Chapter 3: Specific Factors and Income Distribution Multiple Choice Questions 1.

International trade has strong effects on income distributions. Therefore, international trade A. is beneficial to everyone in both trading countries. B. will tend to hurt one trading country. C. will tend to hurt some groups in each trading country. D. will tend to hurt everyone in both countries. . will be beneficial to all those engaged in international trade. Answer! C ". #actors tend to be specific to certain uses and products A. in countries lac$ing comparative advantage. B. in the short run. C. in capital%intensive industries. D. in labor%intensive industries. . in countries lac$ing fair labor laws. Answer! B &. In an economy described by the 'pecific #actors (odel, the production possibility frontier will be A. linear. B. concave to the origin. C. conve) to the origin. D. parabolic with one root. . collapsed to a point. Answer! B *. At the point of production, the production possibility frontier will be tangent to A. the origin. B. a line whose slope is the relative +uality of the two goods. C. a line whose slope is the relative +uantity of the two goods. D. a line whose slope is the relative price of the two goods. . ,one of the above. Answer! D

"-

.. If the price of the capital intensive product rises more than does the price of the land intensive product, then A. demand will shift away from the capital%intensive product, and its production will decrease. B. demand will shift away from the capital%intensive product, and its production will decrease relative to that of the land intensive product. C. the production of the capital%intensive product will indeed decrease, but not for the reasons mentioned in A or B. D. the countries e)porting the capital%intensive good will lose its comparative advantage. . ,one of the above. Answer! /. If the price of the capital intensive product rises, wages will A. rise but by less than the price of the capital%intensive product. B. rise by more than the rise in the price of the capital%intensive product. C. remain proportionally e+ual to the price of the capital%intensive product. D. fall, since higher prices cause less demand. . ,one of the above. Answer! A 0. If Australia has relatively more land per wor$er, and Belgium has relatively more capital per wor$er, then if trade were to open up between these two countries, A. the relative price of the capital%intensive product would rise in Australia. B. the world price of the land%intensive product would be higher than it had been in Belgium. C. the world price of the land intensive product would be higher than it had been in Australia. D. the relative price of the land intensive product would rise in Belgium. . ,one of the above. Answer! C -. If Australia has more land per wor$er, and Belgium has more capital per wor$er, then if trade were to open up between these two countries, A. Australia would e)port the land%intensive product. B. Belgium would import the capital%intensive product. C. Both countries would e)port some of each product. D. trade would not continue since Belgium is a smaller country. . ,one of the above.

"1

Answer! A

1. If Australia has more land per wor$er, and Belgium has more capital per wor$er, then if trade were to open up between these two countries, A. the real income of capital owners in Australia would rise. B. the real income of labor in Australia would clearly rise. C. the real income of labor in Belgium would clearly rise. D. the real income of landowners in Belgium would fall. . the real incomes of capital owners in both countries would rise. Answer! D 12. If trade opens up between the two formerly autar$ic countries, Australia and Belgium, then A. the real income of Australia and of Belgium will increase. B. the real income of Australia but not of Belgium will increase. C. the real income of neither country will increase. D. the real income of both countries may increase. . the real income of both countries will increase. Answer! D 11. The marginal product of labor in manufacturing slopes downward because of A. diseconomies to scale. B. discontinuities in the production function. C. diminishing returns. D. gross substitution with the food sector. . ,one of the above. Answer! C 1". In the 'pecific #actors model, each of the two sectors A. employs the same factors used by the other. B. employs different factors than those employed in the other. C. employs a fi)ed coefficient production function. D. shares one factor of production with the other sector. . ,one of the above. Answer! D

