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Chapter 4: Specific factors and Income Distribution

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Economics

University/Undergrad

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The book example uses 3 factors, Capital (K), Labour (L), and Land (T)
One good (cloth, C) only uses labour, but not land and food use land, but not capital.

The production function (for cloth) is given by: Q_c=Q_c(K,L_c)
The production function (for food) is given by: Q_f=Q_f(T,L_c)

Where Lc+Lf=L

If only one resource is increased (let's say L) without increasing the other (K), the output per unit of input will increase less and less as more workers have less to work with

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Where the the slope of the curve equals =-Pi/px

wages increase, but labour allocation stays the same

Labour moves from one sector to another

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For trade to take place:

Free trade P ≠ autarky P

in free trade, Home will export the good where the relative prices have increased and will export the good where the relative price have decreased

In absence of trade, the output, Q, must equal the consumption (demand), Di = the demand for a good.

Qi=Di

Free trade allows different consumption patterns. But a country CAN NOT spend more than they earn. The value of production must be equal

Pi * Di + Px * Dx = Pi * Qi + Px * Qx

can be rearranged to show the imports of "i" in an open economy when demand exceeds production. The budget constraint equation is rewritten from the equation above:

Di - Qi = (Px/Pi) x (Qx/Dx)

A country must export more of the other good to afford the imports:

(Px/Pi) x (Qx/Di)

shows the relative price of the export good and the amount that exceeds own consumption

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