• The slope of the PPF measures the opportunity costs of cloth in terms of food: how much food could be produced using the resources now used to produce one unit of cloth • To produce one extra unit of cloth, we need 1/MPLC units of labor (remember: dQC = MPLC dLC) • These units of labor could have instead been employed in food production, producing MPLF / MPLC units of food (remember: dQF = MPLF dLF) • Opportunity cost of producing one extra unit of cloth is -(MPLF / MPLC) units of food
Production possibilities
• For example, the production function for cloth (similar for food):
e.g. a Cobb Douglas production function: QC = KαL1-α
Production possibilities
Production possibilities
• Note, that also: • Output (QC ) = the area under the marginal product curve
dQc = MPLc dLc
Production possibilities
• For the economy as a whole, the total labor employed in cloth and food must equal the total labor supply (people can only work in one of the two sectors at the same time): LC + LF = L • How does the economy’s mix of output change as labor is shifted from one sector to the other? • When labor moves from food to cloth, food production falls while output of cloth rises … but by how much? • Using the production functions in cloth and food, plus the labor market equilibrium, we can derive the production possibilities frontier of the economy
QC = QC (K, LC)
• Similarly, the production function for food gives the quantity of food that can be produced given any input of land and labor: QF = QF (T, LF) • Where:
• In other words: the marginal product of labor, which is the increase in output that corresponds to an extra unit of labor, decreases with the number of people already employed
L2F
1
Q2 C
PP
QC (increasing )
L2C 2
3 AA Cloth production function QC =QC(K, LC)
Labor allocation(AA)
LC (increasing )
Opportunity costs in the Specific Factors Model
• Labor only factor of production in all industries • Labor can costlessly move between industries
Introduction
• The Specific Factors model relaxes these two assumptions of the Ricardian model • As we will see, this has important consequences: Countries as a whole still benefit from trade, but it may hurt significant groups within the country (particularly in the short run)
• Resources cannot move immediately or costlessly from one industry to another • Industries differ in the factors of production they demand
• The Ricardo model assumes these two away:
• QC and QF are the output of cloth and food resp. • K is the capital stock • T is the amount of land available • LC and LF is the amount of labor employed in cloth and food resp.
• e.g. workers with specific skills may lose their job and have a difficult time finding a new job in a different industry
The Specific Factors model
The Specific Factors Model
The production possibilities frontier
QF (increasing ) Food production function Production possibility frontier(PP) Q2 1'
F
QF =QF(T, LF)
2' 3'
LF (increasing)
Production possibilities
• The marginal product of labor in cloth production (again similar in food production)
Note: this is the derivative of the production function w.r.t. labor (L) !
Specific Factors model
• As in Ricardian model, we first focus on what each economy can produce • Subsequently we can ask what will happen if the country opens up to trade • We start by asking: how much of the two goods can a country produce?
Introduction
• If trade is so good for the economy (see Ricardian model), why is there sometimes such opposition? • Two main reasons why international trade has strong effects on the distribution of income within a country:
The Specific Factors model
Maarten Bosker
Outline
• Introduction
• The Specific Factors Model
• International Trade in the Specific Factors Model • Income Distribution and the Gains from Trade • Political Economy of Trade: a first view - Extension: International Labor Mobility
• This depends on their production tbe summarized by a production function
Specific Factors model
• The production function for cloth gives the quantity of cloth that can be produced given any input of capital and labor:
Opportunity costs in the Specific Factors Model
• This is not constant! (as in the Ricardian model, where unit labor requirements