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, Vol. 69, No. 276 (Dec., 1959), pp. 733-748 Published by: Blackwell Publishing for the Royal Economic Society Stable URL: http://www.jstor.org/stable/2227670 . Accessed: 23/01/2012 10:28

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of the Stolper-Samuelson formulation of the theorem and then to restate the theorem: this restatement being considered to be the only true and general statement about the effect of protection (prohibitive or otherwise) on real wages of factors in the context of the basic Stolper-Samuelson model. Black for substantial help with the exposition of the paper." Mr. I. pp. which is not accepted). linear and homogeneous production functions subject to diminishing returns (along isoquants) and incomplete specialisation in production. Full employment of factors. 199-210. Section II proceeds to extend the scope of the discussion with the argument that. " International trade necessarilylowers the real wage of the scarce factor expressedin terms of 1 This paper was read to the Nuffield Economics Society. My thanks are due to Professor Hicks and J. June 1957. PROTECTION AND REAL WAGES 2. but shows that no general statement about which of the factors this will be can be deduced from the relative 'scarcity' of the factors in the Stolper-Samuelson sense. In the following analysis. two commodities enjoying different factor intensities. 199. Lancasterhas re-examinedthe famous StolperSamuelson theorem and concluded: " This paper does not deny that protection will raise the real wage of one of the factors. with a non-prohibitive tariff. who has been generous with suggestions that have led to numerous improvements in the paper. The logical truth of the restated theorem is briefly analysed then in the context of alternative models. therewith to advance a critique (distinct from Mr." It is proposed in Section I of this paper to review systematically the original Stolper-Samuelson contribution. The following quotation is from p. some implications of this distinction are then analysed. REAL WAGES AND REAL INCOMES I 1. pure competition and perfect mobility of factors are also assumed. we shall take the basicStolper-Samuelson model to mean that the protecting country has two factors. 2 JOURNAL. Founded on this model. IN a recent article in this JOURNAL 2 on " Protection and Real Wages: A Restatement. Lancaster'scriticism.PROTECTION. " Although the Stolper-Samuelson theorem ' Protection raises the real wage of the scarce factor ' is shown to be an incorrect generalisation. a sharp distinction must be drawn between the impact on the real wage of a factor and the effect on its real income. ECONOMIC . we have three alternative formulations of the theorem concerning the impact of protection on the real wages of factors: (1) Restrictive Stolper-SamuelsonTheorem. a restatement in the form ' Protection raises the real wage of the factor in which the imported good is relatively more intensive ' has general validity. I am also happy to record my heavy indebtedness to Professor Harry Johnson.

201. any good. cit. " Protection and Real Wages. p. cit. The theorem can be rewritten as follows: prohibitive protection necessarily raises the real wage of the scarce factor. op. we may rewrite it thus: protection (prohibitive or otherwise) necessarilyraises the real wage of the scarce factor. and (3) the title chosen for the article is not " International Trade and Real Wages " but " Protection and Real Wages. 2 The actual formulation of the general Stolper-Samuelson theorem is from Lancaster.. op.. 346.. Protection raises the real (2) GeneralStolper-Samuelson wage of the scarce factor.E. (4) protection raises the real wage of the scarce factor. reference to the last formulation will always be by its full title. 199. 4. as we shall later see. (3) Stolper-Samuelson-Metzler-Lancaster Theorem. if we wish to sustain only the restrictive formulation of the theorem. p. p. p." Lancaster. . The comparison is confined to the case of a prohibitive tariff and excludes non-prohibitive protection. also construes the Stolper-Samuelson theorem in its general form. p. cit. Concerning argument (1). Blakiston Co. Therefore.2 This formulation is clearly intended to be more general and includes non-prohibitive tariffs as well. Theorem. To emphasise this." Readingsin the Theoryof International Trade (A. 3. These arguments must each be closely examined. Thus any gain to the country through monopolistic or monopsonistic behaviour is excluded " (op." $ In the ensuing analysis any reference to " the Stolper-Samuelson theorems" should be taken to relate to the initial two formulationsalone. we must distinguish between prohibitive and non-prohibitive protection: (i) Protection will necessarily raise the relative price of the im1 Stolper and Samuelson. (3) the importable good is intensive in the use of the scarce factor. this assumption is quite superfluous.. thus witness his argument that " Protection will cause a movement in the generaldirectionQ'Q.A.. 344).734 THE ECONOMIC JOURNAL [DEC. there are several indications that Stolper and Samuelson had in mind the general formulation as well: (1) a large number of quotations they cite from other authors to outline the problem refer to tariffs in general rather than to tariffs of a prohibitive nature alone. While the bulk of their analysis relates explicitly to the restrictive formulation. This theorem has been given its stated name on grounds which are made explicit later. 3 Lancaster. away from the free-trade point towards the self-sufficiency point " (my italics). We can begin by setting out the basic elements in the argument leading to the twin formulationsof the Stolper-Samuelson theorem: (1) protection increases the internal relative price of the importable good: (2) an increase in the relative price of a good increasesthe real wage of the factor used intensively in its production. op." 1 This formulation restrictsitself to the comparison of the free-trade real wage with the self-sufficiencyreal wage of the scarce factor. 1949)."Protection [prohibitive or otherwise] raises the real wage of the factor in which the imported good is relatively more intensive. (2) they feel it necessary to assume that " the country in question is relatively small and has no influence on the terms of trade.. cit. 199.

