The Two-Sector Model and Production Technique in the Short Run and the Long Run

Stuart Landon ()

Oxford Economic Papers, 1990, vol. 42, issue 2, 429-45

Abstract: The standard two-sector model is generalized to include a slowly adjusting technique of production. The relationship between a short run fixed coefficients production structure and a long run production structure in which factors are substitutable is examined. The Stolper-Samuelson theorem holds both on impact and in the long run. However, adjustment from the impact equilibrium to the long run equilibrium could cause both factor prices to increase, or one to rise while the other falls. Which result occurs depends upon the relative long run substitutability of factors in the two sectors. The path of adjustment taken by factor prices following an exogenous shock is analyzed. It is shown that factor price movements depend upon the costs of adjustment and that a variety of adjustment paths are possible. Copyright 1990 by Royal Economic Society.

Date: 1990
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