China’s WTO Accession and China’s WTO Accession and US Pork: US Pork:

A General Equilibrium A General Equilibrium AnalysisAnalysis

byby

Osei-Agyeman Yeboah,Osei-Agyeman Yeboah,11

Victor Ofori-Boadu,Victor Ofori-Boadu,11 & &

Henry ThompsonHenry Thompson22

1North Carolina A&T State University2Auburn University

IntroductionIntroduction China concluded bilateral negotiations with China concluded bilateral negotiations with

member countries of the World Trade member countries of the World Trade Organization (WTO) and gained entry in Organization (WTO) and gained entry in January 2002. January 2002.

This event was preceded by a major This event was preceded by a major breakthrough in trade negotiations between breakthrough in trade negotiations between China and the US in October 2000 when China and the US in October 2000 when President Clinton signed the US China President Clinton signed the US China Relations Act. Relations Act.

• Under the Act, China accepts pork from any packing Under the Act, China accepts pork from any packing plant approved by the Food Safety and Inspection plant approved by the Food Safety and Inspection Service, thus phasing out its restrictive import and Service, thus phasing out its restrictive import and distribution procedures. distribution procedures.

IntroductionIntroduction The USDA estimates accession of China to the The USDA estimates accession of China to the

WTO will add $1.6 billion to US exports of WTO will add $1.6 billion to US exports of grains, oilseeds and oilseed products, and grains, oilseeds and oilseed products, and cotton by 2005. cotton by 2005.

Many analysts expect demand for pork in Many analysts expect demand for pork in China to increase by about 7% based on a China to increase by about 7% based on a tariff reduction from 43% to 12% by 2004.tariff reduction from 43% to 12% by 2004.

This implies that, China’s pork consumption by This implies that, China’s pork consumption by would be three times larger than the 529,000 would be three times larger than the 529,000 metric tons exported in 1998. metric tons exported in 1998.

IntroductionIntroduction In 2004, US pork exports exceeded $2 In 2004, US pork exports exceeded $2

billion in total value and 995,000 metric billion in total value and 995,000 metric tons in volume. tons in volume.

This represents an increase of over 35% This represents an increase of over 35% by volume and 40% by value compared by volume and 40% by value compared to exports in 2003 (NPPC, 2005). to exports in 2003 (NPPC, 2005).

China’s 1.2 billion people consume over China’s 1.2 billion people consume over half the pork produce in the world. half the pork produce in the world.

IntroductionIntroduction Chinese consumers prefer pork variety Chinese consumers prefer pork variety

meats which includes by products such as meats which includes by products such as stomachs, kidneys, hearts and tongues, stomachs, kidneys, hearts and tongues, which traditionally have little value in the which traditionally have little value in the US. US.

According to USDA, cutout values for US According to USDA, cutout values for US hogs have fallen recently because of a drop hogs have fallen recently because of a drop in the price of these variety meats. in the price of these variety meats. However, increased exports to China will However, increased exports to China will bolster prices to pork producers without bolster prices to pork producers without raising domestic prices for the US raising domestic prices for the US consumer. consumer.

IntroductionIntroduction

In 2004, US live hog prices would have In 2004, US live hog prices would have been about 30% lower if US pork exports been about 30% lower if US pork exports were instead sold in the domestic were instead sold in the domestic market. market.

According to Hayes (2005, 2001), the According to Hayes (2005, 2001), the demand for pork by 1.2 billion Chinese demand for pork by 1.2 billion Chinese consumers could boost the value of hogs consumers could boost the value of hogs by $5 per head when the agreement is by $5 per head when the agreement is fully implementedfully implemented

IntroductionIntroduction With regards to the rest of the economy, there With regards to the rest of the economy, there

have been many estimates of the impact have been many estimates of the impact China’s accession into the WTO. China’s accession into the WTO.

Goldman Sachs states that by taking into Goldman Sachs states that by taking into account effects such as increases in foreign account effects such as increases in foreign direct investment, China’s WTO accession direct investment, China’s WTO accession could translate into an estimated $13 billion in could translate into an estimated $13 billion in additional US exports by 2005. additional US exports by 2005.

Many sectors of US businesses are expected Many sectors of US businesses are expected to prosper. This includes information to prosper. This includes information technology, services, and agriculture technology, services, and agriculture

Purpose of StudyPurpose of Study

This paper examines the potential impact This paper examines the potential impact of trade liberalization on the US pork of trade liberalization on the US pork industry in an applied comparative static industry in an applied comparative static general equilibrium model of production general equilibrium model of production and trade. and trade.