which is reproduced. pp. however. T. when a slightly altered condition is fulfilled. REAL WAGES AND REAL INCOMES 735 portable good when the tariff is prohibitive.2 It follows. Metzler and Lancaster. Argument (2) follows necessarily from the basic Stolper-Samuelson model. pp. however. " Tariffs.. can be ruled out. the free-trade relative price of the importable good is lower than under self-sufficiency. These are summarised in Fig. 3 "International Trade and the Equalisation of Factor Prices. op.4 Let Lc and L4representthe labour employed in producing clothing and food respectively. the " perverse " possibility tariff and the impact of increased mentioned in the text will occur. This limiting case will henceforward be ignored. 188 of Samuelson's 1949 ECONOMIC JOURNAL article." ECONOMIC JOURNAL." ManchesterSchool. when the elasticity of foreign demand for is less than the domestic marginal propensity to consume imports (7qZ) exportable goods (C).-VOL. LXIX. 270-83. as with Stolper and Samuelson." ECONOMIC JOURNAL. then. and T. This case. 2 Metzler. Where. 1. however. We propose thus to avoid altogether the use of the box-diagram and work instead with the unique relationshipsthat Samuelson derived in these later articles between commodity price-ratios. determining the impact of protection on the internal commodity price-ratio relates to the case where the initial situation is that of free-trade. with slight changes." Journal of February 1949. It should be emphasised that the Metzler formula for Political Economy. pp. as argued in Section II. 181-97. June 1948. June 1949. is confined to initial situations of free trade.' (ii) Non-prohibitive protection may either raise. 1-29. however. Professor Johnson. the initial situation itself has a protection is the subject of analysis. that if imports are not inferior goods in the protecting country's consumption this case requires inelastic foreign demand. the discussion of this well-known diagram has been kept brief in this paper. 3 B . leave unchanged or lower the internal relative price of the importable good. in the context of our present model. Full exploration of this diagram is to be found in an excellent article by ProfessorJohnson. a prohibitive tariff) for demand to be elastic.1959] PROTECTION. 276. The discussion in Section I. pp. September 1957. from Samuelson's 1949 article.factor price-ratiosand factor proportionsin the two industries in a country. No. and we can ensure that the internal relative price of the importable good always rises with the imposition of a tariff elastic foreign demand (sometimes done in the form by assuming either of assuming a small country) or a big enough tariff (in the limit. by assuming that the community indifference curves (used here without any welfare connotation) are strictly convex. the Terms of Trade and the Distribution of National Income. International Trade and Factor Prices. to be found in Harrod. in the context of the model used here. 1 This is true except in a limiting case where the terms of trade will not change with trade. June 1958. pp. 163-84. 4 This diagram is to be found on p. To show this simply. 245-55. from the given assumptions concerning technology alone. " Factor Endowments." ECONOMIC JOURNAL. On grounds of economy. 5. works with a slightly adapted diagram. we should recall the technological features of 3 to the model employed by Samuelson some years later in this JOURNAL demonstrate factor-price equalisation: these features are identical with those of the Stolper-Samuelson model in all respects. " Factor-price Relations Under Free Trade. being the quantities of land so employed. and " International Factor-Price Equalisation Once Again. cit. Metzler has demonstratedthat this last " perverse" possibility will occur.

we do not need to make the strong assumption that factor-intensities are non-reversible at all factor price-ratios. L/ T the factor endowment ratio of the country. The marginal physical product of land in both products will thus rise and of labour fall. furtherincre-ases the real wage of bothlabour and land. W/R representsthe ratio of wages to rents.736 THE ECONOMIC JOURNAL [DEC. therefore. at all relevant factor price-ratios. . it should be noted. This argument. Clothing is the labour-intensive industry. the factorintensively employed in its production.T > L. and Py/P. (L0/. rests on the assumption. part of the basic Stolper-Samuelson model. that the rise of the relative price of food does not go so far as to make the country specialise completely on food. W/R (FACTOR PRICE-RATIO) T?- (L (COMMODITY PRICE-RATIO) 0 PF/PC L/T FIG. once the country is in the relative price of food will raise specialisedcompletely. the labour-to-land ratios in both food and clothing will rise. and reduces the real wage of labour. food the land-intensive industry. With it. the factor intensively used in producing clothing (whose relative price has fallen)./ TF at all relevant WIR. an increase (de1 Although the factor-intensities of the commodities may be reversible. so that the real wage of land will be unambiguously increased and of labour decreased.)' As wages fall relatively to rents. Increase in the relativeprice of food thus increasesthe real wage of land. which is destructiveof the full validity of argument (2). in so far as the fall in the real wage of labour is concerned. the price of food over the price of clothing. and demand conditions are totally absent from it. The factor endowment ratio of the country (L/ T) fixes the range of the diagram which is relevant. the price of food is shown to rise relatively to that of clothing in a monotonic fashion. Given the basic Stolper-Samuelson model. change it to T1 such that the relative price of food rises. therefore. 1 T being any given commodity price-ratio (Pl/Fc). This is a purely technology-determineddiagram. they cannotreverse for a country with a given factor endowment. for. At the present stage of our argument.

