Stolper-Samuelson Theorem Assignment Help

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Stolper-Samuelson Theorem:


To  determine the effects  of  changes  in  output prices  on  factor prices we differentiate the above two cautions with respect to prices. We have,  

58_Stolper-Samuelson Theorem.png

2451_Stolper-Samuelson Theorem1.png

That  is, if  one  industry  is more labor  intensive  than  the other, the  above comparative  - statics  result is well defined.
For example, suppose industry-l  is labor intensive,  then

1994_Stolper-Samuelson Theorem2.png

These  results are known  as the Stolper-Samuleson theorem. Essentially, the insight thrown by  these is:  if the price of labor-intensive industry is increased, nominal wage  rate will rise whereas  capital  rental  rates will  fall. Generally speaking, the price of a factor of production will rise  if the output price of the industry,  in which that factor is most intensively used, rises;  it will  fall if  the output price of the  industry, which  is  less intensive  in  that  factor,  increases.

Let us now present this diagrammatically.

2302_Stolper-Samuelson Theorem3.png

 

792_Stolper-Samuelson Theorem4.png

Consider an  increase in P1/P2 such  that the price line (t1) is steeper than (t2).  In a full employment economy, efficient  production point moves from C to D such that production of yl  rises and y2  falls. Correspondingly,  the economy moves from  E0  to E1  along the contract curve O1 O2. Due  to CRS, along any  ray through  the origin  MRTS12  is  the  same.  Thus,  we  have

2438_Stolper-Samuelson Theorem5.png . Given  diminishing MRTS,  along  on  isoquant we 4 W have702_Stolper-Samuelson Theorem6.png is the optimum point, we get1775_Stolper-Samuelson Theorem7.png

 rises. Thus, producers in both sectors

substitute K for L. The increase in capital intensity implies MPL  rises and MPk falls in both the sectors. Profit maximisation requires, MPL  =  real wage to rise and MPK  =  real rental to fall.

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