The model generates comparative static The model generates comparative static adjustments in outputs and factor prices adjustments in outputs and factor prices due to changing output prices. Input due to changing output prices. Input substitution is critical and the paper substitution is critical and the paper examines sensitivity of results to constant examines sensitivity of results to constant elasticity substitution. elasticity substitution.

An Applied General Equilibrium An Applied General Equilibrium Model of Production and TradeModel of Production and Trade

Applied general equilibrium models are based Applied general equilibrium models are based on a microeconomic structure of production.on a microeconomic structure of production.

In this study the model assumes constant In this study the model assumes constant returns, full employment, nonjoint production, returns, full employment, nonjoint production, competitive pricing, cost minimization, and competitive pricing, cost minimization, and perfect factor mobility across sectors. perfect factor mobility across sectors.

It is an application of the long run competitive It is an application of the long run competitive model of production and trade summarized by model of production and trade summarized by Jones and Scheinkman (1977), Chang (1979), Jones and Scheinkman (1977), Chang (1979), and Thompson (1995). and Thompson (1995).

An Applied General Equilibrium An Applied General Equilibrium Model of Production and TradeModel of Production and Trade

Full employment of labor, capital, and energy is Full employment of labor, capital, and energy is described by - described by - v =Axv =Ax (1) (1)

where where vv is a vector of inputs, is a vector of inputs, AA is a matrix of cost is a matrix of cost minimizing unit inputs, and minimizing unit inputs, and xx is a vector of is a vector of outputsoutputs

Competitive pricing in each industry leads to the Competitive pricing in each industry leads to the other major relationships in the model other major relationships in the model

- - p= A’wp= A’w (2) (2) where where pp is the vector of product prices and is the vector of product prices and ww

factor prices factor prices

An Applied General Equilibrium An Applied General Equilibrium Model of Production and TradeModel of Production and Trade

Taking the differential of (1) Taking the differential of (1) - - dv= xdA+Adxdv= xdA+Adx (3)(3)

Aggregate economy wide substitution terms Aggregate economy wide substitution terms SSik ik

are introduced are introduced SSikik=Σ=Σjjxaxaijijkk

where where dadaijij/dw/dwkk =a =aijijkk

For every factor iFor every factor i, dAx=Σ, dAx=Σj j SSikik dw dw and (3) becomes:and (3) becomes: - dv = Sdw+Adx - dv = Sdw+Adx (4) (4)

An Applied General Equilibrium An Applied General Equilibrium Model of Production and TradeModel of Production and Trade

Cost-minimizing behavior insures thatCost-minimizing behavior insures that - - wdA’ wdA’ = 0 (5)= 0 (5)

Using (5) and taking the differential of (2) Using (5) and taking the differential of (2) - - dp=A’dwdp=A’dw (6) (6)

Putting (5) and (6) together into matrix formPutting (5) and (6) together into matrix form

(7)(7)S A

A

dw

dx

dv

dp0

.

In elasticity form, the model is written as:In elasticity form, the model is written as:

(8)(8)

Where: Where: is the 12x12 matrix of substitution elasticities, is the 12x12 matrix of substitution elasticities, is 8x5 industry shares, and is 8x5 industry shares, and θ́I is 5x8 matrix of factor shares.θ́I is 5x8 matrix of factor shares.

The variables are written in vectors where The variables are written in vectors where w w represents endogenous factor prices, represents endogenous factor prices, xx endogenous endogenous outputs, outputs, vv exogenous factor endowments, and exogenous factor endowments, and pp exogenous world prices of goods facing the economy. exogenous world prices of goods facing the economy. The ^ represents % changes.The ^ represents % changes.

0

w

x

v

p

Sources of DataSources of Data Payments to each group in manufacturing, Payments to each group in manufacturing,

services, and agriculture are from the 2002 services, and agriculture are from the 2002 Economic Census data by the Census Bureau. Economic Census data by the Census Bureau.

Data on each skilled labor group in Manufacturing, Data on each skilled labor group in Manufacturing, Service and Agricultural sectors were obtained Service and Agricultural sectors were obtained from the 2002 NAICS industry- estimates on labor from the 2002 NAICS industry- estimates on labor by the Bureau of Labor Statistics. by the Bureau of Labor Statistics.

