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      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?
      A The real return to labor (wages) will fall, and the real return to capital (rent) will rise. Correct Answer Incorrect Answer
      B Both real returns will remain unchanged due to the assumption of factor price equalization. Correct Answer Incorrect Answer
      C The real return to capital (rent) will fall, and the real return to labor (wages) will rise. Correct Answer Incorrect Answer
      D Both real returns to labor and capital will rise due to increased overall efficiency. Correct Answer Incorrect Answer

      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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