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Trade effects of factor rewards: 

Trade effects of factor rewards Econ 303 International Economics Prof. Carlos A. Benito

Who gains and who loses from Trade: 

Who gains and who loses from Trade Conceptual frameworks (models) Hechscher-Ohlin Stolper-Samuelson Theorem Topics Trade effects on factor incomes Short run Long run Specialized factor patterns Factor-price equalization across nations

International trade pattern : 

International trade pattern D S D S Bushels/yard Cloth United States Rest of the World X M International Market Cloth Cloth Bushels/yard Bushels/yard Factors: Land abundant Industry: Land intensive Labor abundant Labor intensive

Slide4: 

D S Wheat Wheat United States: Adjustments in Wheat Industry – Short Run Yard/bushels Wheat 45o Wheat Land Land Wheat Rent Ls Ld Labor Wheat Wheat Market Labor Market Land Market Nd Ns wages

Slide5: 

D S Cloth Cloth United States: Adjustments in Cloth Industry – Short Run Bushels/yard Cloth 45o Cloth Labor Labor Cloth Wages Ns Nd Land Cloth Cloth Market Labor Market Cloth Rent Ls Ld

Effect of free trade on factor rewards: 

Effect of free trade on factor rewards In Wheat In the US In the Rest of the World On Landowners On Laborers On Landowners On Laborers In Cloth + + + + - - - - Short run gain or lose Long run gain or lose Land rent wages Land rent wages

Stolper-Samuelson Theorem: 

Stolper-Samuelson Theorem If the price of one commodity rises and the price of the other remain constant, and after full adjustment to long run equilibrium: It raises the real return to the factor used intensively in the rising price industry It lowers the real return to the factor used intensively in the falling price industry

Stolper-Samuelson Theorem: 

Stolper-Samuelson Theorem Under perfect competition & constant marginal cost Land is used intensively in wheat Labor is used intensively in cloth Pwheat= marginal cost of wheat = ar +bw Pcloth= marginal cost of cloth = cr +dw dPwheat > 0 dPcloth = 0 dr > 0 dw< 0