Question
In the Heckscher-Ohlin (H-O) Model of international
trade, the Stolper-Samuelson Theorem predicts the long-run effect of opening to trade on factor returns. If a country is relatively labor-abundant and opens to trade, what is the predicted impact on the real returns to its factors of production?Solution
· H-O Prediction: A country exports the good that is intensive in the factor it is relatively abundant in. A labor-abundant country will export the labor-intensive good. · Stolper-Samuelson Theorem: Opening to trade raises the real return to a country's abundant factor and lowers the real return to its scarce factor. · Application: Since the country is labor-abundant, opening to trade increases the demand for labor (the abundant factor). Consequently, the real wage (return to labor) will rise, and the real return to capital (the scarce factor) will fall.
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