Question

4. The income distribution effects in the specific factors and H (a) Explain the effect international trade on income distribution predicted by the specific factors model Your explanation should be in most general terms, that is, not in terms of cloth and food or labor and capital but in the terms used by the specific factors model mobile factor and specific factor. (b) In a similar fashion, explain the effect international trade on income distribution predicted by the Heckscher-Ohlin model. (c) Then carefully explain two key differences between the effects on income distribution in two models (d) Which of the two models presents a more difficult case for policy makers regulating international trade and attempting to deal with income distribution effects? Explain

Answer 1

Answer-

(a)Specific factor model (Explanation)

The specific factors model was developed by Paul samuelson and Ronald Jones, it assumes that an economy that produces two goods and that can allocate its labour supply between the two sectors, whereas labour is a mobile factor that can move between sectors, the other factor is assumed to be specific

There are two main reasons for effect of international trade on distribution of income. First as the resource are not able to move immediately or without cost from one industry to other

Second industries differ in factors of production they demand. For both of the reasons international trade is not unambiguously beneficial as it appeared to be, while trade may benefit a nation as a whole but it often hurts significant groups within the country in the short run,but to a lesser extent in the long run

b) The Heckscher-Ohlin Model

This model expands upto Ricardian model largely by introducing a second factor of production. It introduces two goods, two factors and two countries .It represents one of the simplest general equilibrium models that allows for interactions across factor markets, good markets and national markets simultaneously.

Effect: Among the important results are that in this model international trade can improve economic efficiency but that trade will also cause a redistribution of income between different factors of production. In other words, some will gain from trade, some will lose, but the net effects are still likely to be positive.

The H-O theorem states that a country will export that good that is intensive in the country’s abundant factor.

Trade is motivated by price differences. A capital-abundant (labor-abundant) country exports the capital-intensive (labor-intensive) good because that product price is initially higher in the labor-abundant (capital-abundant) country.

c)Differences between Heckscher-Ohlin model and Specific factor model

1.In a Heckscher-Ohlin model, both factors, capital and labor, are assumed to be mobile it is often regard as long run model whereas the specific factors model is a short run model in which capital and land inputs are fixed but labor is a variable input in production.

2. All factor are mobile in Heckscher-Ohlin model,which is not in the case of specific factor model.