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(Solved): Specific Factors Model Suppose the economy consists of two sectors: Food and Cloth. Production funct ...
Specific Factors Model
Suppose the economy consists of two sectors: Food and Cloth. Production function
in the Food sector is given by F_(F)(K_(F),L_(F))=K_(F)^((2)/(3))L_(F)^((1)/(3)), where K_(F) is the amount of capital
and L_(F) is amount of labor used in the Food sector. Production function in the Cloth
sector is given by F_(C)(K_(C),L_(C))=K_(C)^((1)/(3))L_(C)^((2)/(3)).
Suppose in the short term the capital is sector-specific (it can not move across sectors)
but labor is mobile. The resource endowment in the Home economy is given by K_(C)=225,
K_(F)=60 and L=60. The resource endowment in the Foreign economy is given by
K_(C)^(*)=300,K_(F)^(*)=40 and L^(*)=60.
a. Which country has a comparative advantage in Cloth? Explain.
Assume that the relative price of Cloth(p_(C))/(p_(F))=1.
b. What will be the distribution of labor across sectors in the Home country? Explain.
c. What would be the distribution of labor across sectors in the Foreign country?
Explain.
d. What explains the difference? Explain.
Now consider the same economies in the long run, when capital becomes mobile
across sectors as well (but the total amount of capital in either country does not
change).
e. Which country has a comparative advantage in cloth? Explain.