Chapter 40: The Stolper-Samuelson Box
Henry Thompson General equilibrium economics stresses the interplay between output markets and input markets in the whole economy. The Stolper-Samuelson (1941) production box solidified the link between prices of products and prices of inputs in a competitive neoclassical economy examining the particular issue of a tariff and the real wage. In the production box with two factors and two products, the intuitive property is that a higher price raises the demand and relative price of the factor intensive in that product. The Stolper-Samuelson theorem relates directly to the underlying theorem of Heckscher (1919) and Ohlin (1933) stating that a country would import the product using its relatively scarce factor intensively, a tariff reducing imports and making the scarce factor more expensive. The production box mirrors the exchange box of Edgeworth (1904) and Pareto (1906) that complete the general equilibrium economy conceptualized by Walras (1874). Figure 40.1 is a production diagram with inputs of capital K and labor L for products 1 and 2. Cost minimization implies that the slope of the convex neoclassical isoquant for product 1 equals the slope of the isocost line. That is, the marginal rate of substitution equals the wage rent ratio w/r. Positive diminishing marginal productivity implies convexity of the isoquant. Product 2 has a similar cost-minimizing equilibrium. The production box in Figure 40.2 combines the two products with the origin O2 for product 2 in the upper right hand corner. The length of the box is the endowment of labor L = L1 + L2...
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