Question

4. Suppose that there are drastic technological improvements in shoe production in Home such that shoe factories can operate almost completely with computer-aided machines. Consider the following data for the Home country: Computers: Sales revenue = PcQc = 100 Payments to labor = WLc = 50 Payments to capital = RKC = 50 Percentage increase in the price = APc/Pc = 0% Shoes: Sales revenue = PsQs = 100 Payments to labor = WLs =10 Payments to capital = RKC = 90 Percentage increase in the price = APs/Ps = 40% Which industry is capital-intensive? Is this a reasonable question, given that some industries 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. 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? a. c.

Answer 1

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the . ( the due to whole capital & labour input is measured 6) The percent Change in nental on Capital is given by for computas BR 쁨 (SPC) x P Q • Pac- low whe ㄷ Rke کام 50 E (0 %)*100 - 50 DW I DR K " - 0

for shoes. کہا واله o Da BQc - ( Joey DR R RRS DW Cow (40%) 100 Jo go OR DW 40 qo -( R 2 Z DW 4 AR R § ( w - 1 고 9 substituting so from equation © DR TAR R 4 न 2 R R R 4 AR 9 R. + 9 9

AR DR 4 9 R K 9 n 8 DR 4 9 9R AR 2 으 49 q R 8 OR OR е R = o.s (3) 50% Subtituling AR value in equation se R R OW -0.5 607) -50% 11 A Hele % change in Calculation in seen (C) AS the rental of 아 Capital in shoe industry for

equal the magnitudes the changes are (as opposite sign) d) Because the increase in Capital rekans exeeds both industries price changes The tems. similarly Capital gains in real decrease in wage because . there is a the outputs stayed prices of the labor loses in real same of increased, the with is Consistent tams. Theorem whose Stoples - Samuelson decrease in relative price went up Ę a real earnings of 아 the Other factor, the