Specific Factors Model

Basic Premise
• 2 Countries, “Home” and “Foreign”
• 3 Factors of Production
• Labor-The ‘Mobile’ Factor
• (K)apital
• Land(T)
• Two Sectors-Manufacturing and Agriculture
• K specific to manufacturing and T specific to Agriculture
• Home country has comparative advantage in manufacturing
• Short-run model
• Model helps in identifying “winners” and “losers” from trade
 Total Factor Productivity
Q
Slope=Marginal
Productivity

Factor (T,L or K)
Marginal Productivity
MP

• Falling MPL holds for both

Agri and Mfg sectors
because of fixity of factors
• (L/K) ↑ →MPL ↓ →
• (K/L) ↓ →MPK ↑ MPL
• (L/T) ↑ → MPL ↓ →
• (T/L) ↓ →MPT ↑

L
 Home
 Slope=Qa/ Qm=(Qa/ La)/(Qm/ Lm)
MPLa= Qa/ la
MPLm= Qm/ Lm

Qa At equilibrium
Autarky Wa=Wm →VMPLa=VMPLm
Price Line Pa MPLa=PmMPLm
slope= Oppty cost=MPLa/MPLm=Pm/Pa
Qa c C
Since Home country is assumed to have a
A comparative advantage in mfg it will
specialize in mfg.
Qa p B World Price
Line Also due to trade, Pm/Pa ↑ so price line
now is “world price line”

Q mc Q p Qm Qmp-Qmc=Exports
m
Qac-Qap= Imports
 VMPa VMPm
After trade production
shifts to mfg in home
country

Hence Labour moves to

 VMP= PmMPLm
Mfg from Agriculture
W< PmMPLm W’
the increased dd from
W abroad causes mfg
W/W< output price, Pm , to rise
PmMPLm/ PmMPLm
Pm/Pa for home
W/W<Pm/Pm country↑

(W/Pm)↓ Oa L’ L* Om For simplicity assume

only Pm ↑ and Pa
i.e. real wage in remains same
terms of Pm ↓
Nominal wage rises
• Since Wage goes up and Pa remains unchanged (assumption),
(W/Pa)↑
• Thus households consuming relatively more mfg items are affected as
compared to those consuming agricultural items.
Effect on Capital
• At equilibrium Rental rates on K
Rk=PmMPk(L/K)

Due to trade as more workers enter mfg sector, MPk ↑. Also Pm ↑

Hence Rk ↑
(Rk/Pm) ↑-------(since MPk ↑)
Also (Rk/Pa) ↑---(since Pa is assumed to be unchanged)
Effect on Land
•  RT=PaMPT(L/T)

RT/Pa=MPT

As labour moves out of agriculture, (L/T)↓ hence MPT ↓

(RT/Pa) ↓Also (RT/Pm) ↓

Key Insights
• Due to trade the price of mfg increased
• The factor specific to commodity being exported i.e. K, gained as real
rental rates of K both in terms of Pm and Pa increased
• The factor specific to commodity being imported ,i.e agriculture loses.
In other words, owners of land lose out.
• Effect on the mobile factor (L in this case) is ambiguous