ECON1089 - Trade Analysis: Income Inequality Report for Italy & Sweden

This report analyzes the relationship between trade openness and income inequality, as measured by the GINI index, in Italy and Sweden. It uses scatterplots to visualize the relationship and correlation coefficients to quantify the strength of the association. The analysis reveals a higher correlation between openness and the GINI index in Sweden compared to Italy. The report also discusses the Stolper-Samuelson theorem, which explains how trade liberalization can affect income distribution by increasing the returns to abundant factors and decreasing returns to scarce factors. Finally, it addresses whether workers should support trade, arguing that it can reduce income inequality and benefit developing countries. This assignment provides a comprehensive overview of the interplay between international trade and income distribution, offering valuable insights into the economic dynamics of Italy and Sweden.

Step 1
The plotting of openness to GINI has been presented for Italy and Sweden as under:
25 25.5 26 26.5 27 27.5 28 28.5 29 29.5
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Sweden Openness
Gini Index
Openess
On the basis of above, it can be inferred that as openness increases GINI Index increases.
Step 2
Correlation is a term which generally refers to the strength of any relationship between two
variables .The high correlation coefficient between two variables indicates that the variables are highly
correlated to each other that is they have a strong correlation with each other .On the other side the
lower correlation coefficient between two variables indicates that the variables are not highly correlated
to each other and they do not have a strong relation with each other and hardly the variables are
related to each other. It is generally the way to study the strength of the relationship with the available
statistical data. The correlation value -1.00 represents a perfect negative correlation which means that
the value of one variable will decrease the other will increase while a value +1.00 indicates that the two
variables are strongly correlated to each other which means that if the one variable will increase the
other variable will also increase and so on. (Crossman, 2018)
32.5 33 33.5 34 34.5 35 35.5 36
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Italy Openness
GINI Index
Openess

As according to the relevant result and data obtained after computation thereof the correlation of Gini
Index and Italy is 0.26 while that of Sweden correlation is 0.49.The correlation of Sweden is high in
comparison to Italy which is 0.26 only. The high correlation of Sweden indicates that they are highly
correlated to each other on the basis of the available computed statistical data.
Step 3
One most important and useful theoretical aspect which explain the relationship between trade and
distribution of income is the stolper-samuelson theorem which is been derived from Hecksher-Ohlin
trade model. According to stolper samuelson theorem, liberalization in trade leads to an increase in the
price of many factors in comparison to the price of scarce factors ,as it expands the production and the
export of abundant factor –intensive products as this also leads to the reduction in the production of
scarce factor intensive products which leads to an increase in the import of scare factor intensive
products. Let us take an instance by assuming that there are two types of labour skilled and unskilled
labour and developing countries and fully equipped with unskilled labour .Under such position trade
liberalization by developing countries will expand export of unskilled labour and import of skilled
labour ,which in turn will lead to an increase in the demand for unskilled labour intensive product and
decrease in the demand for skilled labour. It also lead to increase in the wages of unskilled worker and
decrease in the wages of skilled worker. ( DigitalCommons@LLR, 2017)
Step 4
Part (e)
Yes, the worker shall support trade as the same shall help in reducing the income inequality. Further,
the survey reveals that an increase in trade openness by developing countries appears to have

contributed to narrowing the development gap vis-à-vis developed countries, while its impacts on
income gap between developing countries are not clear. Thus, the trade openness shall be beneficial for
both.
Step -4 Part A, B, C and D