Question

State the Stolper-Samuelson Theorem, and explain what it means. Use a diagram to demonstrate its main result. What is the reason for the Stolper-Samuelson result? What are the effects of trade upon the returns to capital and labor?

Answer 1

Stopler Samuelson theorem links commodity prices and factor prices.

A fall in the relative price of a good will lead to a fall in the return to the factor used most intensively in production of the good, and conversely, to a rise in the return to the other factor

It is based on following assumptions

• a world of very few produced goods
• perfect competition between and within countries
• complete factor mobility within countries (but no mobility between countries)
• no transport costs and
• tradability of all good

suppose there is an increase in the price of one of the goods. Say the price of steel, P_S, rises. This could occur if a country moves from autarky to free trade, or, if a tariff is placed on imports of steel. The price increase will cause an outward parallel shift in the zero-profit line for steel. The equilibrium point will shift from E to F causing an increase in the equilibrium rental rate from , and a decrease in the equilibrium wage rate from
W1 to w
. Only with a higher rental rate and lower wage can zero profit be maintained in both industries at the new set of prices. Using the slopes of the zero-profit lines.

$\frac{a_{LC}}{a_{KC}}>\frac{a_{LS}}{a_{KS}}\\$

which means that clothing is labor intensive and steel is capital intensive. Thus, when the price of steel rises, the payment to the factor used intensively in steel production (capital) rises, while the payment to the other factor (labor) falls.

If the price of clothing had risen, the zero-profit line for clothing would have shifted right causing an increase in the equilibrium wage rate and a decrease in the rental rate. Thus an increase in the price of clothing causes an increase in the payment to the factor used intensively in clothing production (labor) and a decrease in the payment to the other factor (capital).

RENTAL RATE F کی ر؟ 2 لنا وله WAGE RATE