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SPECIFIC FACTORS AND INCOME DISTRIBUTION - Coggle Diagram
SPECIFIC FACTORS AND INCOME DISTRIBUTION
Intoruduction
The specific factor models
Internation trade in the specific factor models
Income distribution and the gains from trade
Political economy trade
International labor mobility
Summary
The specific factor models
Allows trade to affect income distribution with the assumption model cloth and food
Production possibility
when labor moves from food to cloth, food production falls while output of cloth rises
Prices, wages and labor allocation
for the demand of labor
International trade in the specific factor models
The relative price of cloth prior to trade is determined by the intersection of the economy’s relative supply of cloth and its relative demand.
Free trade relative price of cloth is determined by the intersection of world relative supply of cloth and world relative demand.
Opening up to trade increases the relative price of cloth in an economy whose relative supply of cloth is larger than for the world as a whole.
Gains of trade
Without trade, the economy’s output of a good must equal its consumption.
Income distribution and the gains from trade
International trade shifts the relative price of cloth to food, so factor prices change.
Trade benefits the factor that is specific to the export sector of each country, but hurts the factor that is specific to the import-competing sectors.
Trade has ambiguous effects on mobile factors.
The political economy of trade ( A preliminary view)
Trade often produces losers as well as winners.
Optimal trade policy must weigh one group’s gain against another’s loss.
Most economists strongly favor free trade.
Movements in Factors of Production
Movements in factors of production include
– labor migration
– the transfer of financial assets through international borrowing and lending
– transactions of multinational corporations involving direct ownership of foreign firms
Like movements of goods and services (trade), movements of factors of production are politically sensitive and are often restricted.
International labor mobility
Workers migrate to wherever wages are highest.
Consider movement of labor across countries instead of across sectors.
Suppose two countries produce one non-traded good (food) using two factors of production
land and labor
Imigration in the US economy
The largest increase in recent immigration occurred among workers with the lowest education levels, making less educated workers more abundant.