Bibliographical Note to Chapter 7

Most research concerning the labor and capital markets has concentrated on supply behavior. The trade-theoretic approach ignores this source of variation at the aggregate level; all changes in factor supplies occur in the reallocation of a fixed total among alternative industries. This approach has allowed trade theory to concentrate on the effects of divergences in marginal value products among industries and divergences between marginal value products and factor prices. Three surveys of this literature are Stephen P. Magee, "Factor Market Distortions, Production and Trade: A Survey," Oxford Economic Papers 25 (March 1973): 1-43; W. M. Corden, Trade Policy and Economic Welfare (Oxford: Clarendon Press, 1974); and Corden, "The Normative Theory of International Trade," in Handbook o f International Economics_, ed. Ronald W. Jones and Peter Kenen (Amsterdam: North-Holland, 1986), 1, sec. 6, 63-130.

The relationship between commodity market divergences and factor shadow prices has been investigated in benefit-cost analysis; an increase in the shadow price of one factor relative to its market price implies that the price of some other factor has a shadow price below its factor price: Peter Diamond and J. A. Mirrlees, "Private Constant Returns and Public Shadow Prices," Review of Economic Studies 43 (February 1976): 41-48. But the empirical usefulness of this result depends on whether the activities that determine private market factor prices remain socially optimum. In the trade literature, similar results have been obtained in the course of generalizing the results of the Stolper-Samuelson theorem. See Wilfred Ethier, "Some of the Theorems of International Trade with Many Goods and Factors," Journal o f International Economics ₄ (May 1974): 199-206_; and Ethier, "Higher Dimensional Issues in Trade Theory," chap. 3 in Jones and Kenen, Handbook of International Economics_.

Input substitution problems are examined intensively in the literature on the effective rate of protection and domestic resource cost. An early article is Wilfred Ethier, "Input Substitution and the Concept of the Effective Rate of Protection," Journal of Political Economy 80 (January/February 1972): 3447_. A survey is provided in sec. 3.1 of Ronald W. Jones and J. Peter Neary, "The Positive Theory of International Trade," in Jones and Kenen, Handbook of International Economics_. The role of input substitution and differences between first-best and second-best shadow prices for factors is a principal focus of the papers by Ronald Findlay and Stanislaw Wellisz, "Project Evaluation, Shadow Prices and Trade _Policy," Journal of Political Economy 84 (June 1976): 543-52_; and T. N. Srinivasan and Jagdish N. Bhagwati, "Shadow Prices for Project Selection in the Presence of Distortions: Effective Rates of Protection and Domestic Resource Costs," Journal of Political Economy 86 (January 1978): 97-116_. A somewhat heartening result for empiricists is that very large input substitution effects appear necessary to induce perverse results: Ronald W. Jones, "Effective Protection and Substitution," Journal of International Economics 1 (February _{1971): 59-81;} and Harry G. Johnson, "Factor Market Distortions and the Shape of the Transformation Curve," Econometrica 34 (July 1966): 686-98_.