Factor Intensity Versus Factor Substitution in a Specified General Equilibrium Model

Factor Intensity Versus Factor Substitution in a Specified General Equilibrium Model

This paper examines the sensitivity of the comparative static elasticities of a general equilibrium model of production to factor intensity and factor substitution. A model of the US economy is specified with three factors and two goods. Changing factor endowments have consistently inelastic effects on factor prices. Prices of goods, however, have elastic effects on factor prices, and factor endowments have elastic effects on outputs. Factor intensity influences the comparative statics more than factor substitution. Under a move toward free trade characterized by a falling price of manufactures relative to services, the wage of unskilled labor falls while the wage of skilled labor and the price of capital rise.