Suppose Country A, a Labor-Abundant Country, Produces Only Wheat and Cloth

question 60

Multiple Choice

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
Suppose country A engages in free trade and the price of cloth increases to $4 per unit. However, the price of wheat remains unchanged. Under such a situation, the Stolper-Samuelson theorem will predict that:

• A)the real income of the landowners will increase but that of the laborers will remain unchanged.
• B)the purchasing power of the laborers will increase but that of the landowners will decline.
• C)the real income of both the landowners and the laborers will decline.
• D)the purchasing power of both the landowners and the laborers will increase.

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