Energy spending for the Manufacturing and Energy spending for the Manufacturing and Service sectors are from US Department of Energy Service sectors are from US Department of Energy (2001) (2001)

Total receipts, Labor and Energy in Agriculture Total receipts, Labor and Energy in Agriculture and Pork are from the 2002 Census of Agriculture and Pork are from the 2002 Census of Agriculture “Summary by NAICS:2002.” “Summary by NAICS:2002.”

Sources of DataSources of Data Total receipts from pork variety (exports) are Total receipts from pork variety (exports) are

from the US Meat Export Federation.from the US Meat Export Federation.

Data on labor and each skilled labor group for Data on labor and each skilled labor group for Pork Variety is based on equal percentages from Pork Variety is based on equal percentages from the Bureau of Labor Statistics estimates under the Bureau of Labor Statistics estimates under the Animal Slaughtering and Processing industry. the Animal Slaughtering and Processing industry.

The total labor for pork variety was estimated to The total labor for pork variety was estimated to be 10.4% of total receipts. be 10.4% of total receipts.

Energy used in the pork variety industry is Energy used in the pork variety industry is estimated as 3.6% of the total receipts. estimated as 3.6% of the total receipts.

Capital receives the residual in each industry Capital receives the residual in each industry after the labor and energy bills. after the labor and energy bills.

ResultsResults Factor shares are the portions each productive factor Factor shares are the portions each productive factor

receives from industry revenue, and industry shares receives from industry revenue, and industry shares are portions of productive factors employed in each are portions of productive factors employed in each industry. industry.

Table 1 shows factor payments matrix used to derive Table 1 shows factor payments matrix used to derive factor shares and industry shares.factor shares and industry shares.

For this study, Labor is disaggregated into six skilled For this study, Labor is disaggregated into six skilled groups: groups: • ManagersManagers• ProfessionalsProfessionals• Service WorkersService Workers• ClerksClerks• Agricultural WorkersAgricultural Workers• Production Workers. Production Workers.

ResultsResults

Mfg Service Agriculture Agric. Less Pork

Pork Pork Variety

Total

Managers 108,751,550 354,459,309 2,890,281 2,770,228 117,891 2,162 466,101,139

Professionals 88,123,101 640,946,147 455,398 404,693 50,290 415 729,524,646

Service 95,311,210 1,117,781,548 3,767,635 3,524,828 239,327 3,479 1,216,860,394

Clerks 44,348,796 425,705,359 1,490,338 1,415,343 74,264 731 471,544,493

Agriculture 879,964 1,177,735 12,384,720 12,105,961 278,485 274 14,442,419

Production 213,591,040 51,584,830 711,628 664,964 37,720 8,945 265,887,499

Capital 3,142,434,749 4,662,228,714 170,000,000 161,523,691 8,343,374 132,935 7,974,663,463

Energy 137,820,000 387,162,000 28,000,000 27,508,159 486,283 5,558 552,982,000

Total 3,831,260,410 7,641,045,643 219,700,000 209,917,868 9,627,634 154,498 11,692,006,053

Table 1. Factor Payment Matrix ($’000)

ResultsResults Table 2 presents the factor shares, the share of each Table 2 presents the factor shares, the share of each

factor is the ratio of payments for the factor and the factor is the ratio of payments for the factor and the total sector revenue. total sector revenue.

Summing down a column in Table 1 gives total sector Summing down a column in Table 1 gives total sector revenue. For instance, the total revenue of services revenue. For instance, the total revenue of services is $7,641,046 billion and the capital share is is $7,641,046 billion and the capital share is $4,662,228/7,641,045 = 61%. $4,662,228/7,641,045 = 61%.

Capital has the largest factor share in each sector or Capital has the largest factor share in each sector or industry. industry.

Production workers have the largest share in pork and Production workers have the largest share in pork and pork varieties, 8.3%, and 10.4 % in pork and pork pork varieties, 8.3%, and 10.4 % in pork and pork variety processing. variety processing.

