Specific Factors Model

1. Specific Factors Model

Who?	Jacob Viner 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 model. In contrast to the Ricardian model, this model includes factors other than labor.
Mobile vs Specific Factors	Thus, 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 each specific factor is fixed and cannot move to the other industry. Specific factors cannot move between industries. Examples of specific factors: climates, soil, skilled workers.
Assumptions: 2 goods x 3 factors	K is used in industry 1 only. T is used in industry 2 only. Labor is mobile. The economy produces two goods using two factors of production, capital and labor in a perfectly competitive market. Capital is assumed to be specific to each industry, and is immobile between industries. In the two good model, there are two specific factors, K and T. In this sense, Jones calls it a 2-good, 3-factor model. (K = Kapital, which is capital in German, T = Terra in Latin, meaning land or earth. 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	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 mostly Indians who hunt these wild animals. This cold climate or forest is a factor specific in the leather goods industry. In the urban areas Finns are also engaged in cruise ship building and Finland exports cruisers to European countries. In addition to well educated workers, the ship building 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 Siena, Italy (2000). Horse trainers are specific to the horse industry. Jockeys ride horses without saddles.
Specific Factors model vs Heckscher-Ohlin	In a Heckscher-Ohlin model to be studied shortly, both factors, capital and labor, are assumed to be mobile. Recall that in production decisions, some factors are fixed (and hence specific) in the short run, but all factors are variable inputs in the long run. Hence, the HO model is a long-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) In contrast to the Ricardian model, labor is the mobile factor between the two industries. Resource constraint: L₁ + L₂ = L π₁ = p₁y₁ - wL₁ - rK 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. p₁MP_L1 = w Alternatively, p₁ = w/MP_L1 = 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) p₂MP_L2 = w. p₁MP_L1 = p₂MP_L2 p₁/p₂ = MRT = MC₁/MC₂

2. Main Results

No specialization	Diminishing Returns: Marginal product of labor (or any other input) 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.
No wage equalization	p₂MP_L2 = w, p₂MP_L2 = w. Thus, w ≠ w" If labor productivities are the same in the two countries, free trade equalizes wage rates. However, due to diminishing marginal returns, marginal product of labor decreases with employment. In general, MP_Li is not equal to MP*_Li in any industry. Free trade equalizes output prices, but not wages.
Allocation of labor
Price effect	How does a change in the output price affect income distribution? An increase in the price of the exportable increases wage. An increase in the price of the exportable increases rent. More generally,
Which factor benefits	A price increase benefits the specific factor in that sector. An increase in the price of a good increases the rent of the factor specific to 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 US government now endeavors to achieve energy independence, i.e., independence from imported oil. Billions of dollars are now being invested to develop alternative source of energy such as ethanal from corn or switchgrass. This increase in the price of ethanol should increase the land value in the Midwest, because it is a fixed factor there.
Effect of Free Trade	This implies that a movement toward free trade (FT) increases the price of the exportable (p₁), and hence free trade increases the return to the factor (K) specific to the export sector.
	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.
The Silkroad	Silk was invented by the Liangzhu people who settled down in Liangzhu (near Shanghai now) about 3000 BC. The Liangzhu people was trading jade artifacts during the Neolithic period (3300-2200 BC) even before their first dynasty, Xia. In the "Arabian Nights," the story of Aladdin, a lazy boy in China, indicates that Arabia was an intervening region on the silk road and Arabia connected China and Africa. Gold, amber, and ivory were prized in China and imported from Africa. Aladdin itself is either Persian or Arabic name, meaning "faithful." The intervening regions also joined the trade on the silk road.