Question

In: Economics

what is the Stopler-Samuelson theorem? what are the underlying conditions and assumptions for the theorem?

what is the Stopler-Samuelson theorem? what are the underlying conditions and assumptions for the theorem?

Solutions

Expert Solution

The Stopler-Samuelson theorem describes the relationship between prices of output relative to the various factors. It suggests that a relatively abundant factor of production is benefited by free trade while it harms the locally scarce factor of production. Here, often the locally scarce factor might be labour and the abundant factor might be capital in most cases.

This is the reason why the developed countries are less impressed towards free trade while the developing countries are attracted to free trade. It is showing a kind of distributional effects of trade that occurs in the globalised world.

The various assumptions of Stopler-Samuelson theorem are that the goods of a particular industry are perfect substitutes and cost of production depends on factor outputs mainly.

For example: If country A has higher skilled labour manpower and country B has unskilled labour manpower, then if the trade barriers between both these countries are relaxed, there would be a shift in price ranges of both skilled and unskilled labour on both countries.

Skilled and unskilled labour wages might be insensitive to changes in relative factor endowments. It implicates an adverese effect on the concept of globalisation, with the concept of free trade.


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