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Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 41: The Lerner Diagram

Alan V. Deardorff

Subjects: economics and finance, economic psychology, history of economic thought


Alan V. Deardorff The Lerner Diagram was first drawn by Abba Lerner in an unpublished seminar paper in 1933. He used unit-value isoquants together with unit isocost lines to show the relationship between prices of goods and factors in what we now call the Heckscher-Ohlin model. That paper was reproduced, ‘as it was originally written’ according to the journal editor, as Lerner (1952). Since then, many others have used the diagram, attributing it to Lerner, for purposes well beyond Lerner’s explication of good and factor prices. Notably, Findlay and Grubert (1959) used the diagram for analyzing the effects of technological progress on outputs and, in consequence, the terms of trade. Some (including me, until I learned better) have called it the LernerPearce Diagram, giving credit also to Pearce (1952a,b). In fact, although Pearce (1952a) was debating Lerner regarding the likelihood of factor price equalization, he used unit isoquants, not unit-value isoquants. Since these do not align in equilibrium with a single unit isocost line, they cannot be used in the same way, and they do not achieve the essential simplicity of Lerner’s construction. Pearce (1952b) did use unit-value isoquants, but in context it is clear that he was simply copying Lerner.1 1. THE DIAGRAM The essential Lerner Diagram is Figure 41.1. It is drawn for given constant-returns-to-scale technologies for producing two goods, X and Y, from two factors, capital K and labor L, and for given goods prices, pX and pY. Technologies and prices together imply the two curved...

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