Germany, a relatively capital abundant nation, has extensive trade ties with Sou

Question

Germany, a relatively capital abundant nation, has extensive trade ties with South Korea, a relatively labor abundant nation. As free trade expands between the two nations, the Stolper–Samuelson theorem would predict that:

Select one:

a. the real return to both labor and capital would decline in Germany.

b. the real return to both labor and capital would rise in Germany.

c. the real return to labor in Germany would rise while the real return to capital in Germany would decline.

d. the real return to labor in Germany would decline while the real return to capital in Germany would rise.

Explanation / Answer

Solution: the real return to labor in Germany would decline while the real return to capital in Germany would rise

Explanation: The Stolper-Samuelson theorem shows that an increase in the relative price of a commodity increases the return of the factor used intensively in its production. As a result, the capital abundant nation will see a fall in wages, but an increase in the return to capital.

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