Question

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:increased real wages in France and increased real returns to capital in Italy.increased real wages in both countriesdecreased real wages in both countries.increased real returns to capital in France and increased real wages in Italy.

Answer 1

The answer is: increased real returns to capital in France and increased real wages in Italy.

Step-by-step explanation:

The Stolper-Samuelson theorem (is a part of the Heckscher–Ohlin trade theory) that describes the relationship between input prices and real wages and capital returns.

It states that a rise in the relative price of a product will lead to a rise in the production factor (either capital or labor) most intensively used in the production of that specific product. On the other hand, the production factor less intensively used in the production of that specific good will decrease.

In this case, in France the capital returns will increase and in Italy real wages will increase.