06/02/2020 Specific Factors Model

Specific Factors Model

1. Essence of Specific Factors Model

Jacob Viner (1892-1970) first examined the specific factors model,

which is a variant of the Ricardian model.
It was further developed by Paul Samuelson and Ronald Jones. It is
also called the Ricardo-Viner model. Michael Mussa (1974)
developed the graphical approach to illustrate the main results of this
Who and why? model. In contrast to the Ricardian model, this model includes two
specific factors.
Viner designed the model to explain the migration of workers from
the rural to urban areas after the Industrial Revolution in the 1820s.
Specific or fixed factors suffer the vicissitudes of urban life much
more than the mobile factor, labor.

There are two types of factors. Labor is the mobile factor that can
move between the two sectors. Each of the other two factors is
assumed to be specific to a particular industry. That is, the quantity of
a specific factor is fixed. Specific factors cannot move between
Mobile vs Specific industries.
Factors
Examples of specific factors: climate, soil, skilled workers in
sericulture and the car industry. Detroit's population was 1.8 million
in 1950, but declined to .7 million in 2010. (It took six decades for
the laborers to leave the city.)

K is used in industry 1 only. (K = Kapital in German)

T is used in industry 2 only. (T = Terra = land in Latin)
Labor is mobile.
Assumptions: The economy produces two goods using three factors of production,
2 goods × 3 factors capital, land and labor in a perfectly competitive market. Labor is the
mobile factor, and there are two specific factors, K and T.
In this sense, Jones calls it a 2-good, 3-factor model. We do not use L
to denote land because it is reserved for labor, and the lower case l
looks like "one." It is best to avoid confusing symbols.)

Example

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Land is a specific factor in Finland. Finland produces ocean cruisers

and leather products such as reindeer fur, mink and fox coats.
Lapland, the nothern part of Finland, is sparsely inhabited by Indians
who hunt these wild animals. The cold climate is a factor specific to
the leather goods industry.
In the urban areas Finns are also engaged in shipbuilding and Finland
exports cruisers to the European countries. In addition to well
educated workers, the shipbuilding industry requires a large amount
of capital, which is specific to that industry in that it cannot be used
in the leather goods industry. Finnish workers are mobile between the
two industries.

Palio in Piazza del Campo (Siena, Italy 2000). Horse trainers are
specific to the horse industry. Jockeys ride horses without saddles.
Organized by ten contrade (districts) in 1590 when bullfighting was
outlawed. (Palio di Provenzano, July 2, and Palio dell'Assunta,
August 16, as shown in the opening scene of Quantum of Solace.)

In a Heckscher-Ohlin model, both factors, capital and labor, are

assumed to be mobile. Recall that in production decisions, some
Specific Factors factors are fixed (and hence specific) in the short run, but all factors
model vs Heckscher- are variable inputs in the long run. Hence, the HO model is a long-
Ohlin 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.

Production y1 = F(K,L1)
y2 = G(T,L2)
As in the Ricardian model, labor is the mobile factor between the two
industries.
Resource constraint:
L1 + L2 = L
π1 = p1y1 - wL1 - rK
Optimal allocation of labor between two industries: Value of
marginal product of labor must be equal in the two industries.

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Consider a change in the amount of labor employed, ΔL1.

Δπ1 = p1Δy1 - wΔL1 = 0 for a maximum profit (The profit function
must reach a peak or a plateau so that a change in profit is zero)
Divide both sides by ΔL1.
p1MPL1 = w [Note: MPL1 = Δy1/ΔL1]
Alternatively,
p1 = w/MPL1 = MC1 (For instance, if the marginal worker produced
2 automobiles and got paid $60,000, marginal cost of the automobile
is $30,000).
p2 = p2y2 - wL2 - sT (s = land rental, sT = landlords' income)
p2MPL2 = w. ( p2 = w/MPL2 = MC2).
p1MPL1 = p2MPL2
p1/p2 = MRT = MC1/MC2

In competitive markets, each factor receives its marginal product. For

instance, a worker's wage is the value of his marginal product.

2. Main Results

Diminishing Returns: Marginal product of labor (or any other input)

(1) No specialization
declines as more is employed. ⇒ PPF is concave to the origin!
Unlike in the Ricardian model, labor is shared between the two industries.
Thus, the specific factors model explains why a country produces a product
and also imports it. For instance, the US produces but also imports oil from
the Middle East.
The exact output mix depends on the prices.

(2) No wage Choose any price. For instance, in industry 2, we have

equalization (the same p2MPL2 = w,
as in the Ricardian
model) p*2MP*L2 = w*.
Even if output prices are equalized, p2 = p*2, there is no reason why wage
rates should be equalized, w ≠ w*.
If labor productivities are different in the two countries (due to differences
in weather, capital or infrastructure), free trade will not equalize wage rates.
However, due to diminishing marginal returns, marginal product of labor

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decreases with employment. In general, MPLi is not equal to MP*Li in any

industry. Free trade equalizes output prices, but not wages.

Allocation of labor

In the Ricardian model, L1 = 0 or L. (specialization in industry 1 or 2.)

If labor is mobile between the two industries, one wage prevails in each
country. Both industries pay the same wage in each country, but w ≠w*.

