Resources, Comparative Advantage and Income Distribution
Resources, Comparative Advantage and Income Distribution
A Written Report Requirement for ECONOMICS 141: International Economics
Professor Burt G. Galang
30 August 2014
Resources, Comparative Advantage and Income Distribution
The previous discussion has shown how international trade could be helpful to both countries that are engaged in it as shown in the Ricardian Model. Now that we have seen the positive effects of trade, it is time to take a look at how trade affects the distribution of income in the country. Previously, the Ricardian Model presents that both the country and its individuals are made better-off by trade. On the other hand, this is not the case in the real world so this discussion would highlight the actual effects of trade to the distribution of income to the individual.
Distribution of income There are two prevalent reasons as to why international trade has brought significant effects on the distribution of income:
A. Resources cannot move immediately or without cost from one industry to another; and
B. Industries differ in the factors of production they demand.
The first reason shows the short-run disadvantage of trade while the second one presents the long-run consequence in the sense that changing the combinations of products that an economy produces will certainly reduce the need for some of the factors of production in the country while raising the need for others. This being explained, we can now say that a more realistic model would be needed to aid in our study of how income distribution can be affected by trade.
Specific Factors Model I. ASSUMPTIONS This model makes it possible for trade to affect the income distribution with the assumptions that:
1. There are two goods produced in an economy.
2. There are other factors of production besides from labor (L), such as Land (T) and capital (K).
3. Perfect competition prevails in the market, which assures that all participants
A Written Report Requirement for ECONOMICS 141: International Economics
Professor Burt G. Galang
30 August 2014
Resources, Comparative Advantage and Income Distribution
The previous discussion has shown how international trade could be helpful to both countries that are engaged in it as shown in the Ricardian Model. Now that we have seen the positive effects of trade, it is time to take a look at how trade affects the distribution of income in the country. Previously, the Ricardian Model presents that both the country and its individuals are made better-off by trade. On the other hand, this is not the case in the real world so this discussion would highlight the actual effects of trade to the distribution of income to the individual.
Distribution of income There are two prevalent reasons as to why international trade has brought significant effects on the distribution of income:
A. Resources cannot move immediately or without cost from one industry to another; and
B. Industries differ in the factors of production they demand.
The first reason shows the short-run disadvantage of trade while the second one presents the long-run consequence in the sense that changing the combinations of products that an economy produces will certainly reduce the need for some of the factors of production in the country while raising the need for others. This being explained, we can now say that a more realistic model would be needed to aid in our study of how income distribution can be affected by trade.
Specific Factors Model I. ASSUMPTIONS This model makes it possible for trade to affect the income distribution with the assumptions that:
1. There are two goods produced in an economy.
2. There are other factors of production besides from labor (L), such as Land (T) and capital (K).
3. Perfect competition prevails in the market, which assures that all participants