Trade Theory Application

The assignment content discusses the Stopler Samuelson Theorem, an extension of the Heckscher-Ohlin model that explains how countries trade based on their factors of production. According to the theorem, a country will export goods it can produce with abundant resources and import those requiring scarce resources. Australia's increasing trade openness is found to be consistent with this theory, resulting in increased wages for skilled labor and decreased demand for unskilled labor. In contrast, USA's decreasing IPI as trade openness increases does not align with the Stopler Samuelson Theorem.

TRADE THEORY
Question 3
One of the prominent trade theories is Stopler Samuelson Theorem which is essentially an
extension of the Heckscher-Ohlin model. The addition done to the Ohlin model was in the
form of wages for labour and rent for capital. Their basic premise is that a country would
primarily export that particular good which it can manufacture or produce with factors of
production that are relatively abundant. Further, the goods imported are those for which the
country has relatively scarce resources (Koutsoyiannis, 2013). As a result, there is a
production shift in favour of the product for which the country has relatively abundant
resources and the good which tends to use the resources scarcely available would diminish in
production. Thereby as a result of trade and resultant production shift, the factor prices should
tend to become equal in the two nations. However, this is never complete or else the basis for
trade would stop existing (Dombusch, Fischer and Startz, 2012).
With regards to Australia, it is observed that there is a rise in the IPI as the trade openness
tends to increase. This is in line with the Stopler Samuelson Theorem as the abundant
resource for Australia is skilled labour and not the unskilled labour. Due to increase in trade,
Australia would tend to increase production of goods and services where skilled labour is
required while decreasing the demand for unskilled labour as these products would be
imported from low cost destination such as India and China. This causes an increase in the
wages of the skilled labour coupled with constant wages of the unskilled labour leading to
increase in the IPI. This observation is in line with the outcome stipulated by Stopler
Samuelson Theorem (Koutsoyiannis, 2013).
With regards to USA, the data collected suggests that as the trade openness tends to increase,
there is a decrease in the IPI. This is not expected on the basis of the Stopler Samuelson
Theorem. Ideally, as the trade increases, the demand for high skilled labour should increase
as it is available in abundant in the US. As a result, US should specialise in providing high
end skilled services coupled with high end technology products. On the other hand, the
unskilled jobs would be outsourced to low cost destinations which have abundant of cheap
low skilled labour available. Hence, the IPI should increase for US like Australia. Thus, USA
does not seem to follow the Stopler Samuelson Theorem (Dombusch, Fischer and Startz,
2012).

TRADE THEORY
References
Dombusch, R, Fischer, S. and Startz, R. (2012).Macroeconomics, 10th edn, New York:
McGraw Hill Publications
Koutsoyiannis, A. (2013). Modern Macroeconomics, 4th edn, London: Palgrave McMillan