Explain the meaning of the Stolper-Samuelson Theorem and how international trade affects the distribution of income.
Explain the meaning of the Stolper-Samuelson Theorem and how international trade affects the distribution of income.
Homework Answers
Stolper-Samuelson Theorem is a corollary to hecksher-ohlin theory:
It states that international trade will result in equalization in the relative and absolute income of factors across nations.
Suppose Nation 1 specialises in the production of labour intensive product say x. Then due to increase in production demand of labour will rise, this will cause wages of the labours to rise. At the same time making relative demand of capital to fall, causing interest rates to fall.
Effect of trade on the distribution of income:
The real income of factors move in the same direction as the movement in factor prices.
Now Nation 1 is labour intensive so, trade tends to increase the wages of labours and reduce the real income of the owners of capital.
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Explain the meaning of the Stolper-Samuelson Theorem and how international trade affects the distribution of income.
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