The Stolper-Samuelson theorem predicts that when a developed country with abundant skilled labor opens trade with a developing country with abundant unskilled labor...
AAll workers in the developed country benefit from cheaper imports
BSkilled workers in the developed country gain while unskilled workers lose, because increased imports reduce demand for unskilled-labor-intensive goods
CAll workers in the developing country are made worse off
DTrade has no effect on wages in either country
Stolper-Samuelson predicts that trade benefits the factor used intensively in the export sector and hurts the factor used intensively in the import-competing sector. A skill-abundant developed country exports skill-intensive goods and imports unskilled-labor-intensive goods. This raises demand for skilled labor (higher wages) and reduces demand for unskilled labor (lower wages) in the developed country. The theorem shows that even though trade increases aggregate welfare, the distributional effects can be significant — there are clear losers.
Question 2 True / False
Standard trade theory predicts that workers displaced by trade competition will quickly find comparable employment in expanding sectors.
TTrue
FFalse
Answer: False
The China shock literature dramatically challenged this prediction. Autor, Dorn, and Hanson (2013) found that US communities exposed to Chinese import competition experienced persistent declines in manufacturing employment that were not offset by gains in other sectors. Displaced workers faced prolonged unemployment, lower re-employment wages, withdrawal from the labor force, and increased reliance on disability insurance and other transfers. These adjustment costs persisted for over a decade, far longer than standard models with frictionless labor mobility predict.
Question 3 Short Answer
How does task offshoring differ from traditional trade in goods, and what are its labor market implications?
Think about your answer, then reveal below.
Model answer: Traditional trade involves exchanging finished goods — a country imports cars and exports software. Task offshoring involves relocating specific tasks within a production process to other countries — a US firm keeps product design in-house but offshores data entry to India. The labor market implication is that offshoring exposes individual tasks (not just entire industries) to international wage competition. This means that even workers in 'non-tradable' service occupations can face competitive pressure if their specific tasks can be performed remotely from a low-wage country.
Blinder and Grossman-Rossi-Hansberg developed models of task offshoring that show how it differs from Heckscher-Ohlin trade in goods. Offshoring fragments the production process geographically, putting competitive pressure on specific tasks rather than entire occupations. A radiologist reading X-rays faces offshoring pressure if the images can be transmitted digitally, while a surgeon performing operations does not. This task-level analysis overlaps with the automation literature — both identify vulnerability based on task characteristics rather than traditional skill categories.