&2

1&. The 'pecific #actors model assumes A. imperfections in the labor mar$et. B. imperfections in the land mar$et. C. imperfections in the capital mar$et. D. imperfections in the entrepreneurship mar$et. . ,one of the above. Answer! 1*. At the production point the production possibility frontier is tangent to a line whose slope is A. the price of manufactures. B. the relative wage. C. he real wage. D. the relative price of manufactures. . ,one of the above. Answer! D 1.. If the price of manufactures and the price of food increase by ".3, then A. the economy moves down its aggregate supply curve. B. the economy moves bac$ along its aggregate demand curve. C. the relative +uantities of manufactures and food remain unchanged. D. the relative +uantities of products change by ".3. . ,one of the above. Answer! C 1/. If the price of manufactures rises, then A. the price of food also rises. B. the +uantity of food produced falls. C. the +uantity of both manufactures and food falls. D. the purchasing power of labor in terms of food falls. . ,one of the above. Answer! B 10. In the model described in this chapter, if the price of manufactures rises, then A. the real income of capital rises. B. the real income of land rises. C. the purchasing power of landowners rises. D. the production of both products falls. . ,one of the above.

&1

Answer! A 1-. If the price of food rises , then the income of capital owners will fall because A. capital owners consume only food. B. the real wage in terms of manufactures rises. C. they must pay higher wages to maintain subsistence levels. D. food is an element of organic capital for capitalists. . ,one of the above. Answer! B 11. If additional land were to be brought into cultivation in the 'pecific #actor model, the output of manufactures would fall because of A. lower marginal productivity of labor in this sector. B. lower marginal productivity of labor in food production. C. higher marginal productivity of labor in manufacture sector. D. lower labor input in manufacture sector. . ,one of the above. Answer! D "2. If 4apan is relatively capital rich and the 5nited 'tates is relatively land rich, then trade between these two, formerly autar$ic countries will A. lead to perfect speciali6ation with 4apan alone producing manufactures. B. create a world relative price of food that is lower than that of the 5.'. C. lower the price of food in both countries. D. raise the price of food in both countries. . ,one of the above. Answer! "1. If 4apan is the land%rich country, then international trade will clearly A. raise the real income of all factor owners in that country. B. lower the real income of wor$ers. C. lower the real income of capital owners. D. lower the real income of landowners. . ,one of the above. Answer! D

&"

"". The reason trade clearly benefits a country is that A. it raises the real income of the more productive elements in society. B. it lowers the real income of the less productive elements in society. C. it increases the levels of consumption of everyone. D. it increases society7s consumption choices. . ,one of the above. Answer! D "&. Those who stand to lose from trade A. are li$ely to migrate to another country. B. tend to be more effectively organi6ed politically. C. tend to re8ect compensation as smac$ing of socialism. D. are universally opposed by economists who consider them parasites. . ,one of the above. Answer! B "*. Those who stand to gain from trade A. do not really care about the issue of income redistribution. B. could not compensate losers since there are so many poor people. C. could compensate losers but would rather not in modern industrial economies. D. compensate losers at least partially through such legislation as unemployment compensation. . ,one of the above. Answer! D ".. 9roups that lose from trade tend to lobby the government to A. shift the direction of comparative advantage. B. abolish the 'pecific #actor model from practical application. C. provide public support for the relatively efficient sectors. D. provide protection for the relatively inefficient sectors. . ,one of the above. Answer! D

&&

"/. It is $nown that the e)istence of the sugar +uota causes several billion dollars of added e)penses to 5.'. consumers, while paying much less in benefits to 5.'. sugar producers. The continued e)istence of this +uota for many years to the present is attributable to the fact that A. as a growing proportion of the 5.'. population develops Type II Diabetes, no one is really interested in ma$ing sugar even cheaper than it is. B. obviously the +uota will be removed now that it has been calculated that the costs e)ceed the benefits. C. the per%capita harm to the public is so small that it is not worth the time for anyone to fight this +uota. D. it is understood that the sugar +uota is an important weapon in $eeping Communism from sweeping the Caribbean. . ,one of the above. Answer! C "0. It was found that when the 5nited 'tates imposed steel +uotas, this caused harm not only to steel consumers, but also to many producers for whom steel is an important input. This insight A. suggests that general e+uilibrium models of tariffs will demonstrate that the partial e+uilibrium deadweight loss triangles tend to overstate the tariff harm. B. suggests that the deadweight loss triangles from partial e+uilibrium models tend to understate the harm to society of protectionism. C. suggests that it is +uite sensible that producers tend to support +uotas. D. suggests that steel production is an infant industry in the 5.'. . ,one of the above. Answer! B "-. It was found that when the 5nited 'tates placed +uotas on imported 4apanese semiconductors, this harmed the international competitiveness of 5.'. computer manufacturers. This is a good illustration of the principle that A. trade benefits the factor that is specific to the e)port sector. B. protectionism helps manufacturers but harms consumers. C. protectionism harms the factor that is specific to the e)port sector. D. effective protection is not the same as a nominal tariff or tariff e+uivalent. . ,one of the above.

