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    Question

    Which theorem intends to show that the change in commodity prices changes the distribution of real incomes between capital and labor?

    A Factor Intensity Reversal Theorem Correct Answer Incorrect Answer
    B The Heckscher-Ohlin Theorem Correct Answer Incorrect Answer
    C The Rybczynski Theorem Correct Answer Incorrect Answer
    D The Stolper-Samuelson Theorem Correct Answer Incorrect Answer

    Solution

    The Stolper-Samuelson Theorem: If there are CRTS and if both goods continue to be produced, a relative increase in the price of a commodity will increase the real return to the factor used intensively in that industry and reduce the real return to the other factor. A labor abundant country enters free trade then this will increase the relative price of labor intensive goods, make the workers better off and capitalists worse off. – Workers will support free trade while capitalists will oppose it. – Not only workers in labor intensive sectors will be better off, but also workers in capital intensive sectors

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