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Factor Substitution and Relative Factor Prices

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  • Hikari Ban

Abstract

This paper examines the effects of factor endowments on factor prices in a three-factor, two-commodity general-equilibrium model with endogenous commodity demand and prices. Unlike the conventional small open-economy model that assumes constant commodity prices, factor substitution influences the direction of these effects. When a factor endowment increases, complementarity with the expanding factor benefits an unchanged factor, but substitutability harms it. If the unchanged factors are complements, there is a possibility of a rise in the expanding factor's price. A comparison of this closed-economy model with the small open-economy model reveals the role of international trade, which dampens the effect on the expanding factor's price. Copyright © 2010 Blackwell Publishing Ltd.

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  • Hikari Ban, 2010. "Factor Substitution and Relative Factor Prices," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 562-573, August.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:3:p:562-573
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    References listed on IDEAS

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    1. Ruffin, Roy J., 1981. "Trade and factor movements with three factors and two goods," Economics Letters, Elsevier, vol. 7(2), pages 177-182.
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    7. Suzuki, Katsuhiko, 1983. "A synthesis of the heckscher-ohlin and the neoclassical models of international trade : A Comment," Journal of International Economics, Elsevier, vol. 14(1-2), pages 141-144, February.
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    Cited by:

    1. Yoshiaki Nakada, 2017. "Factor endowment -- commodity output relationships in a three-factor, two-good general equilibrium trade model," Papers 1711.11429, arXiv.org.
    2. Nakada, Yoshiaki, 2015. "Economy-wide substitution and Rybczynski sign pattern in a three-factor two-good model," MPRA Paper 67863, University Library of Munich, Germany.

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