A Model of a Two-Factor Economy Factor Intensity In a world of two goods(cloth and food) and two factors(labor and land), food production is land- intensive, if at any given wage-rental ratio the land labor ratio used in the production of food is greater than that used in the production of cloth TELE>TOLC Example: If food production uses 80 workers and 200 acres, while cloth production uses 20 workers and 20 acres, then food production is land-intensive and cloth production is labor-intensive Copyright C 2003 Pearson Education, Inc Slide 4-6
Copyright © 2003 Pearson Education, Inc. Slide 4-6 • Factor Intensity – In a world of two goods (cloth and food) and two factors (labor and land), food production is landintensive, if at any given wage-rental ratio the landlabor ratio used in the production of food is greater than that used in the production of cloth: TF /LF > TC/ LC – Example: If food production uses 80 workers and 200 acres, while cloth production uses 20 workers and 20 acres, then food production is land-intensive and cloth production is labor-intensive. A Model of a Two-Factor Economy
A Model of a Two-Factor Economy Figure 4-2: Factor Prices and Input Choices Wage-rental ratio, wlr cC FF Land-abor ratio, T/L Copyright C 2003 Pearson Education, Inc Slide 4-7
Copyright © 2003 Pearson Education, Inc. Slide 4-7 CC FF Wage-rental ratio, w/r Land-labor ratio, T/L A Model of a Two-Factor Economy Figure 4-2: Factor Prices and Input Choices
A Model of a Two-Factor Economy Factor Prices and Goods prices Stolper-Samuelson Theorem(effect) If the relative price of a good increases, holding factor supplies constant, then the nominal and real return (in terms of both goods) to the factor used intensively in the production of that good increases, while the nominal and real return (in terms of both goods) to the other factor decreases The reverse is also true Copyright C 2003 Pearson Education, Inc Slide 4-8
Copyright © 2003 Pearson Education, Inc. Slide 4-8 ▪ Factor Prices and Goods Prices • Stolper-Samuelson Theorem (effect): – If the relative price of a good increases, holding factor supplies constant, then the nominal and real return (in terms of both goods) to the factor used intensively in the production of that good increases, while the nominal and real return (in terms of both goods) to the other factor decreases. – The reverse is also true. A Model of a Two-Factor Economy
A Model of a Two-Factor Economy Figure 4-3: Factor Prices and Good prices Relative price of cloth, PCPE Wage-rental ratio, wr Copyright C 2003 Pearson Education, Inc Slide 4-9
Copyright © 2003 Pearson Education, Inc. Slide 4-9 SS Relative price of cloth, PC/PF Wage-rental ratio, w/r A Model of a Two-Factor Economy Figure 4-3: Factor Prices and Goods Prices
A Model of a Two-Factor Economy Figure 4-4: From Goods Prices to Input Choices Wage-renta ratio, w/r FF w/门2 Relative (PP:)2(Pc/PF) (TC/Lcl'(TC/LC(T/L)(T/LELand price of labor cloth, PCPE Increasing Increasing Rato,T几 Copyright C 2003 Pearson Education, Inc lide 4-10
Copyright © 2003 Pearson Education, Inc. Slide 4-10 FF CC SS Landlabor Ratio, T/L Relative price of cloth, PC/PF Wage-rental ratio, w/r (PC/PF ) 1 (TC/LC) 2 (TC/LC) 1 (TF /LF ) 2 (TF /LF ) 1 (w/r) 2 (w/r) 1 Increasing Increasing A Model of a Two-Factor Economy Figure 4-4: From Goods Prices to Input Choices (PC/PF ) 2