Stolper - 2 competition 3 factor supplies are fixed and...

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Stolper-Samuelson Theorem assumptions: 1. 2 goods (wheat and cloth) 2. 2 factors of production (land and labor) 3. perfect competition 4. full-employment 5. wheat is land-intensive and cloth is labor-intensive 6. factors are mobile between sectors but not countries 7. trade raises the relative price of wheat Under assumptions (1)-(7), moving from no trade to free trade unambiguously raises the returns to the factor used intensively in the rising-price industry (land) and lowers the return to the factor used intensively in the falling-price industry (labor), regardless of which goods the sellers of the two factors prefer to consume. The more a factor is specialized into the production of exports the more it gains from trade; the more a factor is specialized in the production of importable goods, the more it stands to lose from trade. Factor Price Equalization Theorem assumptions: 1. 2 factors of production (land & labor), 2 commodities, and 2 countries
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Unformatted text preview: 2. competition 3. factor supplies are fixed and immobile between countries 4. full employment 5. no transportation costs 6. no tariffs or other barriers to trade 7. production functions for each industry are the same between countries 8. no economies of scale 9. factor-intensities are the same at all factor-price ratios 10. both countries always produce both goods Under assumptions (1)-(10), free trade will equalize factor prices so that all laborers will earn the same wage rate and all units of land will earn the same rent in both countries. Suppose that labor is scarce. The country will import labor-intensive products. The demand for labor in labor-intensive industries falls. So, wages fall in the scarce labor country. Where labor is cheap, the country will export labor-intensive products. The demand for labor there rises, so wages go up in the cheap labor country. Trade is a substitute for the migration of labor....
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