International Trade: Stolper-Samuelson Theorem Analysis Assignment

This assignment analyzes international trade using data from the United States and Malaysia, focusing on the relationship between trade openness and industry pay inequality. The student uses data from the World Bank and UTIP-UNIDO to create graphs illustrating the correlation between trade as a percentage of GDP and industrial pay inequality for each country. The core of the analysis involves applying the Stolper-Samuelson theorem, examining how changes in relative prices of traded goods affect the real return to factors of production (skilled and unskilled labor) in both developed and developing nations. The student concludes by discussing how the theorem holds for both countries based on their respective trade patterns and factor endowments. The assignment demonstrates an understanding of international trade theory and its application to real-world economic data.

Running Head: INTERNATIONAL TRADE
International Trade
Name of the Student
Name of the University
Author note
Course ID

1INTERNATIONAL TRADE
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................4
Stolper-Samuelson theorem.........................................................................................................4
References........................................................................................................................................6

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Answer 1
15 17 19 21 23 25 27
0.015
0.020
0.025
0.030
0.035
0.040
United State
Trade (%) of GDP
Industry pay inequality
Figure 1: Openness versus industry pay inequality in United State

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100.00 120.00 140.00 160.00 180.00 200.00 220.00 240.00
0.015
0.020
0.025
0.030
0.035
0.040
0.045
Malaysia
Trade (%) of GDP
Industry pay inequality
Figure 2: Openness versus industry pay inequality in Malaysia

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Answer 2
The correlation coefficient is a representative measure of causal relation between two
variables. For Malaysia, the obtained correlation coefficient is -0.32. Negative sign of correlation
implies an inverse relation between openness and industry pay inequality. This is to say that as
the country involve in more and more trade the ratio of skilled to unskilled labor decreases
implying a gain in unskilled labor wage. The correlation coefficient in United State is obtained as
0.24. Positive correlation coefficient implies a positive relation between openness and industry
pay inequality (Feenstra 2015). In this case, an increase in percentage share of trade in GDP is
associated with an increase in wages of skilled labor force.
Answer 3
Stolper-Samuelson theorem
The Stopler-Samuelson theorem is derived from the trade model established by Hecksher
and Ohlin. The fundamental theorem describes the relation between relative rewards to factors
and that of relative price of goods traded. The reward to factors are measured in terms of real
return on capital and real wages.
Statement of the theorem: Under certain economic assumption, an increase in relative price of a
traded good leads to an increase in real return to the factors that a nation uses intensively in
production while the return to other factor declines (Krugman, Obstfeld and Melitz 2015).
The theorem can be tested in real world using relevant data set on trade. The two chosen
nations for analysis are United State (developed) and Malaysia (developing). Skilled and
unskilled labor are the two factor inputs for the analysis. In a developing nation unskilled labor is
use as an intensive factor while in a developed nation skilled labor is used as an intensive factor.

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In the given dataset openness of the nation is measured in terms of percentage share of trade in
GDP. The industry pay inequality on the other hand is used as a proxy measure of the ratio of
skilled to unskilled labor wages.
Goods mainly exported from Malaysia are mineral fuels, animal or vegetable fats, oil,
waxes, optical, medical, technical apparatus, rubber, rubber articles, wood and organic chemical.
These goods are manly produced with the intensive use of unskilled labor. The developing
nations do not have much supply of skilled laborers. The main exports of United State include
Cars, Refined petroleum, pharmaceuticals, plastic, spacecraft, helicopters, gas turbines,
computer, medical instrument and integrated circuits (Handley and Limao 2017). The production
of these goods need intensive use of skilled labor force.
For Malaysia a negative correlation coefficient is obtained between openness and
industry pay inequality. With an increase in price of export in the world market country tends to
increase its export and hence, openness increases. This leads to a decrease in ratio of skilled to
unskilled labor wages. This in turn means an increase in wage of unskilled wage or decline in
skilled wage. Therefore, with increase in world relative price the intensive factor in Malaysia
experience an increase in return while the other factor experiences a decline in return
(Stockhammer 2017) The data set shows a positive correlation between openness and industry
pay inequality for United State. That is an increase in trade leads to an increase in the ratio of
skilled to unskilled labor force. This is to say that, an increase in relative price of exported good
causes increase in wages of skilled laborers (intensive factor) while a decline in wages of
unskilled labor. The Stolper- Samuelson theorem thus holds for both the nation.

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References
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university
press.
Handley, K. and Limao, N., 2017. Policy uncertainty, trade, and welfare: Theory and evidence
for china and the united states. American Economic Review, 107(9), pp.2731-83.
Krugman, P., Obstfeld, M. and Melitz, M., 2015. International Trade: Theory and Policy:
Global Edition. Pearson Higher Ed.
Stockhammer, E., 2017. Determinants of the wage share: a panel analysis of advanced and
developing economies. British Journal of Industrial Relations, 55(1), pp.3-33.