Price effect How does a change in the output price affect income distribution?
An increase in the price of the exportable increases wage.

(i) An increase in the price of the exportable increases its output, i.e., the
PPF is negatively sloped.
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(ii) An increase in the price of the exportable increases rent. More generally,
An increase in the price of a good increases the rent of the specific factor in that industry.

For instance, international trade raises the price of the exportable good
(foodstuff, such as corn and soybean), which in turn raises the price of the
factor stuck in that industry such as land. That is, trade raises land value in
the Midwest.
The world population is expected to rise to 11 billion by the end of this
century. As the food price rises to keep pace with the growing population,
land owners will benefit from the rising food prices.

(3) Which factor

benefits from trade?
(vs. which country
benefits in the
Ricardian model)

The specific factor in the export sector benefits from free trade.
because a movement toward free trade (FT) increases the price of the
exportable (p1). Thus, free trade increases the return to the factor (K)
(4) Main Result specific to the export sector.
(Effects of Free Example: Rising food prices raise the price of land (a necessary and specific
Trade) factor in agriculture) and land owners benefit from free trade.
Population growth (the world population will increase to 11 billion people)
⇒ Rising food price ⇒ rising land price during the next few decades!

An increase in the price of the exportable increases its output. Note that
PPF is concave to the origin, unlike that in the Ricardian model.

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sericulture Production of silk

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silk cocoons

The Silkroad during

Tang period (618-907
AD)

A good example of Viner's model is the silk trade. The silkroad connected
China to Europe since the 1st century AD. Silk was invented by the
Liangzhu people who settled in Liangzhu area (near Shanghai now) about
3000 BC. China had a near monopoly of silk (The secret of silk production
spread to Korea and Japan when the Qin emperor burned books, including
those made of silk, and the silk workers left the country. The Chinese
character chih originally meant silk, and includes the character meaning
silk.
Edouard Chavannes, Chinese Books before the Invention of Paper, Journal
asiatique, Jan.-Feb. 1905.)
(i) Emperor Justinian (527-565 AD) sent spies and obtained silkworms from
China in 552 AD. Subsequently, Florence, Genoa, and Venice exported silk
to Europe. Silkworms produce iridescent silk only if they are fed mulberry
leaves. (white mulberry during breeding → white, Jinji fruit → yellow,
ochre →dark red, etc.)

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Interior of the Blue Mosk, Istanbul, Turkey

(ii) The Rise of Islam . In the 7th century, the Arabs blocked the overland
route to China, and spread the sericulture to Spain and Sicily, while China
became the silk supplier and exported high quality silk. The spread of Islam
encouraged the development of Maritime Silkroad. The overland silkroad
was re-established during the Tang period.
Muhammad moves to Medina in 622 AD, but returns to Mecca in 630 AD.
After Rashidun army laid siege of Jerusalem for 6 months, the Patriarch
Sophronius of Jerusalem submits to Caliph Umar in 637. The Islamic
empire expands and quickly spreads in Europe. Arab's control of Jerusalem
continues until the first Crusade in 1099, but Saladin retakes the city in
1187. In 1453, the Ottoman Turks take the city of Constantinople (end of
the Byzantine Empire.)
Navigation: Triangular sail (Lateen sail) may have been invented by the
Romans (A mosaic in Kelenderis, Turkey made in 400 AD shows a Lateen
sail.), but Lateen sails were widely used by Arabs in the Indian Ocean.
(iii) The Rise of Italian city states : The Florentine silk industry was born in
the last decades of the 14th century. Florence began to export large
quantities of high-quality silk products to Europe. Florence accumulated so
much wealth that it minted the first gold coin (Florin) in 1252 since the
Roman times. Florence under the rule of the Medici family became the
banking center in Europe.
Economic reason for the Renaissance. Also, Venice rebuilt the shipyard
(Arsenalle) in 1350s. Pisa and Genoa also competed with Venice.

Volume of trade on "By the lowest reckoning, India, Seres[China] and the Arabian peninsula
the Silk Road take from our Empire 100 million sestertii every year: that is how much our
luxuries and women cost us." [about $2 - 3 billion today]
—Pliny the Elder, Natural History 12.84. (AD 23-79)
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1 denarius = about $100.

1 sestertius = about $25 today.
Rome's defense in AD 150 = 80% of the imperial budget = 2.5% of GDP.
US in 2016 = 18% of the federal budget = 3.8% of GDP.
Because of increasing trade deficit, Rome's military budget gradually
declined.

Old silkroad

the Old Silk Route, Sikkim, India

The Silk road ended at Antioch or Constantinople, and through these cities,
Romans acquired silk. By the first century BC, Roman aristocrats wore silk
garments. Emperor Tiberius complained that ladies and their baubles are
transferring our money to foreigners." He prohibited Romans from wearing
silk. In one year, Rome paid 22,000 pounds (11 tons or 320,000 oz) of gold
for silk shipments (about $400 million today, Facts and Details)

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A caravan on the Silkroad near Dunhuang

Gemanic Migrations

Attila the Hun had small eyes and brown skin, probably a descendant of
Xiongnu, the barbarian group who lived in the northern part of China.

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