A Model of a Two-Factor Economy Factor Prices and Goods prices Stolper-Samuelson Theorem(effect) If the relative price of a good increases, holding factor supplies constant, then the nominal and real return (in terms of both goods) to the factor used intensively in the production of that good increases, while the nominal and real return (in terms of both goods) to the other factor decreases The reverse is also true Copyright C 2003 Pearson Education, Inc Slide 4-8Copyright © 2003 Pearson Education, Inc. Slide 4-8 ▪ Factor Prices and Goods Prices • Stolper-Samuelson Theorem (effect): – If the relative price of a good increases, holding factor supplies constant, then the nominal and real return (in terms of both goods) to the factor used intensively in the production of that good increases, while the nominal and real return (in terms of both goods) to the other factor decreases. – The reverse is also true. A Model of a Two-Factor Economy