The Stolper-Samuelson Theorem
The Stolper-Samuelson theorem describes the relationship between changes in output, or goods, prices and changes in factor prices such as wages and rents within the context of the H-O model. The theorem was originally developed to illuminate the issue of how tariffs would affect the incomes of workers and capitalists (i.e., the distribution of income) within a country. However, the theorem is just as useful when applied to trade liberalization.
The theorem states that if the price of the capital-intensive good rises (for whatever reason) then the price of capital, the factor used intensively in that industry, will rise, while the wage rate paid to labor will fall. Thus, if the price of steel were to rise, and if steel were capital-intensive, then the rental rate on capital would rise while the wage rate would fall. Similarly, if the price of the labor-intensive good were to rise then the wage rate would rise while the rental rate would fall.
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
intersectorally mobile, so the Stolper-Samuelson predictions are restored.
Among many applications, the Stolper-Samuelson theory has been used to address the
"trade and wages" debate. This asks to what extent globalisation in general, and increased
imports from low-wage...