France and Italy only trade with each other. Each produces wine and bread. The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. France is relatively abundant in capital, while Italy is relatively abundant in labor. According to the Stolper-Samuelson theorem, free trade between France and Italy should result in:

Question

Quizplus · Accepted Answer

According to the Stolper-Samuelson theorem, in a scenario where both countries in a trade only produce two different goods and one of them is capital-intensive and the other is labor-intensive, the country that is relatively abundant in capital (France) will experience an increase in real returns to capital while the country that is relatively abundant in labor (Italy) will experience an increase in real wages. Therefore, the correct answer is D, which corresponds to increased real returns to capital in France and increased real wages in Italy.

France and Italy Only Trade with Each Other