Question

3. Suppose there are drastic technological

improvements in shoe production at Home such
that shoe factories can operate almost complete-
ly with computer-aided machines. Consider the
following data for the Home country:
Computers:
Shoes:
Sales revenue = PcQc = 100
Payments to labor = WLc = 50
Payments to capital = RKC = 50
Percentage increase in the
price = APc/Pc = 0%
Sales revenue = PsQs = 100
Payments to labor = WLs = 5
Payments to capital = RK, = 95
Percentage increase in the
price = APs/Ps= 50%
a. Which industry is capital-intensive? Is this a
reasonable question, given that some indus-
tries are capital-intensive in some countries
and labor-intensive in others?
b. Given the percentage changes in output
prices in the data provided, calculate the
percentage change in the rental on capital.
c. How does the magnitude of this change
compare with that of labor?
d. Which factor gains in real terms, and which
factor loses? Are these results consistent
with the Stolper-Samuelson theorem?

Answer 1

a. The shoe industry in Home is capital-intensive, as payments to capital are equal to payments to labor in that industry.

It is reasonable to ask which industry is capital-intensive, but it is important to note that the capital intensity of an industry can vary across countries and regions depending on factors such as technology, labor costs, and natural resources.

b. Using the formula (APs/Ps - APc/Pc)/(RKc/Kc), we get:

(50%/0% - 0%/0%)/(50/100) = 100%

Therefore, the percentage change in the rental on capital is 100%.

c. The magnitude of the percentage change in the rental on capital is higher than that of labor (100% compared to 90%). Therefore, the change in the rental on capital is larger than the change in labor payments.

d. Capital gains in real terms, as the rental on capital increases by 100%, while the price of shoes increases by 50%. Labor loses in real terms, as labor payments only increase by 90%, which is less than the increase in the price of shoes.

These results are consistent with the Stolper-Samuelson theorem, which predicts that an increase in the price of a good will benefit the factor of production that is used intensively in that industry (in this case, capital), while harming the factor that is used less intensively (in this case, labor).