Compare and contrast the ricardian trade model with the specific factors model

Other individuals, owners of capital in the import-competing industries, will lose from free trade.

Definitions: Absolute and Comparative Advantage

Florence accumulated so much wealth that it minted the first gold coin Florin in since the Roman times. The Chinese character chih originally meant silk, and includes the character meaning silk. Unlike in the Ricardian model, labor is shared between the two industries.

A specific factor is one which is stuck in an industry or is immobile between industries in response to changes in market conditions. Because capital is immobile, one could assume that the capital in the two industries are different, or differentiated, and thus are not substitutable in production.

Thus, the specific factors model explains why a country produces a product and also imports it. Under this interpretation, it makes sense to imagine that there are really three factors of production: The adjustment will continue until the wage rises to a level that equalizes the value of marginal product in both industries.

Ronald Jones derived a magnification effect for prices in the specific factor model which demonstrated the effects on the real returns to capital and labor in response to changes in output prices. An increase in the price of the exportable increases wage. For instance, the US produces but also imports oil from the Middle East.

The model's name refers to its distinguishing feature; that one factor of production is assumed to be "specific" to a particular industry. In the import-competing industry, lower revenues and higher wages will combine to reduce the return to capital in that sector.

Ricardian Model of International Trade: An Overview

Under this assumption the specific factor model is a simple variant of the Heckscher-Ohlin model. This in turn implies that there is perfect competition in all markets. The value of the marginal product is the increment to revenue that a firm will obtain by adding another unit of labor to its production process.

Notice that the clear winners and losers in this model are distinguishable by industry. Production is assumed to display diminishing returns because the fixed stock of capital means that each additional worker has less capital to work with in production.

Trade which involves exchange of goods and services has been carried in terms of money. One country has comparative advantage over the other because of the differences in relative amounts of each factor. Trade may arise due to differences in endowments, differences in technology, differences in demands or some combination.

These assumptions place the specific factor model squarely between an immobile factor model and the Heckscher-Ohlin model. Some individuals, owners of capital in the export industry, will benefit from free trade. By the first century BC, Roman aristocrats wore silk garments.

Thus the modern theory is an improvement over the classical theory. Cost difference is expressed in terms of money Superiority of H.

Contribution to positive economies Ricardian theory which no doubt explains the reason for internal trade is more concerned with the benefits of trade. The second factor, labor, is assumed to be freely and costlessly mobile between the two industries.

Specific Factors Model

Thus, the slope of the PPF expresses the number of gallons of wine that must be given up hence the minus sign to produce another pound of cheese. Unlike other international trade theories, which propose that trade is beneficial for some, but not favorable for others, the Ricardian model of trade highlights on the fact that trade is beneficial for all the countries involved in international trade.

For classical economists, the welfare aspect of trade is more important. Some factors may be specifically designed in the case of capital or specifically trained in the case of labor for use in a particular production process.

It is found as the product of the price of the good in the market and the marginal product of labor.The basis for trade in the Ricardian model is differences in technology between countries.

Below we define two different ways to describe technology differences. The first method, called absolute advantage, is the way most people understand technology differences.

Unlike Ricardian Model, the model suggested by Heckscher-Ohlin assumes that there are two factors of production, namely, labor and capital. One country has comparative advantage over the other because of the differences in relative amounts of each factor.

H-O vs spec factors 2 From the specific factor model to H-O The specific factor model is often considered as a special case in H-O.

In the short run, some factors are immobile trade. In the long run it is the owners of the relatively scarce factor in either industry that will hurt by trade.

Specific Factors Model

The specific-factors model concludes that if there is an increase in relative price (and an expansion) in one industry, the factor specific to that industry will:  the Chicago model of trade.

  B) the Ricardian model. D) the Heckscher-Ohlin model. .

The Specific Factor Model - Overview

A) specific-factors model B) Ricardian comparative advantage model C) Heckscher-Ohlin model D) comparative advantage model 2. A long-run model of trade basic to the determination of how mobile factors of production affect national welfare and the returns to the factors is.

In contrast to the Ricardian model, this model includes two specific factors. Viner designed the model to explain the migration of workers from the rural to urban areas after the Industrial Revolution in the s.

The Specific Factor Model - Overview

Specific or fixed factors suffer the vicissitudes of urban life much more than the mobile factor, labor.

Compare and contrast the ricardian trade model with the specific factors model
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