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International trade and investment lecture 3
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International trade and investment lecture Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 2
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Specific-factors model= short-run model in which some factors of production cannot beshifted between sectors and thus are sector-specific or specific factors.
● 2 x 2 x 3 - model
- 2 countries (Home and Foreign)
- 2 products: cloth (C) and food (F)
- 3 factors of production: Labour (L) required for production C and F; Land (T)
required for production of F; Capital (K) required for the production of C.
Labour is constant.
● Perfect competition
w/p is the real wage. MPL is the inverse
of unit labour requirements. Unit labour requirements is the amount hours required
for one (bv gallon wine).
Production function for C gives output of C for
varying input of L. Concave since the marginal
product of L is decreasing or returns to employing
more L are decreasing. ⇒
K is constant. We have more workers, but we have the
same capital so less productive.
wC = PC * MPLC
wF = PF * MPLF
Workers will move between sectors until wages are equalised w= wC = wF.
production takes place in this
point.
–MPLF / MPLC is the slope → extra unit of C
means that production of F changes by –MPLF /
MPLC.
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