ResultsResults

Table 2. Factor Shares, ij 2002

Mfg Service Agriculture Agric. Less Pork

Pork Pork Variety

Managers 0.0284 0.0464 0.0132 0.0132 0.0122 0.0140

Professionals 0.0230 0.0839 0.0021 0.0019 0.0052 0.0027

Service 0.0249 0.1463 0.0171 0.0168 0.0249 0.0225

Clerks 0.0116 0.0557 0.0068 0.0067 0.0077 0.0047

Agriculture 0.0002 0.0002 0.0564 0.0577 0.0289 0.0018

Production 0.1438 0.3392 0.0988 0.0995 0.0829 0.1036

Capital 0.8202 0.6102 0.7738 0.7695 0.8666 0.8604

Energy 0.0360 0.0507 0.1274 0.1310 0.0505 0.0360

ResultsResults Industry shares are reported in Table 3. Industry shares are reported in Table 3.

Summing across rows in Table 1 gives total factor Summing across rows in Table 1 gives total factor incomes. Assuming perfect labor mobility, the wage incomes. Assuming perfect labor mobility, the wage is the same across sectors leading to the share of is the same across sectors leading to the share of each factor in each sector. For instance, total income each factor in each sector. For instance, total income of service workers in all sectors is $1,216,860 billion of service workers in all sectors is $1,216,860 billion and therefore service workers in the service sector and therefore service workers in the service sector are $1,117,781/$1,216,860 = 91.8%are $1,117,781/$1,216,860 = 91.8%

Results show that very large shares of service Results show that very large shares of service workers, clerks, professionals, and managers are in workers, clerks, professionals, and managers are in the service sector. the service sector.

Also large shares of agricultural workers are found in Also large shares of agricultural workers are found in agriculture sector. The pork and pork variety industry agriculture sector. The pork and pork variety industry employs about 2% of all agricultural workers. employs about 2% of all agricultural workers.

ResultsResults

Table 3. Industry Shares, ij

Mfg Service Agriculture Agric. Less Pork

Pork Pork Variety

Managers 0.233322 0.760477 0.006201 0.005943 0.000253 0.000005

Professionals 0.120795 0.878581 0.000624 0.000555 0.000069 0.000001

Service 0.078326 0.918578 0.003096 0.002897 0.000197 0.000003

Clerks 0.094050 0.902789 0.003161 0.003002 0.000157 0.000002

Agriculture 0.060929 0.081547 0.857524 0.838223 0.019282 0.000019

Production 0.803314 0.194010 0.002676 0.002501 0.000142 0.000034

Capital 0.174129 0.819014 0.006858 0.006600 0.000252 0.000005

Energy 0.394052 0.584630 0.021318 0.020255 0.001046 0.000017

ResultsResults Factor shares and industry shares are used to Factor shares and industry shares are used to

derive the Cobb-Douglas substitution elasticities derive the Cobb-Douglas substitution elasticities in Table 4. in Table 4.

The largest own substitution occurs for wages for The largest own substitution occurs for wages for clerks and the smallest is pork industry capital. clerks and the smallest is pork industry capital.

Every 10% increase in wages for clerks causes Every 10% increase in wages for clerks causes 6.8% decline in their employment. 6.8% decline in their employment.

Every 10% increase in the return to capital Every 10% increase in the return to capital decreases capital input 1.3%. decreases capital input 1.3%.

Own labor substitution elasticities are larger than Own labor substitution elasticities are larger than own capital elasticities. own capital elasticities.

ResultsResultsTable 4. Cobb-Douglas Substitution Elasticities, ik

ŵMgr ŵProf ŵSer ŵClrk ŵAgr ŵProd ŵE ŵMfg ŵS ŵAg.<P ŵPork ŵP.vty âMgr -0.6377 0.0692 0.1172 0.0451 0.0005 0.0182 0.0477 0.0419 0.2965 0.0014 0.0001 0.0000

âProf 0.0442 -0.6523 0.1315 0.0504 0.0002 0.0127 0.0489 0.0217 0.3425 0.0001 0.0000 0.0000

âSer 0.0449 0.0789 -0.6094 0.0521 0.0003 0.0106 0.0498 0.0141 0.3581 0.0007 0.0000 0.0000

âClrk 0.0446 0.0779 0.1345 -0.6877 0.0003 0.0113 0.0495 0.0169 0.3519 0.0007 0.0000 0.0000

âAgr 0.0168 0.0100 0.0280 0.0110 -0.4301 0.0067 0.1171 0.0110 0.0318 0.1932 0.0044 0.0000

âProd 0.0318 0.0348 0.0484 0.0201 0.0004 -0.3952 0.0391 0.1444 0.0756 0.0006 0.0000 0.0000

