Question

Explain the theory of factor mobility. Consider this theory, and create a trade agreement between two to four countries that does not already exist. Explain why this agreement would be beneficial to each country and how the theory of factor mobility connects to this trade agreement.

Answer 1

Factor mobility refers to the ability to move factors of production - labor, capital or land - out of one production process into another. Factor mobility may involve the movement of factors between firms within an industry, as when one steel plant closes but sells its production equipment to another steel firm.

• Factors of production are potentially mobile in three distinct ways:

  • Between firms within the same industry
  • Between industries within the same country
  • Between firms or industries across countries
• A standard simplifying assumption in many trade models is that factors of production are freely and costlessly mobile between firms and between industries but not between countries.
• The immobile factor model and the specific factor model are two models that assume a degree of factor immobility between industries.