The Specific Factors Model for Trade and Migration

Abstract

When proposing new or modified economic policies, it is important to understand the distributional implications of such policies. Do they potentially affect everyone in the same way? Or can we expect different impacts for different segments of the population? The specific factors model is a canonical model that is very well suited to address distributional questions related to a range of economic policies, as it distinguishes multiple sectors in the economy that each employ a different mix of production factors (such as labor and capital). This technical note focuses on applications of the specific factors model to international trade policies; toward the end it also explores how the model might be useful in other settings. At Darden, this note is used in the second-year International Trade elective; a variant of the same model is taught in the Global Economics of Water elective. It would also be suitable in courses covering short-, medium-, and long-run analyses of economic policy. Excerpt UVA-GEM-0157 Mar. 23, 2018 The Specific Factors Model for Trade and Migration In recent years, income inequality—and its rise in many countries—has increasingly taken central stage in public debates. When proposing new or modified economic policies, such as liberalizing trade or establishing more or less restrictive immigration rules, it is important to understand the distributional implications of such policies. Do they potentially affect everyone in the same way? Or can we expect different impacts for different segments of the population? It is clear that it is of primary importance to grasp differential impacts, should they exist, in order to anticipate and manage the political economy of policy reforms. At least from an economist's point of view, it is not unreasonable to expect support from those who stand to benefit, as well as opposition from those whose well-being may be adversely affected. In this context, economic models can be useful. The specific factors model is a canonical model that is very well suited to address distributional questions. Moreover, it is very flexible, in that it lends itself to analyses not just of trade policy, but also of immigration reform and other topics such as water markets. This note focuses on international trade–related applications for a small open economy; toward the end it also explores how the model might be useful in other settings. . . .