BA CORE 6 | INT’L TRADE & AGREEMENT
2nd SEMESTER REVIEWER
LESSON 4:OTHER
THEORIES OF
Us and India have been perhaps the largest victims
of China’s dumping. Indian overdependence on
China.
INTERNATIONAL
TRADE
The Specific
4.1 THE Factor
SPECIFIC (SF) model,
FACTOR MODEL originally
advanced by Jacob Viner and later formalized by
Ronald Jones and Paul Samuelson, focuses on the
impact of specific factors like territory (T), labor (L),
and capital (K) on production and trade.
It posits that certain factors are specific to the
production of particular goods, while others, like labor,
are mobile.
In the SF model, production is determined by
specific factors unique to each industry.
For example, food production (X) requires
territory and labor (T + L), while manufacturing (Y)
requires capital and labor (K + L).
The model illustrates how the movement of
labor between sectors affects production levels. The
law of diminishing marginal returns is a key concept
in the SF model, stating that adding more of a specific
factor to production will eventually yield diminishing
increases in output. Total labor employed in both sectors
must equal the total labor supply.
Trade between countries rich in different factors
allows for the optimization of production and income
distribution.
For instance, a country abundant in capital but
lacking in territory may focus on manufacturing, while a
country with ample land resources may specialize in
food production.
Mathematically, the production functions for food
and manufactured products can be expressed as
follows:
For food production: QF=QF(T,L)
where: QF represents the output of food, T represents
territory/terrain (land) L represents labor employed.
For manufactured product production: QMP = QMP
(K, L)
where: QMP represents the output of the manufactured
product, K represents the capital stock, L represents
labor employed.
The total labor employed in producing manufactured
goods and food must equal the total labor supply:
LMP + LF = L
where: LMP represents labor used for the production of
manufactured products, LF represents labor used for the
production of food, L represents total labor supply.
Trading between countries with different factor
endowments can lead to an integrated global economy,
where each country specializes in the production of
4.2 STANDARD MODEL OF TRADE
goods that align with its comparative advantage. This
can result in increased gains from trade and improved
overall welfare.
The standard model of trade by (Paul
Krugman-Maurice Obsfeld model) implies the
existence of the relative global demand curve
resulting from the different preferences for a certain
good and the relative global supply curve resulting
from the different production possibilities.
According to Paul Krugman and Maurice
Obsfeld, the exchange rate, the rapport between the
export prices and the import prices, is determined by
the intersection between the two curves, which is the
equilibrium.
Global demand or total demand refers to the
amount of money, which subjects (consumers) of an
economy plan to spend on goods and services at
different sizes of income or given prices in a given
period.
The economy's equilibrium level is
established as a result of the game of global demand
and global supply in a market economy.
Market equilibrium is the intersection of the
global demand curve and the global supply curve.
The aggregate demand curve shows how many
goods and services consumers can and are willing to
buy at different total price levels, with other conditions
remaining the same.
The supply curve represents the relationship
between price and quantity supplied, with all other
factors affecting supply held constant.
Quantity supplied (supply curve) is a function
of price. A shift in the supply curve happens when a
nonprice determinant of supply changes and the overall
relationship between price and quantity supplied is
affected.
The standard trade model is a general model
that includes the Ricardian model, the Ronald Jones
and Paul Samuelson specific factors model, and the
Heckscher-Ohlin (H-O) model as special cases goods,
food (F), and cloth (C).
Each country's production possibility frontier
(PPF) is a smooth curve.
A country's production possibility frontier (PPF)
determines its relative supply function because it shows
what the country is capable of producing, which should
be maximized.
The national relative supply function
determines the world relative supply function, which
along with world relative demand determines the
equilibrium under international trade.
The slope of an isovalue line (relative price of
cloth to food) equals PC/PF.
The best point to produce is where PPF is
tangent to the isovalue line, a line of slope equal to the
relative prices.
 BA CORE 6 | INT’L TRADE & AGREEMENT
2nd SEMESTER REVIEWER
The standard trade model is built on four key
relationships Generally, a rise in the TOT increases a
country's welfare, while a decline in the TOT reduces its
welfare.

Intuitively, if TOT falls, the price of what a

country produces goes down relative to the price of what
the country consumes. The relationship between TOT,
the total price of production, and a country's welfare is
direct.

4.2 LEONTIEF PARADOX

Heckscher-Ohlin theory (factor proportions

theory), a country rich in a particular resource should be
exporting products that will use that resource and import
products made from resources that the country lacks.

The first serious attempt to test the H-O theory

was made by Russian-bom American economist
Wassily W. Leontief in 1953 when he studied the US
economy closely.

The H-O theory predicts that the US would

export more capital-intensive goods and import
labor-intensive goods. However, Leontief was
surprised to discover that the US was exporting labor-
intensive goods and importing capital-intensive
goods. His analysis became known as the Leontief
paradox.

A paradox is a seemingly absurd or self-

contradictory statement or proposition that when
investigated or explained may prove to be well-founded
or true.

The Leontief paradox showed that in the

international division of labor, the US specialized in
labor-intensive rather than capital-intensive goods.

WASSILY LEONTIEF

Wassily Leontief received a Nobel prize in

1973 for his contribution to the input-output analysis.

Three of his students, Paul Samuelson (specific

factor model), Robert Solow, and Vernon Smith also
received Nobel prizes.