ECS4865
ASSIGNMENT 1 2025
UNIQUE NO.
DUE DATE: 30 MAY 2025
,ECS4865 – Assignment 1 (2025)
Advanced International Economics
Question 1: Definition of Specific and Mobile Factors, and Why Specificity is
Temporary
In the context of international trade and production theory, economic resources used in
production can be classified as either specific factors or mobile factors based on their
ability to shift between different industries.
A specific factor is a resource that is restricted to use in a particular sector and cannot
be easily relocated in the short term. For example, land designated for agriculture or
specialized equipment for textile manufacturing may not be usable in other industries
without considerable modification or investment. These factors are considered “specific”
because they are tied to a certain production process or industry.
On the other hand, a mobile factor is one that can move freely across various sectors.
Labour is the most common example—workers can typically switch between industries
depending on where job opportunities or higher wages exist. Similarly, general-purpose
capital or financial investments can also be redirected to different sectors if returns are
higher elsewhere.
The idea of factor specificity is not fixed; it changes over time. While some resources
are industry-bound in the short run due to technical, institutional, or skill-based
limitations, they can become mobile in the long run. With the passage of time, several
mechanisms contribute to increased mobility: Technological innovation, Training and
education, Policy reforms and investment, Market forces . This transition means
that what is initially seen as a specific factor can eventually become mobile. Therefore,
factor specificity is a short-term constraint rather than a permanent condition.
Economies naturally adjust over time through changes in resource allocation, especially
in response to external shocks like trade liberalisation, which alters the relative returns
of factors in different industries.
, 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)
Advanced International Economics
Question 1: Definition of Specific and Mobile Factors, and Why Specificity is
Temporary
In the context of international trade and production theory, economic resources used in
production can be classified as either specific factors or mobile factors based on their
ability to shift between different industries.
A specific factor is a resource that is restricted to use in a particular sector and cannot
be easily relocated in the short term. For example, land designated for agriculture or
specialized equipment for textile manufacturing may not be usable in other industries
without considerable modification or investment. These factors are considered “specific”
because they are tied to a certain production process or industry.
On the other hand, a mobile factor is one that can move freely across various sectors.
Labour is the most common example—workers can typically switch between industries
depending on where job opportunities or higher wages exist. Similarly, general-purpose
capital or financial investments can also be redirected to different sectors if returns are
higher elsewhere.
The idea of factor specificity is not fixed; it changes over time. While some resources
are industry-bound in the short run due to technical, institutional, or skill-based
limitations, they can become mobile in the long run. With the passage of time, several
mechanisms contribute to increased mobility: Technological innovation, Training and
education, Policy reforms and investment, Market forces . This transition means
that what is initially seen as a specific factor can eventually become mobile. Therefore,
factor specificity is a short-term constraint rather than a permanent condition.
Economies naturally adjust over time through changes in resource allocation, especially
in response to external shocks like trade liberalisation, which alters the relative returns
of factors in different industries.
, 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
