Step-by-Step Example Using Solver

This page gives a step-by-step tutorial on using the Solver based models. We will consider simulating the Stolper-Samuelson theorem using the single economy version of the HOS model. First open the sheet in Excel. You should see the following screen (we are using Excel 2007):


Click on the image to see it in full size. You should have the Solver add-in installed following the instructions. To simulate Stolper-Samuelson we use the spinner next to cell C14 to increase the price of good X by (say) 20 percent:


As we change the price, note that the graphs move in response. The unit value isoquant for X moves inward, while the isoprice for X moves outward. The prevailing factor prices are not a solution. Now, from the ribbon select the Data tab and click on the Solver button under Analysis:


If you are using Excel 2003, choose Solver from the Tools menu.  The following dialog appears:


This is the model, written in Excel. Click the Solve button in the top right, and the following dialog appears:


This indicates that a solution was found. Clicking OK returns us to the sheet:


We observe that the price of capital has risen by more than 20 percent, while the price of labor has fallen. Examination of the factor use matrix confirms that X is capital-intensive, so the result is consistent with what the Stolper-Samuelson theorem predicts. The graphs depict the new equilibrium. We also observe that output of X has risen in response to the price rise, while output of Y has fallen, and so on. Any other simulation can be conducted in the same way.