Answer! D

&*

"1. The specific factor model argues that if land can be used both for food production and for manufacturing, then a +uota that protects food production will A. clearly help landowners. B. clearly hurt landowners. C. clearly help manufacture but hurt food production. D. have an ambiguous effect on the welfare of landowners. . ,one of the above. Answer! D &2. :icardo7s model of comparative advantage demonstrated no harm to any group in the economy as a result of free trade. This was probably because A. :icardo did not understand the concept of diminishing returns. B. the specific factor model had not yet been invented. C. ;ec$scher and <hlin had not yet been born. D. a model, which demonstrated such harm, was counter%productive to :icardo7s political or polemical aims. . ,one of the above. Answer! D &1. =hen the ,apoleonic =ars were over, the Corn >aws were enacted in ngland. This may be understood in terms of the following! A. The 'pecific #actors model. B. The intra%trade model. C. The monopolistic competition model D. The scale economies model . ,one of the above. Answer! A &". The production function may be analy6ed using calculus. #or e)ample, the total product may be calculated as being e+ual to A. the first derivative of the total product curve. B. the second derivative of the marginal product curve. C. the integral summed up under the total product curve. D. the integral summed up under the marginal product curve. . ,one of the above. Answer! D

&.

&&. If 9ambinia has many wor$ers but very little land and even less productive capital, then, following the specific factor model, we $now that 9ambinia has a comparative advantage in A. manufactures. B. food. C. both manufactures and food. D. neither manufactures nor food. . ,ot enough information given. Answer! &*. If, relative to its trade partners, 9ambinia has many wor$ers but very little land and even less productive capital, then, following the specific factor model, in order to help the country7s economic welfare, the 9ambinian government should A. protect the manufacturing sector. B. protect the agricultural sector. C. protect both sectors. D. not resort to protectionism . ,one of the above. Answer! D &.. If, relative to its trade partners, 9ambinia has many wor$ers but very little land and even less productive capital, then, following the specific factor model, we $now that 9ambinia has a comparative advantage in A. manufactures. B. food. C. both manufactures and food. D. neither manufactures nor food. . ,one of the above. Answer! B

&/

Essay Questions 1. The Specific Factors model ma$es a distinction between general%purpose factors that can move between sectors and factors that are specific to particular uses. ;ow do differences in the availabilities of the specific factors form the basis for international trade? Identify factors, which are specific, and e)plain in what sense or conte)t they are specific. Answer! This model posits a 6ero elasticity of technical substitution of a @specific@ factor@ between the two products. ;ence, if the supply of one of these is ArelativelyB small, then the marginal product of labor in that industry will be low. 'ince each country is producing some of each, the wage rate must be e+ual in both sectors. ;ence, the country will not be able to produce and sell the product competitively. An e)ample of a specific factor might be an engineer trained to operate and maintain a certain type of machine. <r land which can be used to raise only one type of crop. ". The Specific Factors model clearly illustrates how the e)pansion of trade can have significant distributional effects on the relative incomes of different factors of production. =hy do economists ob8ect to using trade protectionist policy to mitigate or reverse these effects? If mitigating such effects were considered to be a reasonable goal, would economists then favor do this via the use of trade policy? =hy or why not? Answer! conomists note that in general such remedies are inefficient. That is, there is almost always an alternative policy that can provide the same sectoral protection with a lower cost to the rest of the economy. In any case, such policy would also be inefficient in that they would divert scarce resources away from the country7s area of comparative advantage. &. It is claimed that the persistence of protectionism is often the result of the fact that those who lose from trade are usually a much more informed, cohesive and motivated a group than those who gain. 9ive a specific e)ample from @real life@ that supports this claim. Answer! The shift of shipbuilding comparative advantage in shipbuilding away from the 5.'. has caused economic damage to trained shipbuilders, as well as to owners of shipyards, and to peripheral businesses located near such shipyards. These groups, and their Congressional representatives will be very much aware of the damage being done. The gainers would be those who pay somewhat lower shipping charges, or lower retail prices due to the use of cheaper Aforeign builtB ships. 'ince shipping is typically a very small component of total retail cost, this gain will hardly be noticeable by any one single group in the economy.

