Professional Documents
Culture Documents
• Home Country
Manufacturing uses labor and capital.
Agriculture uses labor and land.
Diminishing returns to labor—decreasing MPLM and
MPLA (see Figure 3.2).
Specific-Factors Model
Figure 3.2
Specific-Factors Model
Figure 3.3
Specific-Factors Model
W = PM ⋅ MPLM
Specific-Factors Model
W = PM ⋅ MPLM
W = PA ⋅ MPLA
Specific-Factors Model
• Since we assume that
labor is mobile, the wages
in the two industries must
be equal. PM ⋅ MPLM = PA ⋅ PMLA
• Relative price of PM PMLA
manufacturing equals the =
opportunity cost of PA PMLM
manufacturing (slope of
PPF).
Specific-Factors Model
• In equilibrium
PM/PA = −(slope of PPF) = −(slope of indifference curve)
The indifference curve is tangent to PPF
Specific-Factors Model
Home Country without Trade
Agriculture
Output, QA
A
U1
Slope = –(PM/PA)
B
PPF
Manufacturing
Output, QM
Specific-Factors Model
• The Foreign Country
Assume the no-trade price in the foreign country
(PM*/PA*) is higher than that in the Home Country
(PM/PA).
Agriculture
Output, QA
Once
Tradetrade
makesis opened
prices and
for
The gains from
consumers trade
faceinthe can be
new
Slope = –(PM/PA)W manufacturing
measured by the Home
rise in rise
utility
world
as price,
seen fromthey
newareprice
ableline
to
from
moveUto1 to U2.
a higher indifference
C
curve (U2)
A U2
Gains from trade
U1
Slope = –(PM/PA)
B
PPF
Manufacturing
Output, QM
Specific-Factors Model
• What has happened at Home?
The relatively higher price in manufacturing attracts
more workers to that industry—production now at point
B (instead of A).
Manufactured goods are exported and Agricultural
goods are imported.
Consumption changes — moving individuals to a higher
indifference curve allowing them to now consume at C
(instead of A).
Specific-Factors Model
Old production = A
New production = B
Old consumption = A
New consumption = C
Specific-Factors Model
• Conclusions
LM + LA = L
Labor used in manufacturing is measured from the left axis.
Labor used in agriculture is measured from the right axis.
See Figure 3.5
Earnings of Labor
• Determination of Wages
Firms hire up to the point where wages equal the value
of the marginal product.
We can graph PM ∙ MPLM and PA ∙ MPLA in figure 3.5.
0M L → L ←L 0
M A A
L
Manufacturing Agriculture
labor
Total labor
labor Figure 3.5
supply
Earnings of Labor
Assume PM rises
PM*MPLM curve shifts up by Δ PM ∙ MPLM
New equilibrium at higher wage
LM has increased and LA has decreased
Figure 3.6
Earnings of Labor
PA⋅MPLA
B
W’
ΔW PM'⋅MPLM
W
A
PM⋅MPLM
0M L → L L′ ←L 0
M A A
L
Earnings of Labor
∆W PM ⋅ MPLM ∆PM
< =
W PM ⋅ MPLM PM
ΔW/W is the percentage change in wages
Earnings of Labor
APPLICATION
• Manufacturing Services in the U.S.: Employment
and Wages Across Sectors.
• Figure 3.7 shows employment in U.S.
manufacturing industry over time.
• Figure 3.8 shows real wages earned by
production workers in manufacturing, all private
services, and in information services.
Manufacturing and Services in the US
APPLICATION
Manufacturing and Services in the US
APPLICATION
Manufacturing and Services in the US
APPLICATION
• Conclusions
1. Wages differ across different sectors in the economy,
so the assumption that wages are the same in both
industries is a simplification.
2. Many workers that are displaced every year for various
reasons must find jobs elsewhere.
Some are laid off because of import competition, but
there are many other reasons
3. The majority of workers find new jobs within 2–3 years,
but not necessarily at the same wage
4. Real wages for all production workers fell in most
years between 1972–95, but have since risen.
Manufacturing and Services in the US
APPLICATION
Job Losses in Manufacturing and Service Industries, 2003–2005
RK = PM ⋅ MPK M
RT = PA ⋅ MPTA
Earnings of Capital and Land
• Change in the Real Rental on Capital
Assume PM increases as before, PA constant.
We saw before that wages rise and labor shifts from
agriculture to manufacturing.
As more labor is used in manufacturing, the marginal product of
capital will rise.
As more labor leaves agriculture, the marginal product of land
will fall.
General Conclusion:
An increase in the quantity of labor used in an industry
will raise the marginal product of the factor specific to
that industry, and a decrease in labor will lower the
marginal product of the specific factor.
Earnings of Capital and Land
• Agriculture
Sales Revenue = PAQA = $100
Payments to Labor = QLA = $50
Payments to Land = RTT = $50
0(QA ) − ∆WLA
∆RT =
T
We know that wages are increasing which means the
rental on land is falling. We can calculate how much.
Numerical Example
• Change in Rental on Land
• Land rent falls by same percentage as
wage increases.
This occurs because we assumed labor and
land received the same share of sales revenue
∆RT ∆W WLA
=−
RT W RT T
∆RT 50
= −5% = −5%
RT 50
Earnings of Capital and Land