Final answer:
The Stolper-Samuelson theorem is factor-based and deals with how trade impacts the distribution of income based on factor abundance in a country. It contrasts with Adam Smith's advocacy for trade liberalization, commenting on the benefits for individuals and countries. The theorem suggests that trade liberalization benefits the factor of production that is abundant in a country.
Step-by-step explanation:
The Stolper-Samuelson theorem is a fundamental theory in international economics, which addresses how international trade impacts the distribution of income within a country. This theorem is factor-based, meaning that it evaluates how changes in trade policy affect the returns to factors of production, typically labor and capital. The theorem predicts that trade liberalization will benefit the abundant factor of production and harm the scarce factor within a country. According to the Stolper-Samuelson theorem, when a country opens up to free trade, the price of the factor that is abundant and thus more intensively used in the export sector of the economy will rise, while the price of the factor that is scarce and more intensively used in the import-competing sector will fall.
For example, in a developed country with abundant capital, opening up to trade should increase the return to capital, as capital-intensive goods are likely to be exported, while labor, being the less abundant factor, may see a decrease in wages. Conversely, in a labor-abundant developing country, wages might increase, and returns to capital might decrease when trade barriers are removed.
Adam Smith, on the other hand, proposed that trade liberalization benefits individuals and countries by allowing each to specialize according to their comparative advantage. This contrasts with mercantilist views, which advocated for trade barriers. Smith's insight laid the foundation for classical free trade theory, which greatly influences trade policy up to this day.