The Stolper-Samuelson and Rybczynski theorems

The Stolper-Samuelsom and Rybczynski theorems are results that hold in long-term equilibrium. The Stolper-Samuelson theorem says that: "Increased price of a good leads to an increased price of the input factor that is used intensively in the production of said good, and a reduced price of the other input factor. The input factor that increases, will have a higher percentage increase than the product price" (Norman & Orvedal, 2019, p.

96). The latter statement is not that important to show graphically, but we will show the former statement graphically. We will do this in the following two examples, and figure 15 below shows an increased product price of goods from the non-traded sector:

Figure 15: Increased price in non-traded sector. Adapted from Norman & Orvedal (2019, p. 97)

We start in an initial long-term equilibrium allocation E⁰ and experience an increase in the product price of non-traded goods, which we will refer to as the first-order effect. In the short-term, the labour demand and capital return curves of the non-traded sector both shift outwards. In short-term equilibrium in the labour market, the non-traded sector will hire some of the labour from the traded sector. This leads to increased employment and production in the non-traded sector and decreased employment and production in the traded sector. The wage level will then increase, but the percentage increase is less than

3.5 The Heckscher-Ohlin model 33

the percentage increase in product price. Because of the shift in the capital return curve for the non-traded sector, the capital return will increase in the non-traded sector, while it will decrease in the traded sector. This happens because the wage increases, while the product price for the traded sector remains unchanged. For non-traded goods, the product price increases more than the wage level increase. These are all short-term results, which all stem from the first-order effects from increased product price. These results are the same as from the Ricardo-Viner model (Norman & Orvedal, 2019, p. 98 & 99).

The secondary effects associated with transition dynamics is where the Heckscher-Ohlin model differs from the Ricardo-Viner model. Because the wage level is lower than the long-term equilibrium wage level, we obtain the same results as in the section about transition dynamics. An important clarification is that in the long-term equilibrium, the percentage increase in the wage level is higher than the percentage increase in product price. It is worth noting that the secondary effect has the same sign as the first-order effect for both the wage and employment, thus it reinforces the short-term effects. The capital return has also decreased in both sectors, thus it is line with the prediction from the Stolper-Samuelson theorem in that increased price of labour-intensive goods leads to increased price of labour, and decreased price of capital (Norman & Orvedal, 2019, p. 97

& 98). The Stolper-Samuelson theorem also holds for an increase in the product price of traded goods, which is illustrated in figure 16 below:

Figure 16: Increased price in traded sector. Adapted from Norman & Orvedal (2019, p. 98)

34 3.5 The Heckscher-Ohlin model

The initial long-term equilibrium is the same as in the previous example. In the short-term, the labour demand and capital return curves of the traded sector both shift outwards.

The traded sector will hire some of the labour from the non-traded sector. This leads to increased employment and production in the traded sector and decreased employment and production in the non-traded sector. The wage level will then increase, but percentage increase is less than the increase in product price. Because of the shift in the capital return curve for the traded sector, the capital return will increase in the traded sector, while it will decrease in the non-traded sector. These are all short-term results, which all stem from the first-order effects from increased product price. These results are the same as from the Ricardo-Viner model. Because the wage level is higher than the long-term equilibrium wage level, we obtain the same results as in the section about transition dynamics.

An important clarification is that in the long-term equilibrium, the percentage increase in capital return is higher than the increase in product price. It is worth noting that the secondary effect has the opposite sign for wage compared to the first-order effect, thus it counteracts the short-term effects. However, the sign for employment is the same for the short-term and long-term effects. The wage level has also decreased in both sectors, thus it is line with the prediction from the Stolper-Samuelson theorem in that increased price of capital-intensive goods leads to increased price of capital, and decreased price of labour.

The Rybczynski theorem says that "increased access to an input factor leads to increased production of the good that uses said input factor intensively, and reduced production of the other good" (Norman & Orvedal, 2019, p. 99). Here, we will assume that the results from the Rybcszynski theorem holds, without formally showing it.

35

4 Methodology

4.1 Descriptive method

In the following parts of the thesis, we will start with having an analysis of the Norwegian model in the Ricardo-Viner framework and the Heckscher-Ohlin framework, respectively.

This gives us some results that we will use as hypotheses for discussion and findings.

We will illustrate and discuss the results from the theoretical analysis by looking at the development of different variables in the Norwegian economy. This thesis is therefore not a formal data-based analysis, but rather an attempt to use data to illustrate the effects we have mentioned above. Our aim is to collect data that can illustrate the main points mentioned in the theoretical approach and how data and theory can help us understand how wage determination has functioned in Norway. To do so, we use the data to create graphs that can illustrate some of these mechanics. We will also consider the hypotheses mentioned in the theory section and create a discussion around this, with focus on the Norwegian model for wage settlements.