3 Using each of these definitions in turn. This definition has been used by Heckscherand Ohlin. The crucial question that it raises is: does the Heckscher-Ohlin theorem follow from the basic Stolper-Samuelson model? To answer this question. Jones. Heckscher-Ohlin Definition. cit. for instance." We may choose from three alternative definitions of factor scarcity: A. tariffs are imposed on labour-intensive industries rather than on products of industries using a factor which is scarcer at home than abroad. 6. It may also be described as an internal definition. since the country'sscarce factor is that factor which is more expensive prior to trade than abroad. country A is labour-abundant and country B land-abundant if. then the Heckscher-Ohlin theorem holds by definition." Proceedings EconomiaInternazionale. since it excludes any comparison with-the foreign country. p. The definition may be also illustrated Theorem. reprinted in Re-examined. A country's scarce factor is that which is used more intensively in the production of the importable good. " Factor Proportions and the Heckscher-Ohlin Studies. 1-10. This may also be describedas a price definition. pp.1959] PROTECTION.February 1954. see a masterly article. (L/T)A> (L/T)B- . Again. 3 W. under self-sufficiency. 1953. A country'sscarce factor is that whose relative price is hligherthan abroad under self-sufficiency. (WIR)A < (W/R)B. September 28. argues that " the only acceptable definition " of a scarce factor is that which defines it as the factor " which is used more intensively in the good of which more is produced in isolation than in trade." Review of Economic in terms of Fig. Argument (3) that the importable good is intensive in the use of the scarce factor is really the well-known Heckscher-Ohlin theorem.' B. 1956-57. we should first have to define " factor scarcity. Leontief. A country's scarce factor is that of which there are fewer physical units per unit of the other factor than abroad. since it defines scarcity with reference to the relative physical quantities of factors. It has been suggested by Lancaster. op. LeontiefDefinition. under selfsufficiency. This definition may be describedas tautological.2 C. with the possible exception of the pauper-labour argument for such tariffs. 2 For a convincing attribution of the authorship of this definition of factor scarcity to Heckscher and Ohlin. 1: country A is labour-abundant and country B land-abundant if. since it turns the HeckscherOhlin theorem into a valid proposition by definition.. 208. This may also be described as a physical definition. " Domestic Production and Foreign Trade: The American Capital Position of the AmericanPhilosophicalSociety. Lancaster Definition. let us analyse the HeckscherOhlin theorem. REAL WAGES AND REAL INCOMES 737 crease) in the relative price of a good will necessarilyincrease (decrease) the real wage of the factor intensively used in its production." It is of some interest to note that tariffs designed to influence distribution are probably set with reference to such internal criteria: to raise the real wage of labour. A: If the Lancaster definition of factor scarcity is used. B: If the Heckscher-Ohlin definition of factor scarcity is used then the further assumptionsof international identity of production functions and non-reversibility of factor-intensities of commodites between the 1 Lancaster. by R.

