The _______ analyzes the income distribution effects of trade in the short run when resources are immobile among industries.

 Options:

a. Stolpher-Samuelson theory b. factor endowment theory c. specific factors theory d. overlapping demand theory

The Correct Answer Is:

• c. specific factors theory

The correct answer is option “c. specific factors theory.” The specific factors theory is the economic model that analyzes the income distribution effects of trade in the short run when resources are immobile among industries. Let’s provide a detailed explanation of why this is the case and why the other options are not correct:

Correct Answer (c): c. Specific factors theory

Explanation:

The specific factors theory, also known as the specific factors model, is a trade theory that examines the income distribution effects of international trade when certain factors of production are immobile or specific to particular industries. In this theory, it is assumed that in the short run, some resources (factors of production) cannot easily move or be reallocated from one industry to another.

This immobility of resources leads to specific factors that are tied to a particular industry, such as labor specialized in a specific skill set or machinery designed for a specific production process.

When trade occurs, specific factors theory shows that changes in relative prices and production levels can have significant effects on the distribution of income among factors of production.

For example, if a country opens up to international trade and the industry it specializes in (due to comparative advantage) expands, the specific factors used in that industry may experience an increase in their income, while factors tied to industries that are not specialized may experience a decrease in their income.

Now, let’s discuss why the other options are not correct:

a. Stolper-Samuelson theory:

The Stolper-Samuelson theorem is a different trade theory that focuses on the relationship between changes in relative prices and the income of factors of production. It specifically examines the impact of changes in commodity prices on the returns to factors of production, such as labor and capital.

The theorem suggests that when the price of a product that uses a specific factor intensively (e.g., labor-intensive goods) rises due to trade, the return to that factor will also increase. Conversely, factors used intensively in the production of goods whose prices fall may experience a decrease in income.

While related to trade and income distribution, the Stolper-Samuelson theory doesn’t directly address the issue of resource immobility among industries, as the specific factors theory does.

b. Factor endowment theory:

The factor endowment theory, often associated with the Heckscher-Ohlin model, focuses on the relationship between a country’s factor endowments (such as labor and capital) and its pattern of comparative advantage in trade.

This theory emphasizes how differences in factor endowments among countries lead to specialization in the production of goods that are intensive in the use of the relatively abundant factor.

While the factor endowment theory is important for understanding trade patterns, it does not delve into the income distribution effects within a country, especially regarding the short run and immobile resources, as the specific factors theory does.

d. Overlapping demand theory:

The overlapping demand theory is not a standard economic theory used to analyze trade or income distribution effects. It does not specifically address the issue of resource immobility among industries or the short-run income distribution effects of trade.

The theory may involve concepts related to consumer preferences and market demand but is not directly relevant to the specific factors theory’s focus on the income distribution effects of trade in the context of immobile resources.

In summary, the correct answer is option “c. specific factors theory” because it specifically addresses the income distribution effects of trade in the short run when resources are immobile among industries.

This theory provides insights into how trade can impact the income of specific factors tied to particular industries, making it a valuable tool for analyzing the effects of trade on income distribution in situations where resources cannot easily be reallocated among sectors.

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