Specific Factors Model

Essence of Specific Factors Model

• Jacob Viner initially examined the specific factors model, a variant of the Ricardian model (1892-1970).
• Paul Samuelson and Ronald Jones further developed it; also known as the Ricardo-Viner model.
• Michael Mussa (1974) created a graphical approach to demonstrate the model's key results.
• Model includes two specific factors, unlike the Ricardian model.
• Viner's model aimed to explain worker migration from rural to urban areas post-Industrial Revolution in the 1820s.
• Specific or fixed factors are more affected by urban life than the mobile factor, labor.

Mobile vs. Specific Factors

• There are two types of factors with labour as a mobile factor as it can move between sectors.
• Each of the other two factors is specific to a particular industry.
• The quantity of a specific factor is fixed and cannot move between industries.
• Examples of specific factors include climate, soil, skilled workers in sericulture, and the car industry.
• Detroit's population decreased from 1.8 million in 1950 to 0.7 million in 2010.

Specific Factors Model vs. Heckscher-Ohlin

• Both factors, capital and labor, are mobile in a Heckscher-Ohlin model.
• Some factors are fixed in the short run but all factors are variable in the long run when making production decisions.
• The Heckscher-Ohlin model is a long-run model.
• The specific factors model is a short-run model where capital and land inputs are fixed, and labor is a variable input.

Main Results

• Diminishing Returns: Marginal product of labor declines as more is employed so the PPF is concave to the origin.
• Unlike the Ricardian model, labor is shared between the two industries
• The specific factors model explains why a country produces a product and imports it.
• e.g. The USA produces, but also imports, oil from the Middle East.
• The output mix depends on the prices.

No Wage Equalization

• Free trade will not equalize wage rates if labor productivities differ between countries due to differences in weather, capital, or infrastructure.
• Due to diminishing marginal returns, the marginal product of labor decreases with employment.
• Free trade equalizes output prices, not wages.

Price Effect

• An increase in the price of the exportable increases wage.

Which Factor Benefits From Trade?

• An increase in the price of the exportable increases rent.
• An increase in the price of a good increases the rent of the specific factor in that industry.
• International trade raises the price of the exportable good such as corn and soybean; this raises the price of factors like land in that industry.
• Trade raises land value.
• The world population is expected to rise to 11 billion by the end of the century, so landowners will benefit from food prices rising.

Main Result (Effects of Free Trade)

• The specific factor in the export sector benefits from free trade with a movement toward free trade increasing the price of the exportable.
• Rising food prices raise the price of land, a necessary and specific factor in agriculture, and landowners benefit from free trade.
• Population growth increases food prices, rising land price during the next few decades.