(2) The general Stolper-Samuelsontheoremis logically trueif we use the further assumption that the elasticity of foreign demand is greater than the marginal propensity to consume exportable goods (n. would export the land-intensive commodity.Ohlin definition of factor scarcity will suffice to sustain the Heckscher-Ohlin theorem if other factors do not work to invalidate it. and (b) the Lancaster definition of factor scarcity. to Finite Mathematics(Prentice-Hall. (c) the assumptionof internationalidentity of production functions. clothing. (1) The restrictiveStolper-Samuelson theorem is logically true if we use: (a) the basic Stolper-Samuelson model. This follows from the fact that while. Snell and Thompson. specify what appears to be a less restrictive condition than that set out in the text: for instance. clothing. We can now sum up on the Stolper-Samuelson formulations as follows: 3 A. we find that (PF/Pc)A < (PFIPC)Band country A. then the threeof factor-intensitiesof commodities fold assumptionsof non-reversibilities between the trading countries and the international identity of both production functions and tastes will ensure the validity of the Heckscher-Ohlin theorem. instead of identical production functions between countries. p. (b) the Leontief definition of factor scarcity. by virtue of her physical abundance in labour. 1957).' C: If the Leontief definition of factor scarcityis used. 3 The phrase " logically true " in the following statements is used in the strict mathematical sense: " A statement that is true in every logically possible case is said to be logicallytrue" (Kemeny. > c). (c) the assumption of international identity of production functions. Introduction . (b) the HeckscherOhlin definition of factor scarcity. 2 The Heckscher-Ohlin theorem would not hold as a logically true proposition in this case unless we also postulate now international identity of tastes (or the weak postulate that differences in tastes between countries do not affect the issue). If (WIR)A < (WIR)B and production functions with non-reversible factor-intensities are common between the countries. (1) The restrictiveStolper-Samuelson theorem is logically true if we use: (a) the basic Stolper-Samuelson model. > c. this bias in proof clothing: such that. then we can see that (PFIP)A > (PF/P)B under self-sufficiency and the labour-abundant country A will necessarily export the labour-intensive commodity. country A will show a bias towards the production of the labourintensive commodity. We have preferred to use the strong condition (identity of tastes) instead of the weak one on the ground that the use of the latter seems to be bad methodology. (2) The general Stolper-Samuelson theorem is logically true if we use the further assumptionthat n. and (d) the assumption of non-reversibility of factor-intensitiesof commodities between the countries. amounting to the argument that the Heckscher. (d) the assumDtion of non-reversibility of factorThis can be seen readily from Fig. with identical production functions. We could. the differences in the production functions are not large enough to outweigh the effect of differences in factor scarcity on the pre-trade commodity price-ratios.2 7. we could sustain the Heckscher-Ohlin theorem by assuming merely that. of course. 19. B. two countries will suffice to ensure the full validity of the HeckscherOhlin theorem. (1) The restrictiveStolper-Samuelson theoremis logically true if we use: (a) the basic Stolper-Samuelson model. food. C. although physically abundant in labour. in duction may be more than offset by a bias in A towards the consumption self-sufficiency. 1.738 THE ECONOMIC JOURNAL [DEC.

quite explicitly. 4 It is important to remember that these assumptions are restrictive only in so far as we wish to found our theorem exclusively on the basic Stolper-Samuelson model. > c has not been listed here because we wish at this stage to concentrate on only those restrictive assumptions which are made to sustain argument (3). is called for. and.. if we use the Heckscher-Ohlin definition of factor scarcity. (2) they further assume that " the country in question is relatively small and has no influence on the terms of trade ". however. 3 The additional restrictive assumption that -. cit.4 This may also be seen indirectly from 1 Stolper and Samuelson.based on this analysis. . 5. the HeckscherOhlin definition of factor scarcity and the postulate concerning the nonreversibility of factor-intensities.3 10. REAL WAGES AND REAL INCOMES 739 intensities of commodities between countries. (2) The general Stolper-Samuelson theorem is logically true if we use the further assumption that 1t$ > c. Some of the argument is. restrictive. also adopts the Heckscher-Ohlin definition of factor scarcity in discussing the Stolper-Samuelson theorem. p.1959] PROTECTION. 2 this establishesthe general Stolper-Samuelson theorem as logically true (B(2)). is that the theorem should be founded as closely as possible on the basicStolper-Samuelson model alone. therefore. that these restrictive assumptions were made only because we wished to use argument (3) concerning the validity of the Heckscher-Ohlin theorem. p. and (e) the assumption of international identity of tastes. and (1) that. 335-40. on this criterion. A tree-diagram. the assumptionsthat we find ourselves making about the international identity of production functions and the non-reversibility of factorintensities to sustain the twin formulations of the Stolper-Samuelson theorem are. 8. though without complete clarity. given the premises. op. What we could say. is presentedin Table I. obscure in view of the pioneering nature of the article: a sympathetic interpretation. We are now in a position to decide whether Stolper and Samuelson derived their theorems logically.. 9. if we use the Leontief definition of factor scarcity (as we should probably want to since it is. we discover ourselves adopting the threefold restrictiveassumptions (C(1)) of international identity of production functions and tastes plus the non-reversibilityof factorintensities of commodities. in a sense. and (2) that. No critique of the Stolper-Samuelson formulations can thus be founded on the argument that they are not logically true. the most " objective " definition we could adopt in this context). op. Aside from their basic model: (1) they adopt. op. cit. 346. cit. 2 Stolper and Samuelson. pp. Metzler. the assumption of international identity of production functions: 1 this establishesthe restictive Stolper-Samuelson theorem as logically true (B(1)). to sustain the Stolper-Samuelson formulations.. It will be remembered. however. of course.

