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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. E. will be beneficial to all those engaged in international trade. Answer: C 2. Factors tend to be specific to certain uses and products A. in countries lacking comparative advantage. B. in the short run. C. in capital-intensive industries. D. in labor-intensive industries. E. in countries lacking fair labor laws. Answer: B 3. In an economy described by the Specific Factors Model, the production possibility frontier will be A. linear. B. concave to the origin. C. convex to the origin. D. parabolic with one root. E. collapsed to a point. Answer: B 4. At the point of production, the production possibility frontier will be tangent to A. the origin. B. a line whose slope is the relative quality of the two goods. C. a line whose slope is the relative quantity of the two goods. D. a line whose slope is the relative price of the two goods. E. None of the above. Answer: D

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5. 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 exporting the capital-intensive good will lose its comparative advantage. E. None of the above. Answer: E 6. 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 equal to the price of the capital-intensive product. D. fall, since higher prices cause less demand. E. None of the above. Answer: A 7. If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, 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. E. None of the above. Answer: C 8. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were to open up between these two countries, A. Australia would export the land-intensive product. B. Belgium would import the capital-intensive product. C. Both countries would export some of each product. D. trade would not continue since Belgium is a smaller country. E. None of the above.

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Answer: A

9. If Australia has more land per worker, and Belgium has more capital per worker, 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. E. the real incomes of capital owners in both countries would rise. Answer: D 10. If trade opens up between the two formerly autarkic 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. E. 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. E. None of the above. Answer: C 12. In the Specific Factors 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 fixed coefficient production function. D. shares one factor of production with the other sector. E. None of the above. Answer: D

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13. The Specific Factors model assumes A. imperfections in the labor market. B. imperfections in the land market. C. imperfections in the capital market. D. imperfections in the entrepreneurship market. E. None of the above. Answer: E 14. 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. E. None of the above. Answer: D 15. If the price of manufactures and the price of food increase by 25%, then A. the economy moves down its aggregate supply curve. B. the economy moves back along its aggregate demand curve. C. the relative quantities of manufactures and food remain unchanged. D. the relative quantities of products change by 25%. E. None of the above. Answer: C 16. If the price of manufactures rises, then A. the price of food also rises. B. the quantity of food produced falls. C. the quantity of both manufactures and food falls. D. the purchasing power of labor in terms of food falls. E. None of the above. Answer: B 17. 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. E. None of the above.

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Answer: A 18. 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. E. None of the above. Answer: B 19. If additional land were to be brought into cultivation in the Specific Factor 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. E. None of the above. Answer: D 20. If Japan is relatively capital rich and the United States is relatively land rich, then trade between these two, formerly autarkic countries will A. lead to perfect specialization with Japan alone producing manufactures. B. create a world relative price of food that is lower than that of the U.S. C. lower the price of food in both countries. D. raise the price of food in both countries. E. None of the above. Answer: E 21. If Japan 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 workers. C. lower the real income of capital owners. D. lower the real income of landowners. E. None of the above. Answer: D

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22. 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 society's consumption choices. E. None of the above. Answer: D 23. Those who stand to lose from trade A. are likely to migrate to another country. B. tend to be more effectively organized politically. C. tend to reject compensation as smacking of socialism. D. are universally opposed by economists who consider them parasites. E. None of the above. Answer: B 24. 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. E. None of the above. Answer: D 25. Groups that lose from trade tend to lobby the government to A. shift the direction of comparative advantage. B. abolish the Specific Factor model from practical application. C. provide public support for the relatively efficient sectors. D. provide protection for the relatively inefficient sectors. E. None of the above. Answer: D

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26. It is known that the existence of the sugar quota causes several billion dollars of added expenses to U.S. consumers, while paying much less in benefits to U.S. sugar producers. The continued existence of this quota for many years to the present is attributable to the fact that A. as a growing proportion of the U.S. population develops Type II Diabetes, no one is really interested in making sugar even cheaper than it is. B. obviously the quota will be removed now that it has been calculated that the costs exceed 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 quota. D. it is understood that the sugar quota is an important weapon in keeping Communism from sweeping the Caribbean. E. None of the above. Answer: C 27. It was found that when the United States imposed steel quotas, 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 equilibrium models of tariffs will demonstrate that the partial equilibrium deadweight loss triangles tend to overstate the tariff harm. B. suggests that the deadweight loss triangles from partial equilibrium models tend to understate the harm to society of protectionism. C. suggests that it is quite sensible that producers tend to support quotas. D. suggests that steel production is an infant industry in the U.S. E. None of the above. Answer: B 28. It was found that when the United States placed quotas on imported Japanese semiconductors, this harmed the international competitiveness of U.S. computer manufacturers. This is a good illustration of the principle that A. trade benefits the factor that is specific to the export sector. B. protectionism helps manufacturers but harms consumers. C. protectionism harms the factor that is specific to the export sector. D. effective protection is not the same as a nominal tariff or tariff equivalent. E.

