Question

51. The Stolper-Samuelson theorem suggests that, when a country is opened to international trade, the real income of the country's abundant factor of production will and the real income of the country's scarce factor of production a. rise; also will rise b. rise; wil fall c. fall; will rise d. fall; also will fall 52 In the "specific-factors" model where capital in each sector is fixed but labor can move freely between the two sectors, the opening of the country to trade will increase the real return to capital in the who sector and will increase the real wage of a worker a. export; consumes mostly the import good b. export; consumes mostly the export good c. import-competing; consumes mostly the import good d. import-competing; consumes mostly the export good $2

Answer 1

Answer:

51. The Stolper-Samuelson theorem suggests that, when a country is opened to international trade, the real income of the country's abundant factor of production will rise and the real income of the country's scarce factor of production will fall a. rise; also will rise b. rise; will fall c. fall; will rise d. fall; also will fall Ans b. rise; will fall 52. In the "specific-factors" model where capital in each sector is fixed but labor can move freely between the two sectors, the opening of the country to trade will increase the real return to capital in the export sector and will increase the real wage of a worker who consumes mostly the import good. a. export; consumes mostly the import good b. export; consumes mostly the export good c. import-competing; consumes mostly the import good d. import-competing; consumes mostly the export good Ans a, export; consumes mostly the import good

(51) Option 'b' is the correct answer because Stolper-Samuelson theorem states that an increase in the relative price of labor intensive commodity will increase wages. Similarly, an increase in the relative price of capital intensive commodity will increase the price of capital. This implies that free trade would raise the returns to the abundant factor and reduce the returns to the scarce factor.

(52) Option 'a' is the correct answer because specific-factors model states that the import-competing sector will have to raise their wages in step so as not to lose all of its workers due to their free mobility and hence the higher wages will induce the expansion of output in the export sector (the sector whose price rises) and a reduction in output in the import-competing sector. The adjustment will continue until the wage rises to a level that equalizes the value of marginal product in both industries. Thus in the import-competing industry, lower revenues and higher wages will combine to reduce the return to capital in that sector. However, in the export sector, greater output and higher prices will combine to raise the return to capital in that sector.