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Prepared by Iordanis Petsas To Accompany by Paul R. Krugman and Maurice Obstfeld
Prepared by Iordanis Petsas To Accompany by Paul R. Krugman and Maurice Obstfeld
LM + LF = L (3-3)
Production Possibilities
To analyze the economys production possibilities, we
need only to ask how the economys mix of output
changes as labor is shifted from one sector to the other.
Output, QM
QM = QM (K, LM)
Labor input, LM
MPLM
Labor input, LM
LM + LF = L (3-6)
PF X MPLF
(Demand curve
1 for labor in food)
W1
PM X MPLM
(Demand curve for labor in
manufacturing)
Labor used in Labor used
manufactures, LM in food, LF
L1M L1F
Total labor supply, L
Copyright 2003 Pearson Education, Inc. Slide 3-16
The Specific Factors Model
At the production point the production possibility
frontier must be tangent to a line whose slope is
minus the price of manufactures divided by that of
food.
1
Q1F
PP
Two cases:
An equal proportional change in prices
A change in relative prices
PM
increases 2 PF increases
W2 10% 10%
10% PF 1 X MPLF
wage
increase
W1 1
shift in
labor
demand
2
Wage W2
rate 1
rises by W 1 PM 2 X MPLM
less than
7% PM 1 X MPLM
Q1F
1
Q2F
2
PP
1
(PM /PF )1
RD
Relative quantity
(QM /QF )1
of manufactures, QM/QF
Copyright 2003 Pearson Education, Inc. Slide 3-25
The Specific Factors Model
Relative Prices and the Distribution of Income
Suppose that PM increases by 10%. Then, we would
expect the wage to rise by less than 10%, say by 5%.
Owners of capital:
They are definitely better off.
Landowners:
They are definitely worse off.
2
W 2
1
W1 PM X MPLM2
PM X MPLM1
RSWORLD
(PM /PF )W
(PM /PF )J
RDWORLD
Relative quantity of
manufactures, QM/QF
Copyright 2003 Pearson Education, Inc. Slide 3-33
International Trade
in the Specific Factors Model
The Pattern of Trade
In a country that cannot trade, the output of a good
must equal its consumption.
Budget constraint
(slope = -PM/PF)
1
Q1F
Americas QA
F
food
exports D F
A
Japans DJ
F
food
imports QJF
2
1
Q 1
F
Budget constraint
(slope = - PM/PF)
PP
Q1M Consumption of manufactures, DM
Output of manufactures, QM
Copyright 2003 Pearson Education, Inc. Slide 3-39
The Political Economy of Trade:
A Preliminary View
Trade often produces losers as well as winners.
Optimal Trade Policy
The government must somehow weight one persons gain
against another persons loss.
Some groups need special treatment because they are already
relatively poor (e.g., shoe and garment workers in the United
States).
Most economists remain strongly in favor of more or less free
trade.
Any realistic understanding of how trade policy is
determined must look at the actual motivations of policy.
MPLM
Income of
capitalists
w/PM
Wages
MPLM
Labor input, LM
Copyright 2003 Pearson Education, Inc. Slide 3-46
Appendix:
Further Details on Specific Factors
Figure 3A-3: A Rise in PM Benefits the Owners of Capital
Marginal Product of
Labor, MPLM
Increase in
capitalists income
(w/PM)1
(w/PM)2
MPLM
Labor input, LM
Copyright 2003 Pearson Education, Inc. Slide 3-47
Appendix:
Further Details on Specific Factors
Figure 3A-4: A Rise in PM Hurts Landowners
Marginal Product of
Labor, MPLF
Decline in landowners
income
(w/PF)2
(w/PF)1
MPLF
Labor input, LF
Copyright 2003 Pearson Education, Inc. Slide 3-48