Question

Question 3: The Specic Factors Model a.) How does international trade aect the income distribution in Ricardo's model? b.) Via which channel could international trade in uence the income-distribution in the short-run? A small open economy produces cheese using land and labor and cars using capital and labor. Land and capital are specic factors of production, labor can move freely between both industries. The economy initially exports cheese and imports cars. The price of cheese on world markets increases suddenly by 10% while the price of cars remains constant. c.) Explain, with he help of the graph below, how the welfare of the owners of capital (capitalists), land owners (landlords) and workers is aected by this price change. Which group will lobby for protection from trade for sure? d.) Is the model structure you used in this question suitable to assess the welfare eects of trade in the long run? Brie y explain.

Answer 1

(a) International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications.

The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Ricardian model is based on the following assumptions:

- Labor is the only primary input to production.

- The relative ratios of labor at which the production of one good can be traded off for another differ between countries.

(c)