For our discussion this week, let’s talk through the intuition on how the Specific Factors and Heckscher-Ohlin models work. Let’s assume a country with two industries (Manufacturing (M) and Agriculture (A)) and there are two factors of production (Labor (L) and Capital (K)).
In the Specific Factors model, we assume that one factor is mobile and one factor is immobile in the short run. In our example, we’ll assume that workers (Labor) is mobile, meaning they work in the Manufacturing or Agriculture sectors depending on who pays more. And we’ll assume that Capital is immobile in the short run, meaning the Manufacturing equipment can only be used in the Manufacturing sector and Agricultural equipment can only be used in the Agricultural sector.
Please choose one (1) of the following scenarios:
Price of food increases; price of manufactured goods stays the same
Demand for manufactured goods increases; supply of food increases
Price of food decreases; price of manufactured goods decreases
Please discuss what happens to the wage rate for Labor in both sectors, the rental rate for Capital in both sectors. Who is better off, worse off, or not impacted? What happens with the mobile factor and what happens with the immobile factor? Don’t just say “better off” or “worse off”–talk through the intuition.
In the Heckscher-Ohlin model, the factors of production (Labor (L) and Capital (C)) can move freely between our two industries. The pattern of trade is determined by factor endowments, for example countries that have a lot of Labor will produce and export goods that use a lot of Labor. For our example, let’s assume the Manufacturing is more labor intense than Agriculture (perhaps farmers can use large tractors but much of the manufacturing is done by hand).
Like above, please choose one (1) of the following scenarios:
Price of food increases; price of manufactured goods stays the same
Demand for manufactured goods increases; supply of food increases
Price of food decreases; price of manufactured goods decreases
Please discuss what happens to the wage rate for Labor in both sectors, the rental rate for Capital in both sectors. Who is better off, worse off, or not impacted? Talk through the intuition.