As a result of a new Japan-United States Free Trade Agreement (JUSFTA), the United States has shifted to free trade with Japan. Assume that the two major products are A-goods (agricultural products), which are relatively land-intensive, and M-goods (manufactured products), which are relatively skilled-labor intensive. According to the Stolper-Samuelson theorem, how will this shift affect the real returns to landowners in Japan and the real returns to landowners in the United States? Also explain the impact on the real wage of skilled labor in Japan and the real wage of skilled labor in the United States.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: This Japan-United States Free Trade Agreement will remove the trade barriers between Japan and the United States. The shift to free trade leads to an equalization of product prices in these countries. The change in product prices leads to changes in the input prices. Each country will shift toward exporting goods which intensively use its abundant factors of production and toward importing goods which use its scarce factors of production. In this particular case, Japan is clearly relatively land-scarce and the United States is relatively land-abundant, so Japan will increase its imports of A-goods, which require the intensive use of land, and the United States will increase its exports of A-goods. Compared to the pre-FTA situation, the price of A-goods relative to the price of M-goods will go down in Japan, and this relative price will go up in the United States. In the long run this will cause an adjustment in the real returns to the different factors of production. The Stolper-Samuelson theorem asserts that the real return to land will decrease in Japan, and the real return to land will increase in the United States. The Stolper-Samuelson theorem also predicts that the real wage of skilled labor in Japan will increase, and real wage of skilled labor in the United States will decrease.