International Trade - Theory and Policy, 2010a

can be used to transport tomatoes or software. Other factors are so specialized that they cannot be easily
adapted for use in other industries. Machinery is often carefully designed for a particular production
process and cannot be applied elsewhere.
However, the adaptability of any productive factor is likely to change over time, with mobility rising the
longer the amount of time that elapses (see Chapter 4 "Factor Mobility and Income Redistribution", Section 4.3
"Time and Factor Mobility"). Thus, if a country were to suddenly liberalize trade, in the very short run—
perhaps up to a few weeks—most of the productive factors would not adjust to the change in prices. This is
the situation reflected in the immobile factor model. After a few months or more, the most adaptable
factors of production would begin to move from the import-competing sectors to the export sectors, while
the least adaptable factors would remain stuck in their respective industries. This situation is
characterized by the SF model, in which one factor is freely mobile but the other is immobile. Finally, in
the very long run—perhaps after several years or more—we might expect all factors to have adapted to the
changed economic conditions, either by moving to another industry or by moving out of productive
activity, as with retired workers and capital equipment. This situation is depicted in the H-O model.
Thus, by piecing together the results of these models, we can evaluate how income redistribution is likely
to change dynamically over time in response to any shock to the system, such as a movement toward trade
liberalization or free trade.
Scenario Setup/Assumptions
Consider a country that produces two goods, which we simply label the import good and the export good,
respectively. Production of these two goods requires two factors of production, capital and labor. Assume
that the country in question is capital abundant vis-à-vis its trading partner and that the export good is
capital intensive relative to the import good. In general, we maintain all the assumptions of the H-O
model, with one exception: we will assume that in the short run, capital and labor are completely
immobile between industries; in the medium run, labor is freely mobile but capital remains immobile;
and in the long run, both labor and capital are freely and costlessly mobile between industries.
We will consider the effects of trade liberalization, although any change that affects the relative prices of
the goods can be expected to stimulate similar dynamic effects. Trade liberalization, which in the extreme
would be a movement from autarky to free trade, would raise the price of the country’s export good and
lower the price of its import good. The change in prices sets off the following effects.
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