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Monday, February 13, 2012 |
An example that sets the stage for the Stolper-Samuelson theorem
Suppose you know the following information:
Information item 1: Advanced goods (A) and Basic goods (B) are both made by using capital (K) and labor (L) with the following cost shares:
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Cost shares | |
| K | L | |
| A | 70% | 30% |
| B | 20% | 80% |
Information item 2:
Before trade
PK in Mexico is 60% higher than in US (+60%)
PL in Mexico is 80% lower than in US (-80%)
To do: Calculate how expensive PA
and PB are in Mexico compared to the US before trade:
Bonus: This has already been done for PA,
so you just have to do it for PB.
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Cost shares | Pre-trade output prices in Mexico compared to the US | ||||||||||||||
| K | L | |||||||||||||||
| A | 70% | 30% |
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| B | 20% | 80% |
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