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THE MAGNIFICATION EFFECT WITH THREE FACTORS

1993; Keio University; Volume: 30; Issue: 2 Linguagem: Inglês

0022-9709

Henry Thompson,

Economic Theory and Policy

Price changes create a range of factor price adjustments in the three factor, two good general equilibrium model of production. Comparative static adjustments in the model have been described by magnification effects and sign patterns. This note supplements the diagrammatic technique of Jones and East on (1983, Journal of International Economics) and derives eleven magnification effects implied by the sign patterns of Thompson (1985, Canadian Journal of Economics) . At the bottom line, only one type of magnification effect can be ruled out. Stated in terms of the extreme or most intensive factors, the Stolper-Samuelson theorem cannot be reversed. 1. THE MAGNIFICATION EFFECT WITH THREE FACTORS There is ample motivation for wanting to develop general understanding of the structure of production when there are three factors of production . The three factor model with capital, labor, and land is the basis of the classical model of trade. Including the third factor also allows the input of energy or skilled labor . The third factor, however, complicates analysis. The important concept of factor intensity has to be reinterpreted. The possibility of technical complementarity arises. Also, factor substitution plays a more critical role in comparative statics than when there are only two primary productive factors. Jones and East on (1993) utilize a diagrammatic approach to derive magnification effects between percentage changes in prices of goods and factor prices in the three factor, two good (3 x 2) general equilibrium model of production . Thompson (1985) derives the comparative static sign patterns of the same model . This note derives all possible magnification effects implied by the comparative static sign patterns. The third factor creates a middle term in the factor intensity ranking across industries. Ruffin (1981) shows that the most intensive or extreme factors in the ranking are migration enemies in that an increase in one factor's endowment lowers the ether's price. Additionally, the middle factor is a friend of both extreme factors. Batra and Casas (1976) argue that the price of an extreme factor is positively related with the price of its good, and negatively related with the price * Thanks are due to Ron Jones, Stephen East on, and Akira Takayama for suggestions on several critical points as this paper developed. An anonymous referee of this journal made important suggestions.