None of the above.

Answer: D

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29. The specific factor model argues that if land can be used both for food production and for manufacturing, then a quota 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. E. None of the above. Answer: D 30. Ricardo's model of comparative advantage demonstrated no harm to any group in the economy as a result of free trade. This was probably because A. Ricardo did not understand the concept of diminishing returns. B. the specific factor model had not yet been invented. C. Heckscher and Ohlin had not yet been born. D. a model, which demonstrated such harm, was counter-productive to Ricardo's political or polemical aims. E. None of the above. Answer: D 31. When the Napoleonic Wars were over, the Corn Laws were enacted in England. This may be understood in terms of the following: A. The Specific Factors model. B. The intra-trade model. C. The monopolistic competition model D. The scale economies model E. None of the above. Answer: A 32. The production function may be analyzed using calculus. For example, the total product may be calculated as being equal 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. E. None of the above. Answer: D

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33. If Gambinia has many workers but very little land and even less productive capital, then, following the specific factor model, we know that Gambinia has a comparative advantage in A. manufactures. B. food. C. both manufactures and food. D. neither manufactures nor food. E. Not enough information given. Answer: E 34. If, relative to its trade partners, Gambinia has many workers but very little land and even less productive capital, then, following the specific factor model, in order to help the country's economic welfare, the Gambinian government should A. protect the manufacturing sector. B. protect the agricultural sector. C. protect both sectors. D. not resort to protectionism E. None of the above. Answer: D 35. If, relative to its trade partners, Gambinia has many workers but very little land and even less productive capital, then, following the specific factor model, we know that Gambinia has a comparative advantage in A. manufactures. B. food. C. both manufactures and food. D. neither manufactures nor food. E. None of the above. Answer: B

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Essay Questions 1. The Specific Factors model makes a distinction between general-purpose factors that can move between sectors and factors that are specific to particular uses. How do differences in the availabilities of the specific factors form the basis for international trade? Identify factors, which are specific, and explain in what sense or context they are specific. Answer: This model posits a zero elasticity of technical substitution of a "specific" factor" between the two products. Hence, if the supply of one of these is (relatively) small, then the marginal product of labor in that industry will be low. Since each country is producing some of each, the wage rate must be equal in both sectors. Hence, the country will not be able to produce and sell the product competitively. An example of a specific factor might be an engineer trained to operate and maintain a certain type of machine. Or land which can be used to raise only one type of crop. 2. The Specific Factors model clearly illustrates how the expansion of trade can have significant distributional effects on the relative incomes of different factors of production. Why do economists object 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? Why or why not? Answer: Economists 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 country's area of comparative advantage. 3. 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. Give a specific example from "real life" that supports this claim. Answer: The shift of shipbuilding comparative advantage in shipbuilding away from the U.S. 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 (foreign built) ships. Since 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.

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4. One 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. What 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. 5. Even though it is very clear in the context of the Specific Factors model that an expansion 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 requires subjective judgements 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? Explain 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. For example, in the early 1980s, it was decided not to subject blood supplies to ( at that time) very expensive tests for positive HIV 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. Unfortunately, the few happened to be just about every person suffering from Hemophilia at that time. Almost all of these people died as a result. Was their need really less than the needs of the many???

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Quantitative/Graphing Problems 1. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why? Answer: The major exporting industry located in these two States is Oil extraction and refining. Since the factors of production specific to the oil industry could not shift out of them smoothly and quickly, their real income suffered. 2. An Economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depends on labor input as follows: Labor Input to Good 1 0 10 20 30 40 50 60 70 80 90 100 A. A.

Output of Good 1 0 25 38 49 58 66 73 79 84 87 89

Labor input to Good 2 0 10 20 30 40 50 60 70 80 90 100

Output of Good 2 0 40 53 62 70 77 83 88 92 95 96

Graph the production functions for good 1 and good 2 Graph the production possibility frontier. Why is it curved?

Answer: The production possibility frontier is curved because of the diminishing returns associated with the expansion of output in the short run in each of the two industries. 3. Calculate the marginal product of labor for each product, for different labor inputs. Answer: e.g. at 50 workers, the marginal product for 1 is 0.75 For product 2 it is 0.65 At 90 workers, the marginal product for 1 is 0.25 For product 2 it is 0.15

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4.

Suppose the relative price of good 1 falls relative to the price of 2. What happens to the wage rate?

Answer: The labor component of the price of 1 is larger than that of product 2. Hence, a fall in the relative price of 1 will lower the demand for labor and will result in a decrease in the wage rate. 5. Calculate the effects of the fall in the relative price of good 2 on the income of the specific factors capital and land. Answer: Because good 2 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.

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