Relative Prices and the Distribution of Income

Relative Prices and the Distribution of Income
Figure 4A-2 uses the result we just found to show the distribution of income within the
cloth sector. We saw that cloth employers hire labor until the value of the workers’
marginal product, , is equal to the wage w. We can rewrite this in terms of the
real wage of cloth as . Thus, at a given real wage, say , the marginal
product curve in Figure 4A-2 tells us that worker-hours will be employed. The total
output produced with those workers is given by the area under the marginal product curve
up to . This output is divided into the real income (in terms of cloth) of workers and
capital owners. The portion paid to workers is the real wage times the employment
level , which is the area of the rectangle shown. The remainder is the real income of the
capital owners. We can determine the distribution of food production between labor and
landowners in the same way, as a function of the real wage in terms of food, .
Suppose the relative price of cloth now rises. We saw in Figure 4-7 that a rise in
lowers the real wage in terms of cloth (because the wage rises by less than ) while raising
it in terms of food. The effects of this on the income of capitalists and landowners can
PC
PC/PF
w/PF
LC 1
(w/PC)1
LC 1
LC 1
MPLC = w/PC (w/PC)1
PC * MPLC
LC
MPLC LC
LC QC
78 PART ONE International Trade Theory
Marginal product
of labor, MPLC
Labor
input, LC
MPLC
(w/PC)1
Income of
capitalists
Wages
L1
C
Figure 4A-2
The Distribution of Income
Within the Cloth Sector
Labor income is equal to the real
wage times employment. The rest
of output accrues as income to
the owners of capital.
CHAPTER 4 Specific Factors and Income Distribution 79
Marginal product
of labor, MPLC
Labor
input, LC
Increase in
capitalists’ income
(w/PC)2
(w/PC)1
MPLC
LC
L 2 C
1
Figure 4A-3
A Rise in Benefits the Owners
of Capital
The real wage in terms of cloth
falls, leading to a rise in the
income of capital owners.
PC
Marginal product
of labor, MPLF
Labor
input, LF
Decline in landowners’
(w/P income F )2
(w/PF
)1
MPLF
LF
2 LF
1
Figure 4A-4
A Rise in Hurts Landowners
The real wage in terms of food
rises, reducing the income of land.
PC
be seen in Figures 4A-3 and 4A-4. In the cloth sector, the real wage falls from to
; as a result, capitalists receive increased real income in terms of cloth. In the food
sector, the real wage rises from to , and landowners receive less real
income in terms of food.
This effect on real incomes is reinforced by the change in itself. The real income
of capital owners in terms of food rises by more than their real income in terms of cloth—
because food is now relatively cheaper than cloth. Conversely, the real income of
landowners in terms of cloth drops by more than their real income in terms of food—
because cloth is now relatively more expensive.
PC/PF