Chapter 4 Factor Mobility and Income Redistribution
This chapter continues the theme of income redistribution as a consequence of international trade. The focus here is the effect of factor immobility. In the Ricardian model presented in Chapter 2, it is assumed that workers can move freely and costlessly to another industry. In addition, it is assumed that each worker has the same productivity as every other worker in every other industry. This assumption makes it inconsequential if one industry shuts down because, if it does, the workers simply move to another industry where they will be just as productive and will likely earn a higher wage.
This chapter asks, “What happens if free and costless factor mobility does not hold?” The answer is provided by the results of the immobile factor model. This model is helpful for two important reasons. First, from a practical perspective, the model provides a reason why there can be both winners and losers as a result of international trade. Second, the model highlights an important technique used in economic analysis. Because the immobile factor model is identical to the Ricardian model in all but one assumption, the model demonstrates how changes in model assumptions directly impact the model implications and results. This is an important lesson about the method of economic analysis more generally.