Pugel_14_SG_CH05 - CHAPTER 5 WHO GAINS AND WHO LOSES FROM...

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CHAPTER 5 WHO GAINS AND WHO LOSES FROM TRADE? Objectives of the Chapter In this chapter, we see how trade patterns predicted by the Heckscher-Ohlin model may lead to changes in income distribution. International trade divides society into gainers from trade and losers from trade as a result of changes in relative commodity prices. The Stolper-Samuelson theorem explains that in the short run, factors employed to produce the rising-price good gain, while factors employed to produce the falling-price good lose. In the long run, when factors are mobile between industries, the factor used intensively in producing the rising-price good gains whether or not it is actually employed in that industry. Similarly, the factor used intensively in producing the falling-price good loses. The factor price equalization theorem uses both the Heckscher-Ohlin model and the Stolper-Samuelson theorem. It assumes that the more abundant factor works more in the export industry, while the scarcer factor is bound to work more in the import-competing industry; furthermore, it assumes that factors producing the rising-price good have rising incomes in the long run. As a result, scarce (expensive) labor in one country sees its wage fall, while abundant (cheap) labor in another country sees its wage rise. Consequently, wages in the two countries converge. After studying Chapter 5 you should know 1. how income distribution relates to international trade through the Stolper-Samuelson theorem. 2. the assumptions and conclusions of the factor-price equalization theorem. 3. the Leontief Paradox and other empirical evidence on Heckscher-Ohlin. Important Concepts Factor price equalization theorem: Under certain assumptions, free trade will equalize not only commodity prices between countries but also factor prices, so that all laborers will earn the same real wage rate and all units of land will earn the same real rental return in both countries, regardless of the factor supplies or the demand patterns in the two countries.
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Pugel_14_SG_CH05 - CHAPTER 5 WHO GAINS AND WHO LOSES FROM...

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