ECS4865
ASSIGNMENT 1 2025
UNIQUE NO.
DUE DATE: 30 MAY 2025
, ECS4865
Assignment 1 2025
Unique Number:
Due Date: 30 May 2025
Advanced International Economics
Question 1: Define specific factor and mobile factor. Explain why factor
specificity is not a permanent condition but is a matter of time.
A specific factor is one that is tied to a particular industry and cannot be easily
transferred to another sector in the short run. Examples include land used solely for
agriculture or machines designed for textile production. A mobile factor, such as labour,
can be employed in multiple sectors depending on relative wages and productivity. The
distinction is important in trade models, particularly the Specific Factors Model, where
sector-specific factors are fixed in the short term, while labour is free to move across
industries. However, factor specificity is not a permanent condition but is rather a matter
of time. Over the long run, capital can be repurposed, land can be reallocated, and
labour can acquire new skills, making formerly specific factors mobile. For instance,
machinery designed for one purpose may be modified or sold to another industry.
Similarly, land may shift from agriculture to industrial use. Technological advancements,
policy reforms, and structural economic changes can also influence factor mobility.
Therefore, while specificity matters in the short term, economic adjustment mechanisms
gradually reduce rigidities, enhancing mobility across sectors. This dynamic adjustment
is essential in understanding how economies respond to shocks such as trade
liberalisation.
, Question 2: Optimal allocation of labour between clothing and food industries in
the specific factor model (with diagram)
In the specific factor model, labour is the only mobile factor, while capital and land are
specific to the clothing and food sectors, respectively. The optimal allocation of labour
occurs when the wage rate (w*) is equal in both sectors and equals the value of the
marginal product of labour (VMPL). That is:
w∗=PC⋅MPLC=PF⋅MPLF
This condition ensures that there is no incentive for labour to move between sectors, as
the return is equalised. If more labour were allocated to clothing, the marginal
productivity in clothing would decrease due to diminishing returns, while productivity in
food would rise as fewer workers remain. Equilibrium is restored where the two VMPL
curves intersect.
Diagram (label if required in your submission):
X-axis: Total labour (L), divided between LC and LF
Y-axis: Wage (w)
Two downward-sloping VMPL curves (clothing and food)
Intersection point shows LC∗L and LF∗L
This graphical approach demonstrates the efficiency condition and how changes in
product prices shift the VMPL curves, altering equilibrium labour allocation.
Question 3: Effect of cloth price increase on income of capital owners,
landowners, and workers
When the price of cloth increases in the specific factor model, it affects incomes
differently for the three types of factor owners. Firstly, the owners of capital—specific to
the cloth industry—benefit the most. As cloth becomes more expensive, the marginal
ASSIGNMENT 1 2025
UNIQUE NO.
DUE DATE: 30 MAY 2025
, ECS4865
Assignment 1 2025
Unique Number:
Due Date: 30 May 2025
Advanced International Economics
Question 1: Define specific factor and mobile factor. Explain why factor
specificity is not a permanent condition but is a matter of time.
A specific factor is one that is tied to a particular industry and cannot be easily
transferred to another sector in the short run. Examples include land used solely for
agriculture or machines designed for textile production. A mobile factor, such as labour,
can be employed in multiple sectors depending on relative wages and productivity. The
distinction is important in trade models, particularly the Specific Factors Model, where
sector-specific factors are fixed in the short term, while labour is free to move across
industries. However, factor specificity is not a permanent condition but is rather a matter
of time. Over the long run, capital can be repurposed, land can be reallocated, and
labour can acquire new skills, making formerly specific factors mobile. For instance,
machinery designed for one purpose may be modified or sold to another industry.
Similarly, land may shift from agriculture to industrial use. Technological advancements,
policy reforms, and structural economic changes can also influence factor mobility.
Therefore, while specificity matters in the short term, economic adjustment mechanisms
gradually reduce rigidities, enhancing mobility across sectors. This dynamic adjustment
is essential in understanding how economies respond to shocks such as trade
liberalisation.
, Question 2: Optimal allocation of labour between clothing and food industries in
the specific factor model (with diagram)
In the specific factor model, labour is the only mobile factor, while capital and land are
specific to the clothing and food sectors, respectively. The optimal allocation of labour
occurs when the wage rate (w*) is equal in both sectors and equals the value of the
marginal product of labour (VMPL). That is:
w∗=PC⋅MPLC=PF⋅MPLF
This condition ensures that there is no incentive for labour to move between sectors, as
the return is equalised. If more labour were allocated to clothing, the marginal
productivity in clothing would decrease due to diminishing returns, while productivity in
food would rise as fewer workers remain. Equilibrium is restored where the two VMPL
curves intersect.
Diagram (label if required in your submission):
X-axis: Total labour (L), divided between LC and LF
Y-axis: Wage (w)
Two downward-sloping VMPL curves (clothing and food)
Intersection point shows LC∗L and LF∗L
This graphical approach demonstrates the efficiency condition and how changes in
product prices shift the VMPL curves, altering equilibrium labour allocation.
Question 3: Effect of cloth price increase on income of capital owners,
landowners, and workers
When the price of cloth increases in the specific factor model, it affects incomes
differently for the three types of factor owners. Firstly, the owners of capital—specific to
the cloth industry—benefit the most. As cloth becomes more expensive, the marginal
