THE M1hGNIFICATIION EFFECT WITH THREE FACTORS Abstract: Price changes create a range of factor price adjustments in the three

Price changes create a range of factor price adjustments in the three factor, two good general equilibrium model of production. Comparative static adjustments in the model have been described by magnification effects and sign patterns. This note supplements the diagrammatic technique of Jones and Easton (1983, Journai of International Economics) and derives eleven magnification effects implied by the sign patterns of Thompson (1985, Canadian Journal oj'Economics). At the bottom line, only one type of magnification effect can be ruled out. Stated in terms 01 the extreme or most inten'sive factors, the Stolper-Samuelson theorem cannot be reversed. 1. THE MAGNIFICATION EFFECT WITH THREE FACTORS There is ample motivation for wanting to develop general understanding cf the structure of production when there are three factors of production. The three factor model with capital, labor, and land is the basis of the "classical" model of trade. Including the third factor also allows the input of energy or skilled labor. The third factor, however, conlplicates ana!ysis. The important concept of factor intensity has to be reinterpreted. The possibility of technical complementarity arises. Also, factor substitution plays a more critical role in comparative statics than when there are only two primary productive factors. Jones and Easton (1993) utilize a diagrammatic approach to derive magnification effects between percentage changes in prices of goods and factor prices in the three factor, two good (3 x 2) general equilibrium model of production. Thompson (1985) derives the comparative static sign patterns of the same model. This note deri.ves all possible magnification effects implied by the comparative static sign patterns. The third factor creates a middle term In the factor intensity ranking across industries. Ruffin (1981) shows that the most intensive or extreme factors in the ranking are migration enemies in that an increase in one factor's endowment lowers the other's price. Additionally, the middle factor is a friend of both extreme factors. Batra and Casas (1976) argue that the price of an extreme factor is positively related with the price of its good, and negatively related with the price * Thanks are d ~ e to Ron Jones, Stephen Easton, and Akira Takayama for suggestions on several critical points as this paper developed. An anonymous referee of this journal made important suggestions.