_ Yes I> c -q Lancaster l _ _ No c Nonprohibitive l l Identical Prohibitive Basic Yes I Non-reversible TABLE Yes > c q Non- 7 \ THeckscher-Ohlin Stolper-Samuelson No No No x?c prohibitive\ Reversible Model Different -_ j Yes Identical reversible Identical Prohibitive _ Yes > Non- _ c ?c NonDifferent prohibitive Reversible _ _ Leontief No No No No _ _ Different _ .740 THE ECONOMIC JOURNAL [DEC. Does real Relative wage of protection values of the and scarce c necessarily raise factor? the Tariffs Tastes Definition Production of Factor-intensity factor functions scarcity Yes Prohibitive _ _ _ _ _ _ _ _ _ _ .

international trade would necessarily affect the real wage of a factor in the same direction as its relative remuneration. If factors of production are not comparable between countries. This theorem has been described as the Stolper-Samuelson-MetzlerLancaster theorem on the following grounds: (1) It is implicitin the Stolper-Samuelson argument. and (b) the assumption that nx > c. This theorem is logically true if we use: (a) the basic Stolper-Samuelson model. 11. no such restrictiveassumptionsare necessary(A( 1)): for the Heckscher-Ohlin theorem has been rendered valid by definition! The suggestion follows readily from these considerationsthat we should reformulate our theorem in terms of arguments (1) and (2) alone. towards the end of their paper: " It does not follow that our results stand and fall with the Heckscher-Ohlin theorem. in the context of the basic Stolper-Samuelson model combined with the assumptionof a small country facing fixed terms of trade. Homogeneity of factors between countries has not been listed separately as an assumption in this paper because it is believed that this is implicit in both the Heckscher-Ohlin and the Leontief definitions of factor scarcity. . This can be done readily: protection (prohibitive or otherwise) raises the real wage of the factor intensively employed in the production of the importable good.. p. 2 Metzler. or if production functions differ. the proposition that. if we use the Lancaster definition of factor scarcity. Lancasterproceedsby establishing.1959] PROTECTION..however. Lancaster'sobservation that the Stolper-Samuelson formulationsare " non-universal" (restrictive)is well taken. Whereas. On this proposition he founds the following critique: " The non-universalityof the [Stolper-Samuelson] theorem is due to incorrect formulation: if the scarce factor is defined as that which is used more intensively in the good of which more is produced in isolation 1 Stolper and Samuelson. REAL WAGES AND REAL INCOMES 741 the fact that." 2 to (3) Lancaster advances this formulation directly as an alternative the Stolper-Samuelson formulations considered above on the ground that it is more general than the latter. does not state it as a rival formulation. op. 13.with the aid of a highly ingenious model. Our analysis neglected the other country completely. but it is abundantly clear that he is aware that this formulation is implicit in the general Stolper-Samuelson theorem. differencesin demand conditions (" which good is the wage-good ") will affect the composition of a country'sforeign trade."1 states it as " the Stolper-Samuelson conclusion (2) Metzler explicitly that tariffs benefit the factors of production which are required in relatively large amounts in the industries competing with imports. cit. cit. pp. of course. 355-6. Metzler. so long as the countryhas only two factors. nevertheless. the argument by which he supports it is erroneous and different from that set out in this paper. while eliminating the use of the troublesome argument (3). op.

if the tautologous definition of factor scarcityis adopted." Which goodwill be importedinto a countrywill depend in our model on the pre-trade commodity price-ratios in the trading countries. Lancaster has further by-passed the only legitimate critique that can be sustained against the actual formulation of the theorem by Stolper and Samuelson: namely. that he really had in mind the physical definition of factor scarcity. Leontief definition of factor scarcity were proven to have been adopted by Stolper and Samuelson. incomplete) only if the physical.2 In failing to investigate precisely what Stolper and Samuelson assumed by way of their definition of factor scarcity. despite the printed commitment to the tautologous definition: the tenor of the argument on p. None of the criticism advanced here should obscure that fact that Lancaster has handled his model with admirable expertise. 209. cit. the StolperSamuelson formulation is meaningless. . that advanced in this paper. these price-ratiosare determined by domestic supply and demand. the Stolper-Samuelson formulation is meaningless. Lancaster's critique would be valid (though. although it follows upon the formulation of the tautologous definition. in view of our preceding analysis. and were adopted by Lancaster as well. than in trade (the only acceptable definition). however. in private communication.that " different wagegoods may make for different factor scarcities. 208. . cit. the two formulationscome to the same thing! To be sure. from elementary considerations. the criticism is merely erroneous. In this sense. it is difficult to understandwhat Lancaster means by the statement that " the previous analysis has shown that different wage-goods may make for different factor scarcities. since the phrases 'real wages ." If the scarce factor is defined tautologously as that which is used intensively in the importable good it follows then. in terms of any good ' and ' scarce factor ' incompatible more pertinently. op." 1 The following comments on Lancaster'scritique seem warranted here. as we have shown. in terms of any good' and ' scarce factor ' representincompatible concepts.742 THE ECONOMIC JOURNAL [DEC. To begin with. p. then the previous analysis has shown that different wage-goods may make for different factor scarcities. as formulated.. in terms of any good ' and ' scarce factor ' represent incompatible concepts. since the phrases ' real wages .. .then the general Stolper-Samuelsontheorem and the StolperSamuelson-Metzler-Lancaster theorem are identical: the phrases "scarce factor " and " factor intensively employed in the importable good" can be used interchangeably. and domestic demand is affected by " which good is the wage-good. why should this make the Stolper-Samuelson formulation CC non-universal" ? Indeed. how can this or make 'real wages render the Stolper-Samuelson formulationsmeaningless concepts? And. Lancaster. seems to suggest this. therefore. Lancaster cannot. op. Lancaster has pointed out to me. In this sense. . claim one formulation to be " non-universal" and the other to be " universallytrue ": on his own definition of factor scarcity. as Lancastersuggests." But surely. 2 1 .

