4.1: Relative Prices and Distribution of Income
When the price of a product rises, we predict that the factors of production used intensively
in making that product to be paid more. Economists usually say that improvements in production
technology allow firms to increase production, lower prices, or both. In addition, changes in
production technology should change the demand for factors of production, and therefore their
prices. Improvements in production technology are expected to increase the demand for workers
skilled in this technology, and therefore their relative wages. Workers unskilled in the new
technology are expected to have lower relative wages, even if their absolute wages have risen
due to greater production. In general, technological changes change the demand and relative wages
of skilled and unskilled workers.
Have technological changes over the last few decades increased the wages of skilled workers
relative to those of unskilled workers? This question is difficult to answer because it is hard
to measure "skills." But if we claim that education levels are related to skills （which at times
may seem preposterous）, then we can relate education levels with changes in wages. Using the
data links below, graph hourly wages for each of the five levels of education over time. Do you
see evidence of faster growth in wages for highly educated workers? You can also graph the following
ratios:
 wages for workers with an advanced degree / wages for workers without a high school diploma
 wages for workers with a college diploma / wages for workers with a high school diploma
 wages for workers with a college diploma / wages for workers with only some college
（Although technology is viewed as the major cause of changes in relative wages, trade and
immigration may also some influence the trends to some degree, although economists are still
debating to what degree.）
Data: Go to the Economic Policy Institute's site http://epinet.org/datazone/ and select "National
data." Search for "Real hourly wage for all by education."
4.2: Factor Intensity
Measuring the intensity of how factors of production are used is not simple: multiple factors
of production exist, a country's abundant factor may depend on the resources of other countries
under consideration, and an intensive factor of production may depend on the industries under
consideration. For example, try to calculate the labor-to-land ratio between countries. If we
assume that the labor force is a constant fraction of the population, we can compare the
population-to-land ratio （population density） between countries. Calculate the
population-to-land ratio for the U.S., the U.K., and Australia. If the U.S. has an abundance of
land in these calculations, would you predict that it is a net exporter of agricultural goods?
Should it therefore also be a net importer of labor-intensive goods? Depending on the countries
involved, it is hard to predict.
Data: For the abundance/scarcity calculations, go to the World Bank site at
http://www.worldbank.org/data/. Click "Data", select "Quick Reference," and search for "Total
GDP" and "Population."
For U.S. imports and exports in agriculture, go to the International Trade Administration's site
at http://tse.export.gov/. Click on "National Trade Data" and then "Product Profiles of U.S.
Merchandise Trade with a Selected Market." Select the appropriate country, then "Balance" and
the appropriate display. Consider at least two categories of agricultural products.
4.3: Flow of Trade and Factor Intensity
Because it is difficult to determine the factor intensity in different industries and because
goods of the same category have different characteristics, sometimes we cannot explain the trade
patterns that occur between countries using the Heckscher-Ohlin theory. Would you expect the U.S.
or Germany to be an exporter of chemicals? Which country actually does export chemicals? Which
type of chemicals? Notice that the United States and the United Kingdom import and export goods
of the same type. Can the Heckscher-Ohlin theory explain this? （Chapter 6 provides a better
explanation for this fact.）
Data: The Census Bureau's site at http://www.census.gov/foreign-trade/sitc1/ gives bilateral
trade data about chemicals and related products.
4.4: Trade and the Distribution of Income
Find GDP per capita for the major trading partners of the U.S. Which factors of production do
you expect these countries to be abundant and scarce in? Which factors of production do you expect
the U.S. to be abundant and scarce in? Do you expect owners of scarce factors of production in
the U.S. and in the other countries to have relatively low incomes? Is GDP per capita related
to abundance and scarcity of the factors of production?
Data: Go to the Bureau of Economic Analysis International Economic Accounts site at
http://www.bea.gov/international/index.htm#bop to find the value of trade with various countries.
Select "Interactive Tables: Detailed estimates," then "Table 11. U.S. International Transactions,
by Area" and the appropriate display features.
To find the GDP per capita, go to the World Bank page at http://www.worldbank.org/data/. Select
"Data" and "Quick Reference," then "GNI per capita."