&0

*. <ne reason international trade has a powerful effect on the distribution of income within countries is that some factors are @specific@, and therefore cannot move costlessly from one industry to another. =hat is another necessary condition for international trade to have such a strong effect on intra%country income distributions? Answer! It is necessary that the relative factor intensities differ from industry to industry. .. ven though it is very clear in the conte)t of the Specific Factors model that an e)pansion of international trade will create losers as well as winners, economists still claim that the country as a whole gains. The general claim that a country gains even though some identifiable group within it systematically loses re+uires sub8ective 8udgements concerning the relative importance or weights to be given the economic welfares of individuals or groups. Do you believe that this is, in general scientifically or ethically possible to do? )plain your answer. In what sense, then, do economists nevertheless claim that the country as a whole gains?

Answer! This could be considered to be an intractable issue, for which modern welfare economics really has no solution. #or e)ample, in the early 11-2s, it was decided not to sub8ect blood supplies to A at that timeB very e)pensive tests for positive ;IC factors, since it was decided that this would cause blood shortages for large numbers of people, and that the number of people who might gain from applying the stringent tests was very small. That is, the good of the many was deemed superior to the good of the few. 5nfortunately, the few happened to be 8ust about every person suffering from ;emophilia at that time. Almost all of these people died as a result. =as their need really less than the needs of the many???

&-

Quantitative/ raphin! "roblems 1. In 11-/, the price of oil on world mar$ets dropped sharply. 'ince the 5nited 'tates is an oil%importing country, this was widely regarded as good for the 5.'. economy. Det in Te)as and >ouisiana, 11-/ was a year of economic decline. =hy? Answer! The ma8or e)porting industry located in these two 'tates is <il e)traction and refining. 'ince the factors of production specific to the oil industry could not shift out of them smoothly and +uic$ly, their real income suffered. ". An conomy can produce good 1 using labor and capital and good " using labor and land. The total supply of labor is 122 units. 9iven the supply of capital, the outputs of the two goods depends on labor input as follows! #abor Input to ood % 2 12 "2 &2 *2 .2 /2 02 -2 12 122 A. A. $utput of ood % 2 ". &*1 .// 0& 01 -* -0 -1 #abor input to ood & 2 12 "2 &2 *2 .2 /2 02 -2 12 122 $utput of ood & 2 *2 .& /" 02 00 -& -1" 1. 1/

9raph the production functions for good 1 and good " 9raph the production possibility frontier. =hy is it curved?

Answer! The production possibility frontier is curved because of the diminishing returns associated with the e)pansion of output in the short run in each of the two industries. &. Calculate the marginal product of labor for each product, for different labor inputs. Answer! e.g. at .2 wor$ers, the marginal product for 1 is 2.0. #or product " it is 2./. At 12 wor$ers, the marginal product for 1 is 2.". #or product " it is 2.1.

&1

*.

'uppose the relative price of good 1 falls relative to the price of ". =hat happens to the wage rate?

Answer! The labor component of the price of 1 is larger than that of product ". ;ence, a fall in the relative price of 1 will lower the demand for labor and will result in a decrease in the wage rate. .. Calculate the effects of the fall in the relative price of good " on the income of the specific factors capital and land. Answer! Because good " uses land, a fall in its relative price will result in a fall in rental rates on land, and an increase in the return to capital.

*2