Trade and Isoquants

Trade and Production

Stephen Bruestle
Department of Economics University of Virginia

Friday 7th September, 2012

Trade and Isoquants

Input Factors

Capital - equipment, machinery, vehicles, etc. used to make

products
Labor - skills, eort, and hours worked by workers used to

make products
Capital Intensive Goods: manufactured goods Labor Intensive Goods: education, services, software, art,

music, etc.

Trade and Isoquants

Isoquants

isoquant - same qantity show isoqant with wages, interest rate, and diminishing

marginal returns
show 2 good Lerner diagram with cone of diversity,

endownment, and the determination of which goods are produced

Trade and Isoquants

Rybczynski (1955) Theorem

Theorem
An increase in a factor endownment will increase the output of the industry using it more intensively and decrease the output of the industry using it less intensively.
show with 2 good Lerner diagram

Trade and Isoquants

Factor Price Equalization Theorem

Theorem
If two countries produce the same two goods for the same prices and factor intensity reversals do not occur, then the factor prices of the two goods are equalized.
show with 2 good Lerner diagram

Trade and Isoquants

Stopler-Samuelson (1941) Theorem

Theorem
an increase in the relative price of one good will increase the real return of the factor used more intensively in that goods production and reduce the real return of all other factors
%w > %p1 > %p2 > %r show with 2 good Lerner diagram