ECO2/3ITR

International Trade

Tutorial 4 – Specific Factors Model

True or False questions

1. The main message of the Specific Factors Model is that, although some groups
withing country oppose to free trade, everybody within countries that engage
in free trade will win.
True or False? Explain.

2. Consider the following situation in the Specific Factors Model. A country

called Myland produces two goods, X and Y, using three production factors,
A, B and C. While B is specific for the production of X, C is specific for the
production of Y. A is freely mobile across sectors. When the country decides
to open to free trade it observes that the relative price of X in the world is
Myland
higher than in autarky at home, i.e., ( P X /P Y ) < ( P X /PY )World . Hence, after
engaging in free trade the owner of C unambiguously wins.
True or False? Explain.

3. Economists in general are supportive of free trade but recommend that

compensation policies should be implemented so those who win within
country should compensate the losers.
True or False? Explain.

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Question 4

Setup: Japan can produce 2 goods (robots and corn) using labour (L) that is mobile
between the 2 sectors. Capital (K) is specific to producing robots. Land (T) is
specific to producing corn.
a. Use a single diagram to show how Japanese labour (L) is allocated between
robots and corn. This is the combined graph with the labour demand curves for
each sector. Hint: The graph should represent both wages which are a function
of MPL and prices.

b. Now assume Japan engages in free trade and in the world market the price of
robots is 20% higher than in Japan, while the price of corn does not change.
Redraw the diagram in point (a) and let the price of robots increase by 20%.
i. What happens to the wage curve in the robots’ sector?
ii. What happens to the wage curve in the corn sector?
iii. What happens to the allocation of labour and why?
iv. Who wins and who loses in Japan after opening to trade?

Question 5

Assume a specific factors model framework. Brazil and Chile produce coffee and
wine using labour, and land that is specific to growing coffee beans and land that is
specific to growing wine grapes. Consumers in the two countries have identical
preferences over the two goods. Assume both countries are in autarky.
Consider the following graph for relative demand and supply of coffee and wine.

2
 PC/PW RSCHL

RSBRA
(PC/PW)CH
L

(PC/PW)BRA

RDCHL=RDBRA

CHL ❑ BRA ❑ QC/QW

QC QC
( ) ( )
QW AUT QW AUT

a. Which country has the lowest opportunity cost for coffee? Which one for
wine? Briefly explain.

Now let Chile and Brazil trade with each other.

b. What are the patterns of trade? Explain briefly your answer.
c. In the graph you have drawn for a) draw the world relative supply and label
the free trade relative price of coffee (PC/PW)FT. Hint: the world relative supply
will lie in between the two countries relative supply.
d. Does Brazil produce more or less coffee relative to wine at free trade prices or
in autarky? Explain.
e. Will anyone oppose free trade in Brazil? Explain.