In the specific factors model, the effects of trade on welfare overall are ________ and for fixed factors used to produce the imported good they are ________.
A) ambiguous; positive
B) positive; negative
C) positive; positive
D) positive; ambiguous
E) negative; positive

Question

Quizplus · Accepted Answer

In the specific factors model, trade generally leads to overall welfare improvements because it allows countries to specialize in the production of goods for which they have a comparative advantage, thus increasing efficiency and total output. However, for fixed factors that are specific to the production of goods that a country starts importing (i.e., sectors that contract because of trade), the effect can be negative as these factors may not be easily reallocated to other sectors, leading to potential losses for those involved in the production of the now-imported goods.

In the Specific Factors Model, the Effects of Trade on Welfare