We must still make the restrictiveassumption that 1. as the reader will remember. This case. 2 An apparent exception to this proposition may be investigated.1959] PROTECTION. it may happen. This is really the fundamental theorem that Stolper and Samuelson contributed to our knowedge of the properties of the basic model they were using. clearly want to go the whole way and remove all restrictive assumptionsand restate the theorem to include the entire matrix of possibilities: such that the theorem is logically true. increase in the production of importables will lead to a rise in the labour-to-land ratios. Given the basic model. It should be possible. even when we allow for changing optimum factor-ratios with scale. Even the Stolper-Samuelson-MetzlerLancasterformulation does not found the theorem completely and solely on the basic model.lowers unchanged theinternal relative priceof thatgood. of course. 13. a higher proportion of labour is released than is needed in import-substitution. we can claim only that protection will raise. however. lower or leave unchanged the real wage of the factor in which the exportable good is postulated to be intensive according as protection raises. Where the optimum factorratio changes with scale. Our task is yet incomplete. however. It should perhaps be emphasisedthat the preceding analysishas been centred entirely on the problem of analysing the impact of protection on real wages of factors in the context of the basic model employed by Stolper and Samuelson. to change with scale. however. REAL WAGES AND REAL INCOMES 743 12. lowers or leaves unchanged the internal relative price of the exportable good. This formulation is: 1 Protection (prohibitive or otherwise) will raise. and hence reducethe real wage of labour. that if the production of labour-intensive importables expands. our formulation is logically true for all possible cases. which is founded exclusively. fall or be unchanged according as the internal relative price of that good rises. However. on the basic Stolper-Samuelson model. In this case. because such technology involves a concave production frontier. given only the basic Stolper-Samuelson model.reduce orleaveunchanged the realwageof thefactor intensively employed in theproduction of a goodaccording as orleaves protection raises. if we allow the optimum factor-proportionswithin industries. even though importables are on averagemore labour-intensive. for instance. of the importable good because any increase in the internal relative price of the exportable good after complete specialisation must raise the real wage of both factors. If we allow for complete specialisation with trade. Hence the logical truth of our proposition. does not constitute an exception to our theorem. if any. But we cannot extend the theorem to the factor postulated to be used intensively in the production. for instance. falls or is unchanged with the imposition of protection. at given factor price-ratios. > c. would be mostly destructive of the full validity of our theorem. We should.2 1 This formulation stems directly from argument (2). . at given factor price-ratios. so that increase in the production of importables occurs when the price of importablesfalls (and not rises). This. to analyse the problem afresh in terms of models employing alternative assumptions. our theorem will continue to be logically true and the real wage of the factor intensively employed in a good will rise.

