarec. If the two countries were to specialize and trade with one another, which country would import coconuts?