International Trade - Theory and Policy, 2010a

Zero-profit steel: 3w + 4r = 120
Zero-profit clothing: 2w + r = 60
Follow the same procedure to solve for the equilibrium wage and rental rates.
First, multiply the second equation by (–4) to get
3w + 4r = 120
and
−8w − 4r = −240.
Adding these two equations vertically yields
−5w − 0r = −120,
which implies w=−120−5=24. Plugging this into the first equation above (any equation will do) yields 3∗24
+ 4r = 120. Simplifying, we get r=120−724=12. Thus the new equilibrium wage and rental rates are w = 24
and r = 12.
The Stolper-Samuelson theorem says that if the price of clothing rises, it will cause an increase in the price
paid to the factor used intensively in clothing production (in this case, the wage rate to labor) and a
decrease in the price of the other factor (the rental rate on capital). In this numerical example, w rises
from $8 to $24 per hour and r falls from $24 to $12 per hour.
Percentage Changes in the Goods and Factor Prices
The magnification effect for prices ranks the percentage changes in output prices and the percentage
changes in factor prices. We’ll denote the percentage change by using a ^ above the variable (i.e., X∧=
percentage change in X).
Table 5.7 Calculating Percentage Changes in the Goods and Factor Prices
PC∧=60−4040∗100=+50%
The price of clothing rises by 50 percent.
w∧=24−88∗100=+200%
r∧=12−2424∗100=−50%
PS∧=+0%
The wage rate rises by 200 percent.
The rental rate falls by 50 percent.
The price of steel is unchanged.
where
w = the wage rate
r = the rental rate
The rank order of the changes in Table 5.7 "Calculating Percentage Changes in the Goods and Factor Prices" is
the magnification effect for prices:
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