Towards International Economics — The Specific Factor Model

The theory of Comparative Advantage and the Specific Factor Model

David Ricardo in his model of comparative advantage used only one factor of production, labor, and assumed it to be homogeneous in quality and freely mobile among productive sectors of the economy. The model also suggested that all countries gain from trade and that every individual is better off because of trade across borders since there is no impact on the distribution of income. On the other hand, the specific factors model explains why a country produces a product and also why it imports that particular commodity. The theory of comparative advantage states that countries differ in technology but the specific factor model takes into consideration the difference in factor of production.

One Industry Equilibrium

Let us start by understanding the allocation of labor and for that let’s first take the case of a single firm equilibrium in autarky

Two Industries Case

Now that we understand the allocation of labor in a single industry, let us now take the case of two firms.

Change in prices

What happens to the allocation of both the commodities when the prices of the specific factor commodity change? This can be broken down into two situations

Opening of trade

Assumptions of the model

1- The model assumes a two-country model, producing two commodities (textile and steel) using three factors of production labor (L), Land (T), and Capital (K).

Real wages and distribution of income

The real wages of a worker in a specific industry are the wages divided by the price of the commodity-specific to that industry. So the real wage in terms of textile is w/ PT and the real wage in terms of steel will be w/ PS.

Today’s Recommendations , — Jacob Viner has worked in many areas and he was one of the leading figures of Chicago School of Economics. You can read his works and his contribution to the world of economics here.



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