The Stolper-Samuelson Theorem
Who wins and who loses from Heckscher-Ohlin trade?

          a = capital's cost share in the production of A 
      (1-a) = labor's cost share in the production of A
          b = capital's cost share in the production of B
      (1-b) = labor's cost share in the production of B

    Assume:
    1. A is capital-intensive compared to B => a > b; (1-a) < (1-b)
    2. A and B are competitive industries which use L and K to produce output. As a result, output-price changes depend on input-price changes as follows:
        %DPA = a %DPK + (1-a) %DPL
        %DPB = b %DPK + (1-b) %DPL

    Situation: The production of A rises, and the production of B falls. (In class this is the result of the home country opening up to trade, but the reason doesn't really matter; the results are the same.)

    Choose from the list -- %DPA, %DPB, %DPK and %DPL -- to fill in the blanks below, based on the specified resource and cost conditions of the two industries.

    1. Labor and capital are drawn out of industry B and into industry A. Based on the differing resource requirements of the two industries, compare the input-market effects:

        ______ > ______

    2. As noted under assumption 2 above, input-price changes cause output-price changes. Based on the differing cost shares of the two industries, compare the output-market effects:

        ______ > ______

    3. Note that output-price changes are a weighted average of input-price changes. Use this last piece of information to help you rank all four price changes:

        ______ > ______ > ______ > ______

    Is there an unambiguous winner and/or loser from the shift in the nation's production? If so who, and how can you tell? If not, why are you unable to tell?