Students can refer to economics a singapore perspective for the diagrams. A technique for making an economic comparison of location alternatives is referred to as a. Due to the difficulty of predicting the patterns of trade in a world of many goods, the heckscherohlinvanek theorem that predicts the factor content of trade received attention in recent years. This tool is especially useful when starting a new business or entering a foreign market. The specific factors model allows trade to affect income distribution. Steve suranovic is an associate professor of economics and international affairs at the george washington university gw in washington, d. The threefactor specific factors model of an economys production po. Macroeconomic factor model a factors are observable economic and. Many types of economic changes can be considered including a movement to free trade, the implementation of a tariff or quota, growth of the labor or capital endowment, or technological changes.
Our book and ebook portfolio comprises major reference works, textbooks, and. Chapter 10 specific factor models and dynamics in international. Markets, methods and models provides a concise, yet complete, coverage of introductory microeconomic theory, application and policy in a canadian and global environment. A pestel analysis or pestle analysis formerly known as pest analysis is a framework or tool used to analyse and monitor the macroenvironmental factors that may have a profound impact on an organisations performance. We shall then examine the specific factors model, which may be thought of in one way as a logical. An increase in the endowment of a specific factor in a sector makes labor in that sector more productive. An empirical demonstration of classical comparative cost theory. James a primbs is an associate professor of finance at the mihaylo college of business and economics at california state university, fullerton. In the first stage, the consumer that owns a specific factor decides whether to organise or not in pressure groups. Factor analysis principal components analysis statistical factor models. In all other respects, the sf model is like the ho model. At the time of our 1993 paper, these were the two wellknown patterns in average returns left.
Further details on specific factors chapter organization. In asset pricing and portfolio management the famafrench threefactor model is a model designed by eugene fama and kenneth french to describe stock returns. We publish many of the most prestigious journals in economics, including a number of fully open access journals. International economics is written by two of the worlds preeminent economists. The fama and french threefactor model or the fama french model for short is an asset pricing model developed in 1992 that expands on the capital asset pricing model capm by adding size risk. A condition that is satisfied in the specific factor model at the profitmaximizing level of output. Static models of international trade based on the specific factors model incorporate only the first of these. Economics stack exchange is a question and answer site for those who study, teach, research and apply economics and econometrics. The specific factors model international trade in the specific factors model income distribution and the gains from trade the political economy of trade. This book is licensed under a creative commons byncsa 3. Factor pricing slide 1225 fama french three factor model form 2x3 portfolios size factor smb return of small minus big book market factor hml return of high minus low for s are big and s do not vary much for for each portfolio p using time series data s are zero, coefficients significant, high r2.
The basic goal of this paper is to develop an endogenous trade policy model in the grossman and helpman 1994 tradition that could endogenise the number of lobby groups in the economy. Eli heckscher 1879 1952 heckscher was a swedish economist. The book is available in the major bookstores in singapore. One of the two factors of production, typically capital, is assumed to be specific to a particular industry.
His research focuses on international trade policy, market ethics, behavioral economics and more recently, climate change policy. To accurately perform these tasks, you need econometric model building skills, quality data, and appropriate estimation strategies. The interesting part of the model is to examine what happens to the. Jones university of rochester most undergraduates in their first year in economics have been exposed to an important ingredient in the specific factors model, a model in which each industry employs some factor used only in that particular industry. The mussa diagram shows how the increase in the price of one product raises wages, raises the rental rate on capital specific to that industry, and lowers the rent on capital specific to the other industry. The present study proposed an equilibrium six factor assetpricing model by adding a human capital component with fama and french, 2015a, fama and french, 2015b five factor model, which consists of the market factor, size, value, profitability, and investment to explain the variations in asset returns. Statistical factor model a factors are unobservable and extracted from asset returns factor model speci. In an ho model, both factors are assumed to be freely mobilethat is, neither factor is specific to an industry. Endogenous number of lobby groups in a specific factor trade. The classical model and the specific factors model springerlink. A multi factor model is a financial model that employs multiple factors in its computations to explain market phenomena andor equilibrium asset prices. The conceptual framework underlying research by economists on medical students career decisions is that medical education is an investment. Singlefirm equilibrium in the specific factor model in this context, a firm will maximize it profits when it produces a level of output such that the wage it must pay to workers is equal to the value of the marginal product at the chosen level of output.
