Product Price Increase Effect
The Heckscher-Ohlin’s factor price equalization theorem, in essence indicates a change in the domestic income distribution as an impact of international trade. Paul Samuelsson and Wolfgang Stopler empirically obtained that an increase in the relative price of labour intensive product will increase the wage rate relative to both commodity prices and reduce the rent relative to both commodity prices when he wage- rent ratio improves on account of an increase in relative price of industrial product laborers tend to gain more relative to capitalist when a country enters into foreign trade.
The Stopler Samuelsson theorem states that when wage raise relative to both labour intensive and capital intensive goods prices worker are better off Rents, on the other hand fall relative to both commodity prices as such capitalists are worse off. The theorem asserts that under free trade situation when relative prices of goods raise the real income of the relative ely abundant factor also rises and that of relatively scarce factor tends to decline. When the gain accrues to the trading country, the abundant factor gains proportionately ore then the loss to the income of the scarce factor.
In figure, point a shows the input of labour and capital necessitated to produce commodity X and Y in a country. The wage rate is 1/OB and rent is 1/OA. X is labour-intensive and Y is capital-intensive product. When price of Y rises and that of X remaining unchanged, the price line changes as A’B’. The Isoquants shifts through b’ to z. 1/OB’ exceeds 1/OB. Which means rise in wage income. 1/OA’ is less than 1/OA. Which means fall in rent income. Moreover, BB’/OBexceeds Zb/Ob.
In short, the Stopler-Samuelsson theorem implies that an increase in any product price due to trade produces a proportionally greater increase in the price of factor used intensively to that good and a fall in the price of the factor used less intensively. The income gain is shared in a greater proportion by the abundant factor.
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