Stolper-Samuelson theorem

The Stolper-Samuelson theorem is a basic theorem in trade theory. It describes a relation between the relative prices of output goods and relative factor rewards, specifically, real wages and real returns to capital.

Related Topics:
Trade - Real wages

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The theorem states that — under some economic assumptions — a rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor.

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It was derived in 1941 from within the framework of the Heckscher-Ohlin model by Paul Samuelson and Wolfgang Stolper, but has subsequently been derived in less restricted models. As a term, it is applied to all cases where the effect is seen. Jones & Scheinkman (1977) show that under very general conditions the factor returns change with output prices as predicted by the theorem. If considering the change in real returns under increased international trade a robust finding of the theorem is that returns to the scarce factor will go down, ceteris paribus. A further robust lemma of the theorem is that a compensation to the scarce-factor exists which will overcome this effect and make increased trade Pareto optimal.

Related Topics:
1941 - Heckscher-Ohlin model - Paul Samuelson - Wolfgang Stolper - 1977 - Real - International trade - Compensation - Pareto optimal

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The original Heckscher-Ohlin model was a two factor model with a labour market specified by a single number. Therefore, the early versions of the theorem could make no predictions about the affect on the unskilled labour force in a high income country under trade liberalization. However, more sophisticated models with multiple classes of worker productivity have been shown to produce the Stolper-Samuelson effect within each class of labour: Unskilled workers producing traded goods in a high-skill country will be worse off as international trade increases, because, relative to the world market in the good they produce, an unskilled first world production-line worker is a less abundant factor of production than capital.

Related Topics:
Traded goods - First world

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The Stolper-Samuelson theorem is closely linked to the factor price equalization theorem, which states that, regardless of international factor mobility, factor prices will tend to equalize across countries that do not differ in technology.

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