As in the immobile factor model, the factor specific to the export industry benefits, while the factor specific to the importcompeting industry loses. Lessons from the specific factors model of international trade jstor. David ricardos model of trade attempts to personify this quote by assessing the arrangement and profit of international trade in terms of comparative advantage. The magnification effect for the specific factor model is analogous to the magnification effect for prices demonstrated in the heckscherohlin model.
Of increase, decrease, or stay the same, the effect on the value of the marginal product of grapes when there is a decrease in the market price of grapes in a. It expands upon the ricardian model largely by introducing a second factor of production. Fundamental factor model a factors are created from observerable asset characteristics 3. Pestel analysis pest analysis explained with examples b2u. Learn the basic assumptions and results of the specific factor sf model. International economics krugman and obstfeld solution manual. Most undergraduates in their first year in economics have been exposed to an important ingredient in the specificfactors model, a model in which each industry. The dynamic factor model considers the case in which lags of factors also directly a ect x it. An increase in the quantity of factor inputs will lead to an increase in output. The specific factor sf model is designed to evaluate the realworld phenomenon that some factors of production are more mobile between industries than others.
Search the worlds most comprehensive index of fulltext books. Fama and french were professors at the university of chicago booth school of business, where fama still resides. For example, a model with some factor mobility between countries say capital into a foreign enclave is discussed for both model types. Factor models for asset returns university of washington.
The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage in an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i. The specific factor model assumes that an economy produces two goods using two factors of production, capital and labor, in a perfectly competitive market. The heckscherohlin h o model is a general equilibrium mathematical model of international trade, developed by ell heckscher and bertil ohlin at the stockholm school of economics. The reason we investigate the specific factor model in a dynamic framework is that there. Then, a more general model is introduced, with this latter model allowing for both mobile and specific factors of production.
The fama french 3 factor model is an asset pricing model that expands on the capital asset pricing model by adding size risk and value risk factors to the market risk factors. The specific factor model is used to demonstrate the effects of economic changes on labor allocation, output levels and factor returns. The model of perfect competition also assumes that exit will be easy if and when a firm experiences economic losses. Suppose the output of both products requires labor and capital as factor inputs. The model was later developed and formalized mathematically by ronald jones 1971 and michael mussa 1974. Since the mobility of factors in response to any economic change is likely to increase over time, we can interpret the immobile factor model results as shortrun effects, the sf model results as mediumrun effects, and the ho. Garment makers cannot become computer manufactures overnight, but given time the u. On these pages you will find springers journals, books and ebooks in all areas of economics, serving researchers, professionals, lecturers and students. A specific factor model with intermediate goods, centre for international trade and development, jawaharlal nehru university, new delhi discussion papers 1, centre for international trade and development, jawaharlal nehru university, new delhi, india.
Canonical factor analysis seeks factors which have the highest canonical correlation with the observed variables. Hence the model is sometimes referred to as the ricardoviner model. The specific factor sf model was originally discussed by jacob viner and it is a variant of the ricardian model. You can use the statistical tools of econometrics along with economic theory to test hypotheses of economic theories, explain economic phenomena, and derive precise quantitative estimates of the relationship between economic variables. So far we have only considered the static factor model, where the relationship between x it and f t is static. Dynamic factor models dfm constitute an active and growing area of research, both in econometrics, in macroeconomics, and in finance. Keywords exchange rates foreign trade international economics trade policy. One factor of production no distributional conflicts trade not affected by endowments like land or capital factor moves costlessly from producing one good to another. Compare and contrast the ricardian trade model with the specific factors model. A definitive ordering of the percentage changes in all goods and factor prices in a two good specific factor model was derived mathematically by jones 1971. The specific factor sf model was originally discussed by jacob viner, and it is a variant of the ricardian model. Jacob viner 18921970 first examined the specific factors model, which is a.
The economy produces two goods using three factors of production, capital, land. This is written in equation form for a textile firm as follows. The ricardian model is especially simple in that production of commodities had a requirement of only a single factor of production, labor. The time and money costs of medical education act to. He is probably best known for his book mercantilist. British and american productivity and comparative costs in international trade. It does that by assuming that one factor capital cannot move between industries, while the other factor labor can freely move. The entry of new firms exemplifies an important characteristic of perfect competition.
