The Specific Factor Model

Consider the Specic Factor Model studied in class: there is one country, a small open economy that takes commodity prices as given, on World markets. There are two goods, AgriCulture (A) and Manufacturing {M}. All markets are competitive. Production exhibits diminishing return to labor. Manufacturing requires capital (K) and labor (L) while Agri- culture requires land {T} and labor {L}. Workers are free to move between sectors but capital and land are specic to their sectors. 1. Construct a diagram to showcase the relation between the value of the marginal product of labor in the two sectors and the wage. Put the size of the labor force L on the horizontal axis. 2. Use your diagram to study the consequences of a drOp in the price of Manufacturing on World markets for (a) the share of workers employed in Agriculture, {b} the nominal and real wages of workers, {c} the welfare of workers, (d) the welfare of capitalists {capital-owners), and {e} the welfare of land-owners. 3. Go back to the baseline diagram, before any change. Consider the following policy question: Some of the workers in this country now have an opportunity to go work abroad, at a much higher wage (roughly a third of them could go, if allowed). The candidate of Party W says that this is an insidious form of \"brain drain" and that foreigners are stealing our best workers and therefore campaigns on a platform of restricting labor mobility. He argues that the workers benefited from public services and public education here and therefore they have a duty to stay here and contribute. The candidate of Party Y comes out in favor of labor mobility, arguing that people's freedom to free travel and to pursue opportunities cannot be infringed. Use your diagram to study the consequences of the workers leaving for (a) the real and nominal wage of staying workers, (b) the welfare of staying workers, (c) the welfare of capitalists, and (d) the welfare of land-owners. Assume that everyone in the 3 groups (workers, capitalists, land-owners) vote and lobby in favor of their narrowly-defined economic self-interest. Which candidate has the support of which group