âE 0.0402 0.0646 0.1095 0.0422 0.0031 0.0188 -0.6078 0.0448 0.2729 0.0115 0.0002 0.0000

âMfg 0.0284 0.0230 0.0249 0.0116 0.0002 0.0557 0.0360 -0.1798 0.0000 0.0000 0.0000 0.0000

âS 0.0464 0.0839 0.1463 0.0557 0.0002 0.0068 0.0507 0.0000 -0.3898 0.0000 0.0000 0.0000

â Ag.<P 0.0132 0.0019 0.0168 0.0067 0.0577 0.0032 0.1310 0.0000 0.0000 -0.2305 0.0000 0.0000

âPork 0.0122 0.0052 0.0249 0.0077 0.0289 0.0039 0.0505 0.0000 0.0000 0.0000 -0.1334 0.0000

Âp.vty 0.0140 0.0027 0.0225 0.0047 0.0018 0.0579 0.0360 0.0000 0.0000 0.0000 0.0000 -0.1396

ResultsResults Table 5 shows elasticities of factor prices with respect to prices Table 5 shows elasticities of factor prices with respect to prices

of goods in the general equilibrium comparative statics. of goods in the general equilibrium comparative statics.

Every 10% increase in agricultural prices would raise wages of Every 10% increase in agricultural prices would raise wages of agricultural workers other than pork and pork varieties by agricultural workers other than pork and pork varieties by 9.83%, with no change in the wages of any of the remaining 9.83%, with no change in the wages of any of the remaining skilled labor groups, and the return to capital in agriculture skilled labor groups, and the return to capital in agriculture rising by 12.2%. rising by 12.2%.

Higher agricultural prices increase agricultural output, Higher agricultural prices increase agricultural output, attracting labor from other sectors that raises the productivity attracting labor from other sectors that raises the productivity and return to capital.and return to capital.

Every 10% increase in the price of other manufacturers would Every 10% increase in the price of other manufacturers would raise production wages by 7.45%, managers by 1.1%, and raise production wages by 7.45%, managers by 1.1%, and returns to capital in that sector by 11.58%. returns to capital in that sector by 11.58%.

Wages depend heavily on the price in services but very little on Wages depend heavily on the price in services but very little on the prices of pork and especially pork varieties. Some factors the prices of pork and especially pork varieties. Some factors benefit and others lose with any price change, and the effects benefit and others lose with any price change, and the effects are uneven. are uneven.

ResultsResults

Table 5. Elasticities of Factor Prices with Respect to Output Prices

^pMfg ^pS ^pAg.<P ^pPork ^pP.vty

^wMgr 0.111399 0.886525 0.001981 0.000093 0.000002 ^wProf 0.035178 0.967425 -0.002582 -0.000021 -0.000001 ^wSer 0.009123 0.991675 -0.000847 0.000048 0.000001

^wClrk 0.018658 0.982054 -0.000738 0.000027 0.000000 ^wAgr 0.024692 -0.023281 0.982712 0.015862 0.000015

^wProd 0.745242 0.253837 0.000802 0.000088 0.000031 ^eE 0.126665 0.833258 0.039611 0.000460 0.000005

^rMfg 1.157603 -0.155539 -0.002027 -0.000035 -0.000002 ^rS -0.035967 1.039101 -0.003072 -0.000061 -0.000001

^rAg.<P -0.028852 -0.189082 1.219206 -0.001270 -0.000002 ^rPork -0.013790 -0.104481 -0.035095 1.153366 -0.000001 ^rP.vty -0.057753 -0.100662 -0.003732 -0.000061 1.162207

ResultsResults Table 6 reports the price elasticities of outputs along Table 6 reports the price elasticities of outputs along

the production frontier.the production frontier.

A higher price in each sector raises output in the A higher price in each sector raises output in the sector and thus draw labor away from other sectors. sector and thus draw labor away from other sectors.

The largest own output effect occurs in agriculture The largest own output effect occurs in agriculture other than pork and pork varieties, where every 10% other than pork and pork varieties, where every 10% price increase raises output 2.2%. price increase raises output 2.2%.

Every 10% price increase in pork price results in no Every 10% price increase in pork price results in no change in pork output but raises the output of pork change in pork output but raises the output of pork varieties by 1.6%. varieties by 1.6%.

The smallest own effect is in services.The smallest own effect is in services.

