Two Comparative Static Theorems

Abstract

The basic theoretical framework, as propounded by Heckscher (1919) and Ohlin (1933), brought forth two famous theorems: the Stolper-Samuelson (SS) theorem and the factor-price equalisation (FPE) theorem. The former theorem, propounded by Stolper and Samuelson (1941), answers the following question: what happens to income distribution (real rewards to the factors of production) if the pattern of production in a country changes, that is, if the production of one good increases and that of the other good (in a two-good case) falls? The latter theorem, propounded by Samuelson (1948, 1949), answers the question: are factor prices internationally equalised if commodity prices are internationally equalised when only commodities are freely traded? Although the SS theorem was originally expounded in the context of international trade, it essentially answers a general equilibrium question about income distribution when, under full employment, the sectoral levels of production change. The proposition put forward by the SS theorem is of immense importance as it has rendered deep insights into the problems of income distribution. The paper by Stolper and Samuelson (1941) is a precursor1 to the two famous papers by Samuelson (1948, 1949).