whereas the country must have gained from protection before the damaged factor can be overcompensated from the tariff-revenues (necessary condition). and distinguish between. it should be impossible to overcompensate the factor with the damaged real wage (from tariff-revenues). To rephrase the proposition. . situations in which the factor with the damaged real wage will be export-intensive (intensively used in exportables) and those where it will be import-intensive. this gain must be large enough to permit overcompensation (sufficient condition). that of the other necessarily rises. hence. accrual of gain to the protecting country from the imposition of protection is a necessary. factors will derive incomes bothfrom the real wage in employment and from the redistributed proceeds of the tariff-revenue. clearly it becomes impossible to maintain that our theorem will be logically true. It seems useful. then. On the other hand.' In the following brief analysis we seek to relate this proposition to Metzler's formula for determining the impact of protection on the internal commodity price-ratio: partly to establish link with Metzler's pioneering analysis in this field and largely because it enables us to define. Since this possibility constitutes a qualification to the generally accepted implication of the Stolper-Samuelson analysis. II. to emphasise of the that if we are interested in finding out the net change in the realincome factors it is only in the case of a prohibitive tariff that a complete identity obtains between change in real wage and change in the real income of a factor. however. the complication arisesfrom the revenue earned by the Government.744 THE ECONOMIC JOURNAL [DEC. Hence arises the interesting possibility that the factor whose real wage has been damaged by protection may still find its real income improved if the formula for the redistributionof the tariff-revenueis heavily biased in its favour. If this revenue is assumed to be redistributed to the owners of factors according to some formula. To begin with. Our analysis has so far been concerned with the original StolperSamuelson problem of discovering the impact of protection on the realwage earned by factors in employment. PROTECTION AND REAL INCOMES 14. condition for the possibility of overcompensating the factor with the damaged real wage. it should be of some interest to delimit the conditions under which it may occur. Where the tariff is non-prohibitive. though not sufficient. if we allow for changing returns to scale in either or both of the two activities. We know from the preceding analysis that where the real wage of one factor is reduced. if protection did not bring some gain to the country as a whole. this possibility of over-compensatingthe damaged factor from thetariff-revenue clearly cannot arise unless the real income of the country as a whole is improved by protection. The discussion is then briefly extended to the 1 That is to say.

only if (2) Similarly. h' is the trade-indifferencecurve of A passing throughF at a tangent to OF and intersecting 0O at U. is unchanged (W) or falls with the imposition of protection (in turn. which is clearly. OF yielding the correspondingterms of trade. greater than at F. by considering points on ?b to the left of U such as R. 2 let Ob be the foreign reciprocal demand curve facing country A. In Fig. . only if Xx> c). The internal relative price of the importable good is then Ob given by the slope of the trade-indifference curve It' at U. (1) Assume that the tariff-added offer curve of country A intersects at U.that protection can leave the real income of the country unchanged only if the internal relative price of the importable good rises from the free-trade level with the imposition of pro' > c). Its postulated curvature derives from 0 Z x~~~~~~~~~~~~~~~~~~ lLw co 0 MPORTABLES ~~~~~~~~~I FIG. we can argue that protection can reduce the real income of the country only if the internal relative price of the importable good rises with protection (in turn. whether qxz c). tection (in turn. F is the free-trade point. 2 the assumption of strict convexity of the production frontier and community indifference curves. by virtue of the postulated curvature of Ii. therefore.1959] PROTECTION. REAL WAGES AND REAL INCOMES 745 case where the initial situation is that of a tariff instead of free-trade and the in protection is the subject of inquiry. protection can increase the real income of the country whether the internal relative price of the importable good rises. effect of an increase 15. (3) However.'. We can deduce.

3 1 When a < c we know now that: (1) the internal relative price of the importable good falls. and (ni) the tariff is small enough to yield some gain to the country. Symbols: Let p be the externalterms of trade. To begin with. whereas if eq$ > c. then. unsatisfactory attempt. we wish to compare the real incomes and wages of in the tariff. we can then conclude as follows: (1) the export-intensive factor will necessarily become better off and it may be possible to overcompensate the import-intensive factor if $ < C. and (2) the country must have become better off. that the tariff be small enough to make the country better off than under free-trade. the factors in an initial situation of a tariff and after increase analysis must be somewhat modified. the real income may rise. thus increasing the real wage of the export-intensive factor and reducing that of the importintensive factor. thus leaving unchanged the real wages of both factors. If. it is clear. Where. Hence the proposition in the text. though not sufficient. C is the initial .746 THE ECONOMIC JOURNAL [DEC. however. 2 Where = c. 3 This formula is derived from the following analysis. If we assume that importables are not inferior goods in the protecting < 1) is a necescountry. however. we know that: (1) the internal relative price of the importable good is unchanged. Where the comparison is confined to the real income and real wage of the factors in an initial free-trade position and after the imposition of a tariff. 1 (2) neither factor will become worse off and at least one better off 2 and if -c. c' is the marginal propensity to consume importables. the export-intensive factor will necessarilyfind its real wage reduced by protection. for the possibility of overcompensating it to arise. t the initial tariff rate and Xi = p(l + t) the internalterms of trade. be unchanged or fall according as . at the initial terms of trade. the Metzler formula must be altered so as to read: the internal relative price of the importable good will rise. Hence the proposition in the text. fall or be unchanged. 16. measured as the price of the importable good over the price of the exportable good.> 1 -c'(1 + t) where t is the initial tariff-rate and < - c't c' _ (1 - c) is the domestic marginal propensity to consume importables. (3) the import-intensive factor will necessarily become better off and it may be possible to overcompensatethe export-intensivefactor if two conditions obtain: (i) $ > c. furnished by Professor Johnson and replacing my earlier. and (2) the real income of the country must increase. though not a sufficient. Thus. where c C. it will be necessary. foreign demand is elastic and importables are not inferior goods. that inelastic foreign demand (?q* sary. condition for the emergence of the possibilityof overcompensating the import-intensive factor. the real income of the country will necessarily improve with the imposition of a tariff. 17. and.

