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In: Economics

Explain why the Stolper-Samuelson theorem predicts that owners of capital in the USA would prefer free...

Explain why the Stolper-Samuelson theorem predicts that owners of capital in the USA would prefer free trade. Then explain why we actually observe examples of capital owners in the USA advocating protectionism. (10 Marks, maximum word limit: 250 words)

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Expert Solution


SS Model & US Trade
Stolper-Samuelson theorem of international trade put forward the relationship between factors of production and the relative price of the commodity. An increase in the relative price of the commodity will increase the returns for the intensive factor used in the production of that commodity and reduce the returns for other factors. As the theory suggests, capital intensive commodities as it increase its relative price, the return for the factor capital will increase and that of other factors will reduce.
US being a capital intensive country, the theorem suggest US capital owners will choose free trade because a rise in the relative price of the capital intense good will give increased returns to the factor capital. The ability of US to produce capital intensive goods cheaper than others will give them the benefit of high relative price in the world market thus giving increased returns to the factor capital.
The free market situation led to the supply of technology and other factors to different markets all over the world. Other countries which are labor intensive, started to produce capital intensive goods even cheaper than US with the advantage of free trade. Since US lack the necessary labor supply, labor is the expensive factor of production there. Countries which are able to produce with cheap labor through increased technology and free trade could achieve capital also cheaper. US capital owners find it difficult to compete with countries those get advantage from free trade. They lose the advantage of capital intensity and thus retaining the factor from earning better returns.  


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