Technological Change, Factor Intensity Reversals, and Trade

Abstract

There is no shortage of literature on the effect of technological change on trade patterns (see for example Johnson, 1958, or Kemp, 1970), and the question of the effects of factor intensity reversals has received considerable attention. A question that has not been considered, however, is whether technological change could result in the reversal of factor intensities, and if so what the effect on the pattern of production and trade would be. Of course, if arbitrary changes in technology are allowed then any conceivable pattern of changes could be created, so that only factor saving and neutral technological improvements will be considered. The small-country case is considered initially. There are a number of reasons why this question is of interest. Economic expansion is sometimes described as being either export-biased or import-biased (Johnson, 1958, Chapter 7). If economic expansion owing to technological change results in a reversal of factor intensities, then growth that was initially export-biased may become import-biased or vice versa; that is, the pattern and volume of trade may change. There will also be changes in the shape of the production possibility curve; in particular, it becomes flatter as a factor intensity reversal is approached. The curvature of the production possibility curve is important in determining how production and factor rewards will respond to commodity price changes. Finally, reversals of factor intensities over time will result in reversals in the pattern of factor price change. Two situations will be examined: technological change in both industries, and technological change in only one of the two industries. Throughout the discussion the two-factor, two-commodity model will be employed, with the usual assumption that production functions are homogeneous of the first degree and concave. It is assumed that preferences are homothetic and that commodity prices are such that both commodities are produced. Distortions that could result in production inefficiencies are also assumed absent.