. it is small enough to leave some gain in real income to the country from the increase in tariff. imports.M8 (Sm -M) is the elasticityof foreignsupply of importables. assuming p to be unity initially by choice of units and simplifying.Tthe initial quantityof = M. arguing from the optimum tariff theory.1959] PROTECTION. M.(I +t) R/{(I dC. we arriveat the formulathat the excessdemandfor importables will be positive. r.of course.that we have " well-behaved in production elasticities and consumption.zero or negative accordingas: X< > 1 -c'(l + t) -c't It will be seen that this formulareducesto the Metzlerformulawhen t is zero. if negative. the internalterms of trade will rise to restoreequilibrium. both reduction and increase in the real income of the country are now consistent with any shift in this price. if it exceeds the optimum tariff rate. With ir constant.we have dP dt - (+ P t)' The shift in the demandfor importsdue to the change in the tariffis then given by: I t dM + t)2M+ (I + t) dt The shift in the supplyof importsis given by: dM dp M M dp dp-*dt = p~-r. Thirdly.dR dt c dt The excessdemandfor importables is then given by: (dC dM\ Tt dt dt) -1 ( M .d t=. If the excess demand is positive. Now. t will be zero and the formula will reduce to the well-known Metzler formula.r their productionand M .C . Secondly. they " substitution will fall: assuming. It can be demonstrated.(+t){CP+ M+ {( } {(I +z)} ( -c'Pt)rm} Substitutingrm= -1. R tpM 1?t' t . that although the internal relative price of the importable good must still rise for the country to be as well off as prior to the increased tariff.8. 1 - rate t < 1- domesticconsumption of importables. Analysis:The simplestapproachto the problemis to assumethe internaltermsof trade to be constant and to investigatethe excess demand for importableswhen t changes. we can claim that the real income of the country will improve with increased protection if two conditions obtain: (i) the pre-increasetariff rate is less than the optimum tariff and (ii) either the post-increase tariff rate is also less 1' than the optimum tariff rate or. by a geometrical argument analogous to that used earlier. the impact on the real income of the country will not bear the same relationshipto the shiftsin the internal commodity price-ratio as in the previous analysis with the free-trade initial situation. . = (-1) and R = tpM is the tariffrevenue. REAL WAGES AND REAL INCOMES 747 It will be seen that where the initial situation is that of free-trade..

this assumption being made explicit by the use of the phrase " from increased tariff-revenues. (3) Where. though not sufficient. the set of community indifference curves: this practice has been adopted in the present paper for strictly pedagogic reasons. Such analysis would preclude us from taking as given. (2) The import-intensive factor will necessarily become better off and it may be possible to overcompensate the export-intensive factor from increased tariff-revenueswhen three conditions obtain: I (i) x >1 - c(1+t). x 1 1 c(1 + t) the real wage of neither 1.2 JAGDISH BHAGWATI College. and (iii) either the post-increase tariffrate is also less than the optimum tariff or. . 18. 1959 These considerationslead to the following conclusions: 1 (1) The export-intensive factor will necessarily become better off and it may be possible to overcompensate the import-intensive factor from increased tariff-revenues when three conditions obtain: ( . 1 The first two propositions that follow assume that the factor stated to become necessarily better off continues to receive at least the same revenue as in the initial situation. decrease or remain unchanged according as the increase in tariff raises. it should be re-emphasised that the brief discussion presented here has been concerned only with the limited task of exploring some of the implications of the proposition that accrual of gain to the protecting country from the imposition of protection is a necessary. as we have done here.condition for the emergence of the possibilityof overcompensating. that the tariff-revenuesare divided among the factorsin a given proportion. it is still small enough to leave some gain in real income to the country from the increase in protection. so that factor earnings and income subsidies from tariff-revenues could be related to real incomes of factors. Nuffield Oxford. 2 This calls for a rigorous analysis of distribution and demand. however. therefore. (ii) t < l." This assumption is needed because otherwise improvement merely in the real wage of a factor due to increased protection could be offset by an accompanying unfavourable distribution of tariff-revenues to the factor after the increase in the tariff. It is planned to present a rigorousanalysis of the sufficientconditions for the emergence of this possibility in a subsequent article.c't factor changes with the increase in protection. In conclusion. of course.the factor with the damaged real wage. from tariff-revenues.748 THE ECONOMIC JOURNAL [DEC. that the real income of both factors will increase.if it exceeds the optimum tariff.+ t). It follows. (ii) t < -1 (i) 71 < and (iii) either the postincrease tariff rate is also less than the optimum tariff rate or. if it exceeds the optimum tariff. it is still small enough to leave some gain in real income to the country from the increase in the tariff. lowers or leaves unchanged the real income of the country: assuming.

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