Canonical factor analysis, also called raos canonical factoring, is a different method of computing the same model as pca, which uses the principal axis method. Linear factor model macroeconomic factor models fundamental factor models statistical factor models. In it he offers a critique of current methods to evaluate and choose policies and. The text focuses on the neoclassical factor product, factor fact or and productproduct models, and is suitable. The impact of social and cultural environment on health. He has been teaching international trade and finance for more than twenty five years at gw and as an adjunct for cornell universitys washington, d. I would like to write my research paper using the same methodology for the hong kong stocks and see if i get the same. The specificity of factors to particular industries is often only a temporary problem. International trade theory and competitive models world. I after determining an economic model, and corresponding econometric model to answer the questions of interest, we analyze the data, i. Theory and evidence is composed of a series of papers containing both theoretical and empirical analyses of a set of issues in government fiscal policy. One widely used multifactor model is the fama and french threefactor model.
Production is the process by which factor inputs are transformed into output. Whenever there is an opportunity to earn economic profitseven an unexpected opportunitynew firms will enter, provided that entry is easy. A dynamic specificfactors model of international trade. Economics is the study of choices made under constraints, usually the constraints of budgets, prices, and input costs. Assuming constant returns to scale, the marginal product of labor depends only on the ratio of factors, and therefore the marginal product curve shifts horizontally by the percentage change in the specific factor, as shown. The ricardoviner model, also known as the specific factors model, is an extension of the. This paper identities five common risk factors in the returns on stocks and bonds. Many applications lie at the center of policy questions raised by the recent financial crises, such as the connections between yields on government debt, credit risk, inflation, and economic growth. In a dynamic economy land and capital serve not only as factors of production but as assets which individuals use to transfer income from workinq periods to retirement.
The book contains a comprehensive treatment of the traditional agricultural production economics topics employing both detailed graphics and differentialcal culus. The next major step in international trade theory was to allow more than a single factor, perhaps land, capital, or both, to join labor in theoretical attempts at explaining the wide variety in trade patterns among countries. Economic policy choice in an era of globalization was released by palgrave macmillan in fall 2010. Health is determined by several factors including genetic inheritance, personal behaviors, access to quality health care, and the general external environment such as the quality of air, water, and housing conditions. The specific factor model overview social sci libretexts.
Factor models are statistical models that represent instrument returns by a weighted set of common factors plus an instrument specific factor. In addition, a growing body of research has documented associations between social and cultural factors and health berkman and kawachi, 2000. Difference between the specific factors model and the heckscherohlin model in terms of income distribution effects. World scientific studies in international economicsinternational trade theory and. Price isnt the only factor that affects quantity demanded. I have read fama and french paper on the three factor model and was impressed by the model. Introduction the specific factors model international trade. Both the real trade portion of the book and the monetary portion are divided into a core of chapters focused on theory, followed by chapters applying the theory to major policy questions, past and current.
Key takeaways the specific factor sf model is designed to evaluate the realworld phenomenon that some factors of production are more mobile between industries than others. The specific factor sf model is a variant of the ho model that assumes capital is specific to an industry, while labor is freely mobile between industries. The heckscherohlin model ho model is a general equilibrium mathematical model of international trade, developed by eli heckscher and bertil ohlin at the stockholm school of economics. Microeconomics markets, methods and models download book. New material is included on the specific factors model, the adjustment problem, intraindustry trade, trade policy and imperfect competition and the political economy of protection.
Consider an economy with two perfectly competitive industries, textiles and steel. The ricardian model is especially simple in that production of commodities. Common risk factors in the returns on stocks and bonds. The factor model must then be rotated for analysis. The type of analysis employed in the book is standard neoclassical economics, and this analysis is used to study the macroeconomic incentive effects of. Substitution and income effects and the law of demand. The term describing the sum of the total wage bill and the total capital bill. Compare and contrast the ricardian trade model with the. The mussa diagram shows how the increase in the price of one product raises wages, raises the rental rate on capital specific to that industry, and lowers the rent on capital specific to. The methods for static factor models can be readily extended to estimate the number of dynamic factors. Hence, the ho model is a longrun model, whereas the specific factors model is a short run model in which capital and land inputs are fixed but labor is a variable input in production. It builds on david ricardos theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region.
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