Quick Look at The Basic of International Trade

Trade has substantial effects on the income distribution within each trading nation. There are two main reasons why international trade has strong effects on the distribution of income:

• Resources cannot move immediately or costlessly from one industry to another.
• Industries differ in the factors of production they demand.

The specific factors model allows trade to affect income distribution. To take you deeper into this model, you can take a quick look at it.
Assume that we are dealing with one economy that can produce two goods, manufactures and food. There are three factors of production; labor (L), capital (K) and land (T for terrain). Manufactures are produced using capital and labor but not land. Food is produced using land and labor but not capital. Labor is therefore a mobile factor that can be used in either sector. Land and capital are both specific factors that can be used only in the production of one good. Perfect Competition prevails in all markets.

By looking at your capacity to produce anything you can sum up that the production function for good X gives the maximum quantities of good X that a firm can produce with various amounts of factor inputs. For instance, the production function for manufactures (food) tells us the quantity of manufactures (food) that can be produced given any input of labor and capital (land).

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Quick Look at The Basic of International Trade