ResultsResults

^pMfg ^pS ^pAg.<P ^pPork ^pP.vty ^xMfg 0.157603 -0.155539 -0.002027 -0.000035 -0.000002 ^xS -0.035967 0.039101 -0.003072 -0.000061 -0.000001 ^xAg.<P -0.028852 -0.189082 0.219206 -0.001270 -0.000002 ^xPork -0.013790 -0.104481 -0.035095 0.153366 -0.000001 ^xP.vty -0.057753 -0.100662 -0.003732 -0.000061 0.162207

Table 6. Elasticities of Output with Respect to Output Prices

ResultsResultsPredicted Price Changes and AdjustmentsPredicted Price Changes and Adjustmentsin the Model:in the Model:

We assume the US be the excess supplier for agricultural We assume the US be the excess supplier for agricultural and service goods and China the excess demander. and service goods and China the excess demander.

Using average tariff reduction from 43% to 24%, Pc = Using average tariff reduction from 43% to 24%, Pc = 1.43Pus in the original situation; where Pc = price in China 1.43Pus in the original situation; where Pc = price in China and Pus = price in the US. and Pus = price in the US.

With the new tariff, Pc* = 1.24Pus* where Pus* > Pus and With the new tariff, Pc* = 1.24Pus* where Pus* > Pus and the level of trade increases as production in the US also the level of trade increases as production in the US also increases. increases.

Higher prices are expected for exporting industries in the Higher prices are expected for exporting industries in the move to free trade. Using export and import elasticities of move to free trade. Using export and import elasticities of 1 and -1, a price increased of 15% is predicted for pork, 1 and -1, a price increased of 15% is predicted for pork, pork varieties, and the rest of agriculture along with pork varieties, and the rest of agriculture along with services while a fall of 15% in price is predicted for the services while a fall of 15% in price is predicted for the manufacturing sector. manufacturing sector.

ResultsResults Table 7 assumes price changes of 15%. The Table 7 assumes price changes of 15%. The

results are scaled according to the level of results are scaled according to the level of price changes. For instance, 30% price price changes. For instance, 30% price changes would double these adjustments. changes would double these adjustments.

Capital returns in pork and pork varieties Capital returns in pork and pork varieties along with the rest of agriculture and services along with the rest of agriculture and services rise on the order of 30% while capital returns rise on the order of 30% while capital returns fall 39% in manufacturing. fall 39% in manufacturing.

Wages rise on the order of 20% except in Wages rise on the order of 20% except in manufacturing where they fall about 14.7%. manufacturing where they fall about 14.7%.

ResultsResultsTable 7. Factor Prices and Outputs Adjustments

(Cobb-Douglas) Projected Factor Price Price Output Change Adjustments Adjustments

wMgr 11.66 wProf 13.94 wSer 14.73 wClrk 14.44 wAgr 14.26 wProd -7.36 eE 11.20

Mfg -15% rMfg -19.73 xMfg -4.73

Service 15% rS 16.08 xS 1.08

Agric.<Pork 15% rAg.<P 15.87 xAg.<P 0.87

Pork 15% rPork 15.41 xPork 0.41

Pork Variety 15% rP.vty 16.73 xP.vty 1.73

ResultsResults Table 8 reports adjustments with a higher degree of Table 8 reports adjustments with a higher degree of

substitution.substitution.

Output increases by 1.08% in services, 0.87% in the Output increases by 1.08% in services, 0.87% in the rest of agriculture, and an average of about 1% in the rest of agriculture, and an average of about 1% in the pork and pork variety industries. pork and pork variety industries.

Manufacturing output declines about 4.7%. Manufacturing output declines about 4.7%.

These effects are not large but in the long run the These effects are not large but in the long run the lower return to capital will lower investment and the lower return to capital will lower investment and the stock of productive capital, and change outputs more stock of productive capital, and change outputs more drastically.drastically.

ResultsResults

Table 8. Factor Prices and Outputs Adjustments (CES=2.0)

Projected Factor Price Price Output Change Adjustments Adjustments

wMgr 23.32 wProf 27.89 wSer 29.45 wClrk 28.88 wAgr 28.52 wProd -14.71 eE 22.40

Mfg -15% rMfg -39.46 xMfg -9.46

Service 15% rS 32.16 xS 2.16

Agric.<Pork 15% rAg.<P 31.73 xAg.<P 1.73

Pork 15% rPork 30.83 xPork 0.83

Pork Variety 15% rP.vty 33.47 xP.vty 3.47

ResultsResults Suppose capital changes in proportion to the change Suppose capital changes in proportion to the change

in its return with every 1% increase in the return to in its return with every 1% increase in the return to capital causing a 1% long run adjustment in that capital causing a 1% long run adjustment in that capital stock. capital stock.

