The Stolper-Samuelson theorem states that: A) free international trade increases

Question

The Stolper-Samuelson theorem states that: A) free international trade increases the real income of the nation's relatively scarce factor and the nation's relatively abundant factor. B) free international trade increases the real income of the nation's relatively scarce factor and reduces the real income of the nation's relatively abundant factor. C)free international trade reduces the real income of the nation's relatively scarce factor and increases the real income of the nation's relatively abundant factor. D)free international trade does not change the real income of the nation's relatively abundant factor and increases the real income of the nation's relatively scarce factor.

Explanation / Answer

Option C is correct.

As per the theory, when the country specialises according to its abundant resource and exports, the price of the commodity exprted increses, with this the factor price of the intensively used factor also increases and the relatively scarce factor would fall.

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