On Factor-biased Technical Progress and International Trade

Abstract

QNE generally accepted result in the literaturel on technical progress and international trade in terms of the standard two-commodity, two-factor constant-returns full-employment neoclassical model is as follows: Given the international commodity price ratio, technical change in one industry will definitely lead to an absolute reduction in the output of the unchanging industry if the change is neutral2 or if it saves the factor used more intensively in the changing industry; if, however, the technical change saves the factor that is used less intensively in the changing industry, the precise output effect is indeterminate without additional information about the magnitudes of the relevant parameters. The purpose of this paper is to show that in the last case also there will be an absolute reduction in the output of the unchanging industry, provided technical change is not sufficiently saving of the less intensively used factor to reduce its absolute marginal product. Suppose the two commodities are m and c, the latter being always the more capitalintensive commodity (labor, L, and capital, Kn are the two factors). There are two production functions: