Question

please explain the Stolper-Samuelson Theorem. How is this theorem different fromHeckscher–Ohlin (H–O) theory and Comparative advantage theory?

Answer 1

The Stolper–Samuelson theorem is a basic theorem in Heckscher–Ohlin trade theory. It describes the relationship between relative prices of output and relative factor rewards—specifically, real wages and real returns to capital.The theorem states that—under specific economic assumptions (constant returns to scale, perfect competition, equality of the number of factors to the number of products)—a rise in the relative price of a good will lead to a rise in the real return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the real return to the other factor. The Stolper-Samuelson theorem demonstrates how changes in output prices affect the prices of the factors when positive production and zero economic profit are maintained in each industry . The Stolper-Samuelson theorem (SST) simply suggests that, in any particular country, a rise in the relative (producer) prices of the labour intensive good will make labour better off and capital worse-off, and vice-versa, provided that some amount of each good is being produced.The Stolper-Samuelson theorem is one of the central results of Heckscher-Ohlin theory, itself one of the principal theories of international trade. It provides a definite answer to a central question in applied economics: What is the effect of changes in the prices of goods, caused for example by changes in tariffs, on the prices of factors of production. As first presented by Wolfgang Stolper and Paul A. Samuelson (1941), it dealt with a very special framework with many restrictive assumptions, most notably that the economy consists of only two broad sectors, and that production uses only two factors (often labeled capital and labor). However, subsequent theoretical work has shown that essential features of the theorem hold much more generally. It has also been applied to a range of empirical issues, including the effects of increased globalization on income distribution in developed countries, and the long-run political allegiances of classes and interest groups. The Stolper-Samuelson theorem in its original setting can be explained intuitively as follows. Suppose that one sector produces exports and the other produces goods which compete directly with imports. Suppose in addition that the import-competing sector is relatively "labor-intensive," meaning that it uses a higher ratio of labor to capital than the export sector. Now ask what will be the effect of a tariff or some other change, which raises the relative price of the import-competing sector's output. Clearly this will encourage that sector to expand. Provided that the economy is at or close to full employment of both factors, this expansion must come at the expense of the export sector. The combined expansion of the relatively labor-intensive sector and contraction of the relatively capital-intensive sector raises the aggregate demand for labor relative to capital, and so puts upward pressure on the wage. Because the price of exports has not changed, a higher wage must imply an absolute fall in the return to capital. This in turn implies that the wage must rise by even more than the price of imports. Thus, when import-competing goods are relatively labor-intensive, wage earners gain and capital owners lose, irrespective of which bundle of goods they consume. Put simply, in this case, protection unambiguously raises real wages.Another key assumption is that all factors are fully mobile between sectors. Relaxing this for one of the two factors in the simplest case yields the specific-factors model, which provides an illuminating contrast with the Heckscher-Ohlin model. In line with the general results of the last paragraph, protection continues to raise the real return of one factor, the one specific to the import-competing sector, and to lower the real return of another factor, that specific to the export sector. However, its effect on the real return of the mobile factor is now ambiguous. The specific-factors model can also be viewed as depicting a short-run equilibrium. Over time, the specific factors lose their distinctiveness and become intersector-ally mobile, so the Stolper-Samuelson predictions are restored.
     The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model, it's used to evaluate trade and, more specifically, the equilibrium of trade between two countries that have varying specialties and natural resources.The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently. It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance between two countries, each with its resources.
The model isn't limited to tradable commodities. It also incorporates other production factors such as labor. The costs of labor vary from one nation to another, so countries with cheap labor forces should focus primarily on producing labor-intensive goods, according to the model. Although the Heckscher-Ohlin model appears reasonable, most economists have had difficulty finding evidence to support it. A variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with one another and rely less heavily on trade with developing markets.
Heckscher-Ohlin theory, in economics, a theory of comparative advantage in international trade according to which countries in which capital is relatively plentiful and labour relatively scarce will tend to export capital-intensive products and import labour-intensive products, while countries in which labour is relatively plentiful and capital relatively scarce will tend to export labour-intensive products and import capital-intensive products. The theory was developed by the Swedish economist Bertil Ohlin (1899–1979) on the basis of work by his teacher the Swedish economist Eli Filip Heckscher (1879–1952). Some countries are relatively well-endowed with capital: the typical worker has plenty of machinery and equipment to assist with the work. In such countries, wage rates generally are high; as a result, the costs of producing labour-intensive goods—such as textiles, sporting goods, and simple consumer electronics—tend to be more expensive than in countries with plentiful labour and low wage rates. On the other hand, goods requiring much capital and only a little labour (automobiles and chemicals, for example) tend to be relatively inexpensive in countries with plentiful and cheap capital. Thus, countries with abundant capital should generally be able to produce capital-intensive goods relatively inexpensively, exporting them in order to pay for imports of labour-intensive goods.