Model of specific factors of foreign trade, Product...

Model of specific factors of foreign trade

This model was developed by P. Samuelson and R. Jones as a "concomitant result" when checking the model Olin. The essence of this approach is the following: on the basis of the Ricardian model, in which the economy conditionally produces two goods and, accordingly, labor can be used in two branches, the model in question is based on the existence of other factors of production, besides the factor of labor .

Work is seen as a mobile factor capable of moving from one industry to another, but other, specific factors can not move, because they are used only in the production of goods in certain industries. Π. R. Krugman and M. Obstfeld, to illustrate this proposition, propose to consider the economy of the country in which two types of products are produced - industrial goods and food. The given is the presence of three factors of production: labor ( L ), capital ( K ) and land ( T ). In the manufacture of manufactured goods, labor and capital are consumed (the land is not consumed); in the production of food products, labor and land are used, but there is no capital. Here labor is an mobile factor that is applied in any of the sectors, and land and capital are specific factors that can be used only in the production of one kind of goods. On this basis, the production function is revealed as the ratio between the quantities (volumes) of labor and capital employed, showing how much output will be received with given labor and capital expenditure. Production functions for each of the sectors have their own formulas.

For the industrial goods sector:

For the food sector:

For the economy as a whole, the total amount of labor applied ( L ) is as follows:

Analysis of production functions for each of the sectors of the economy makes it possible to identify the production capabilities of each of the factors, i.e. volumes of output of industrial goods ( marginal product of labor ), which creates economic prerequisites for foreign trade. Another condition necessary for its implementation is the existence of different relative prices for goods (in this case industrial products) between the exporting country and the importing country. This is the postulate that underlies all foreign trade, since the absence of a difference in the relative prices of goods makes foreign trade fundamentally impossible.

Product Lifecycle Theory

This is the name of the theory of world trade in finished products based on the stages of the product life cycle. She argues that some types of goods (products) go through a cycle consisting of four stages: introduction, growth, maturity and decline. Accordingly, the production of such a product moves from country to country, depending on the stage of the cycle. These stages are closely connected with each other, representing a certain continuum. The corresponding changes (in stages) are presented in Table. 1.1.

Table 1.1

Product Lifecycle Theory


Life Cycle Stages





Production Location

In the country of innovation (usually industrialized)

In the country of innovation and other industrialized countries

In many countries

Mostly in developing countries

Market Placement

Mostly in the country of innovation with some exports

Mostly in industrialized countries. The shift to export markets as foreign production replaces exports in markets with rapidly growing demand


in developing countries. Some decline in industrialized countries. General stabilization of demand

Mostly in developing countries. The general decline in demand

Specific factors

Almost a monopoly position. Sales are based on uniqueness, not on

The number of competitors is increasing. Some competitors

The number of competitors is decreasing. The price has

Price is the key weapon. Number of manufacturers

the price of the previous product

begin to reduce prices. The product becomes more standardized

important, especially in developing countries

continues to decrease

Production technology

Small-scale production. Implementation of methods that ensure the improvement of the goods. High labor intensity and high qualification. Relatively low capital expenditures

Increased capital outlays, more standardized methods

Large-scale production with high capital costs. High standardization

Unskilled labor for mechanized large-scale production

Source: Daniels D.D. International Business/D.D. Daniels, L. X. Radeba. M .: Del Ltd., 2001. P. 133.

Stage 1 - implementation. This stage includes the development of innovation as a reaction to the established need; production and marketing of new goods within the country; export of new goods from the country. It is also noted that in the last decades the United States is the leading country in initiating the release of most new products and technologies, although other industrially developed countries make an outstanding contribution, primarily Japan. This fact allows us to understand the Leontief paradox, which shows that the US exports mostly labor-intensive products. Since wage rates in the US are among the highest in the world, the question arises as to the competitive positions of such American goods on the world market. One explanation is that the monopoly position of commodity producers allows them to shift costs to those consumers of a new product who do not want to wait for a possible reduction in the price of this product.

Stage 2 - growth. When a product is introduced into production and its sale begins, then for competitors there is an incentive to act, which violates the position of the monopolist. As a rule, an insignificant change in the goods is introduced and, thus, the patent protection of the new product is overcome. At the same time, demand is growing, including in other countries, and primarily in the markets of developed countries. This is how the market is expanding - both through exports and through the creation of new enterprises in different countries.

Stage 3 - maturity. At the maturity stage, the world demand for the product is equalized, although in some countries production and sales can increase, and in others - decline. But, as a rule, at this stage there is a replacement of primary producers, as product models become highly standardized, and their cost is an important tool for competition. A large-scale production of foreign manufacturers begins, which reduces the cost of a unit of production, and then a lower cost makes it possible to increase sales in developing countries. As markets expand and technology spreads, the country of innovation gradually loses its manufacturing advantages. There are incentives to transfer enterprises to developing countries, in which there is less qualified, but relatively cheap labor. This allows us to establish a profitable and efficient production of goods that are in demand.

Stage 4 - Decline. At this stage, markets in developed countries gradually reject goods, they start to curtail: the wealthy people prefer new products. By this time, all production is concentrated in developing countries, and they supply the tapering markets of developed countries with related products.

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