Question

According to the Stolper-Samuelson theorem, would you expect capital owners across the globe to favor tariffs given that due to technological advances, production of most goods the world over are capital intensive? Why or why not?

Answer 1

Certainly no, they will not favor tarrif.

according to Stolper- Samuelson theorem if there is exist two goods, one good is labor intensive and another capital intensive. Increase in price of any of the good, it can be either labor intensive or capital intensive will increase price of the factor involved either labor or capital.

For instance, if price of capital intensive good increases then the price of capital will increase, this will cause capital good market to expand and labour good market to contract. This infact will increase the demand for the capital.

If in all these countries they are two sectors one labor intensive which competes with import market and capital intensive sectors which is used to export. What happens when tarrif is imposed, this will increase price of imports, which in the above we assumed as labor intensive sector. This increase in the price will cause wages to increases. This increase in wage realtively means reduction of return on capital. Ofcourse with this the labour intensive market will expand and the real wages indeed will increase more at the cost of reduction in price of capital.

So, to save from this capital owners will not promote any tarrif restrictions according to samuelson.

Here in the graph, we can say whatever is explained above. As price increased to p2, how it increased the wages since labor intensive market is import competiting market. This increased wage to w1 and reduced return on capital to r1 from r0.

note: kindly note that I did not use mathematical model because the heavy derivation will make understanding much complex in here. Instead a graphical and logical reasoning is provided.