According to the _______ the export of the product that embodies large amounts of the relatively cheap abundant resource results in an increase in its price and income; at the same time the price and income of the resource used intensively in the import-competing product decreases as its demand falls.

 Options:

a. Ricardian equivalence theorem b. Smithian equivalence theorem c. Stolpher-Samuelson theorem d. Bernanke-Greenspan theorem

The Correct Answer Is:

c. Stolpher-Samuelson theorem

Correct Answer Explanation: c. Stolpher-Samuelson theorem

The correct answer to this question is the Stolper-Samuelson theorem. This economic theory, formulated by Wolfgang Stolper and Paul Samuelson, addresses the effects of international trade on the prices of goods and factors of production, particularly labor and capital.

The theorem is rooted in the Heckscher-Ohlin model of international trade, which posits that countries will export goods that intensively use their abundant and cheap factors of production while importing goods that intensively use their scarce factors.

Stolper and Samuelson took this concept further by focusing on how trade affects the incomes of factors of production.

According to the Stolper-Samuelson theorem, when a country exports goods that are intensive in its abundant factor of production (such as labor or capital), the price of that factor increases domestically due to higher demand for it in the production of the exportable goods.

Simultaneously, the income earned by that factor of production also increases. Conversely, the price and income of the factor used intensively in the production of goods that compete with imports decrease because the demand for that factor falls.

For example, consider a country with an abundance of skilled labor but limited natural resources. If this country specializes in exporting high-tech goods that heavily rely on skilled labor and imports goods that heavily use natural resources, the demand for skilled labor increases due to the production of export goods.

Consequently, the wages of skilled labor rise, benefiting this group economically. Conversely, the prices and income related to the scarce natural resources decline as their demand decreases due to imports.

Now, let’s delve into why the other options are not correct:

a. Ricardian equivalence theorem:

The Ricardian equivalence theorem is a theory in public finance proposed by David Ricardo. It suggests that the method by which a government chooses to finance its spending (whether through taxation or borrowing) doesn’t significantly impact consumer spending.

The theorem posits that individuals will anticipate future tax liabilities due to government borrowing and adjust their behavior accordingly by saving more to offset the expected future taxes.

This theorem primarily deals with the relationship between government fiscal policy and private consumption behavior. It does not relate to international trade or the effects of trade on factor prices and incomes.

Instead, it focuses on the implications of government debt and taxation on household saving and consumption decisions. Thus, it’s not applicable to the context of the question, which pertains to the impact of trade on factor prices and incomes.

b. Smithian equivalence theorem:

The term “Smithian equivalence theorem” does not correspond to any recognized economic theorem or principle in the field of international trade or factor pricing. It appears to be a term that has been either fabricated or misattributed.

There is no established economic concept or theory under the name “Smithian equivalence theorem,” and it does not relate to the effects of international trade on factor prices and incomes. The name “Smithian” might allude to Adam Smith, a renowned economist, but no such theorem related to international trade exists under his name.

d. Bernanke-Greenspan theorem:

Similar to the “Smithian equivalence theorem,” the term “Bernanke-Greenspan theorem” does not correspond to any recognized economic theorem or principle related to international trade and factor prices.

While Ben Bernanke and Alan Greenspan are notable figures in economics, particularly in monetary policy and their roles at the Federal Reserve, there is no economic theorem attributed to their names that addresses the effects of international trade on factor prices and incomes.

Any economic principles associated with Bernanke and Greenspan typically relate to monetary policy, financial crises, or central banking rather than international trade effects on factor markets.

In conclusion, the incorrectness of these options lies in their lack of relevance to the topic of how international trade influences factor prices and incomes. The Stolper-Samuelson theorem, on the other hand, specifically addresses these effects within the framework of international trade theory and factor intensities in production.

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