Question

According to the S-S Theorem, what are the effects of international trade on workers and capital owners?

Answer 1

SS Theorem of International Trade & Return to factors of Production
Open trade or entering into international trade make several impacts on labor and capital. The increased competition and availability of cheaper capital and labor will affects the domestic factor resources. The movements of factors from various countries to other increase the efficiency of production and reduce the return for factors. This also leads to change in price due to the availability of cheap perfect substitutes.
SS theorem of international trade states about the relationship between the factors of production and the relative price of the commodities. An increase in the relative price of the commodity will increase the returns for the factor which is used intensively for the production of the commodity and reduces the returns to the other. A labor intensive good will increases the returns to labor as an increase in the relative price of the commodity and reduces the return to other factor. Similarly, a capital intensive good will increase the returns to capital and a reduction to that of labor with increase in relative price of the same.
International market with increased competition will affect the relative price of the commodities thus leading to affect the returns enjoyed by the factors. Labor will be affected with a fall in relative price of the goods that they are intensive in. Capital owners by the same in case of goods which are capital intensive. The availability of similar goods due to free market system, changes the relative prices thus affecting the returns to factors labor and capital.