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RESULTS OF PRODUCT-PRICE STUDIES: Theory Guiding the Data

Posted by Connie R. Aponte on April 19, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

Deardorff (1994) surveys alternative statements of the SS Theorem that have appeared during the past 50-plus years. Each articulation requires a different set of assumptions and thus applies to different contexts. Below I quote (verbatim) Deardorffs six different versions. This list serves two purposes. First, it provides some theoretical context for judging how well researchers have related theory to data. Second, it previews some of the major empirical issues that researchers have had to address.

• General Version: An increase in protection raises the real wage of the scarce factor of production and lowers the real wage of the abundant factor of production.

• Restrictive Version: Free trade lowers the real wage of the scarce factor and raises that of the abundant factor compared to autarky.

• Essential Version’. An increase in the relative price of a good increases the real wage of the factor used intensively in producing that good and lowers the real wage of the other factor.

• Strong Version with Even Technology: A rise in the price of any good, all other prices remaining constant, causes an increase in the real return to the factor used intensively in the producing that good and a fall in the real returns to all other factors.

• Friends and Enemies Version: Every good is a friend to some factor and an enemy to some other factor.

• Correlation Version: For any vector of goods price changes, the accompanying vector of factor price changes will be positively correlated with the factor-intensity-weighted averages of the goods price changes.

Deardorff very clearly discusses the theoretical relationships among all six versions; the interested reader is strongly encouraged to read this discussion. To complement this, I make four points about applying these versions to the empirical issue of rising wage inequality. payday loan lenders

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