Then under the predicted price changes of 15%, the Then under the predicted price changes of 15%, the capital stock in services will rise by 16.1%, the rest capital stock in services will rise by 16.1%, the rest of agriculture by 15.9%, and pork and pork varieties of agriculture by 15.9%, and pork and pork varieties by 15.4% and 16.7% respectively. by 15.4% and 16.7% respectively.

However, manufacturing capital will fall by However, manufacturing capital will fall by approximately 19.7%. approximately 19.7%.

Outputs adjust whenever the levels of capital adjust. Outputs adjust whenever the levels of capital adjust. In the specific-factors model with constant return to In the specific-factors model with constant return to scale, the percentage adjustment in output and the scale, the percentage adjustment in output and the percentage change in the industry’s capital stock percentage change in the industry’s capital stock are about equal. are about equal.

ResultsResults Table 9 shows the approximate long run output Table 9 shows the approximate long run output

changes due to 15% price changes.changes due to 15% price changes.

Outputs in services, the rest of agriculture, pork, and Outputs in services, the rest of agriculture, pork, and pork varieties are projected to increase in the long run pork varieties are projected to increase in the long run by 16.1%, 15.9%, 15.4%, and 16.7% respectively.by 16.1%, 15.9%, 15.4%, and 16.7% respectively.

Output in manufacturing is projected to fall by 19.7% Output in manufacturing is projected to fall by 19.7% in the long run.in the long run.

With the exception of manufacturing wages that are With the exception of manufacturing wages that are projected to fall by 7.4%, all labor wages are projected to fall by 7.4%, all labor wages are projected to increase with the largest 14.7% in projected to increase with the largest 14.7% in services and the smallest 11.7% in managerial services and the smallest 11.7% in managerial positions.positions.

ResultsResults

Table 9. Long-run adjustment in output

Projected Long-run Price Output Change Adjustments

Mfg -15% xMfg -19.73

Service 15% xS 16.08

Agric.<Pork 15% xAg.<P 15.87

Pork 15% xPork 15.41

Pork Variety 15% xP.vty 16.73

ConclusionConclusion The present applied specific factors model provides a The present applied specific factors model provides a

framework to analyze the potential income redistribution in framework to analyze the potential income redistribution in the US. the US.

In the model, markets adjust as the economy moves along In the model, markets adjust as the economy moves along its production frontier toward a new production pattern its production frontier toward a new production pattern caused by changing prices. caused by changing prices.

Results from the study show that, the US service industry Results from the study show that, the US service industry and agriculture, including pork and pork varieties, will and agriculture, including pork and pork varieties, will enjoy higher prices and expansion of outputs while enjoy higher prices and expansion of outputs while manufacturing suffers falling prices with import manufacturing suffers falling prices with import competition.competition.

Predicted output and wage adjustments are not large in Predicted output and wage adjustments are not large in percentage terms if substitution elasticities are moderate. percentage terms if substitution elasticities are moderate. Wages of all but production workers rise in the model by Wages of all but production workers rise in the model by about the same percentage as prices, and as do the about the same percentage as prices, and as do the returns to capital in services, agriculture, and pork and returns to capital in services, agriculture, and pork and pork varieties. pork varieties.

ConclusionConclusion Short run output adjustment will be negligible in Short run output adjustment will be negligible in

pork production and the rest of agriculture, while pork production and the rest of agriculture, while services output increases by 1% and pork varieties services output increases by 1% and pork varieties by almost 2%. by almost 2%.

Manufacturing output will decline by about 5% in Manufacturing output will decline by about 5% in the short run, roughly quadrupling with declining the short run, roughly quadrupling with declining investment in the long run. investment in the long run.

Increased capital returns will increase investment, Increased capital returns will increase investment,

resulting in larger long run adjustments in output. resulting in larger long run adjustments in output.

Output in services, the rest of agriculture, pork, and Output in services, the rest of agriculture, pork, and pork varieties will increase about 16% in the long pork varieties will increase about 16% in the long run. run.