What causes Factor Price Equalization?

Factor-price equalization arises largely because of the assumption that the two countries have the same technology in production. Factor-price equalization in the H-O model contrasts with the Ricardian model result in which countries could have different factor prices after opening to free trade.

How does international trade lead to equalization of factor prices?

To sum up, according to Heckscher-Ohlin theory, free trading of commodities between the two countries results in equalization of factor prices. If factors were mobile between countries, then the free movement of factors from one country to another would have equalized their prices.

What is the Stolper Samuelson Factor Price Equalization Theorem?

The Stolper œSamuelson Theorem: Trade leads to an increase in the return to a country’s abundant factor and a fall in the return to its scarce factor. This result is known as the Factor-Price equalization (FPE) theorem. It claims that trade leads to equalization of returns to factors across countries.

What takes place because of the factor price differences in the two countries?

As the wage rates rise in the two countries, whether the difference in absolute and relative wage rates will rise, fall or remain unchanged, will depend on the rates at which wages increase in the two countries. Thus the factor- intensity reversal can result in the invalidation of the factor price equalisation theory.

How do transportation costs affect the factor price equalization theorem?

Transportation costs prevent product prices from equalizing. Workers in trading nations always earn the same wages, and capital earns the same interest income. Free trade, in the absence of transportation costs or other barriers to trade, tends to equalize product prices and factor prices.

What is theory of factor pricing?

The theory of factor pricing deals with the determination of the share prices of four factors of production, namely land, labor, capital and enterprise. In other words, the theory of factor pricing is concerned with the principles according to which the price of each factor of production is determined and distributed.

What are the factors affecting gains from trade?

Some of the important factors that determine the gains from international trade are as follows:

• Differences in Cost Ratios:
• Reciprocal Demand:
• Level of Income:
• Terms of Trade:
• Productive Efficiency:
• Nature of Commodities Exported:
• Technological Conditions:
• Size of the Country:

What is factor endowment theory?

The factor endowment theory holds that countries are likely to be abundant in different types of resources. In economic reasoning, the simplest case for this distribution is the idea that countries will have different ratios of capital to labor. Factor endowment theory is used to determine comparative advantage.

What are factors of pricing?

The main determinants that affect the price are:

• Product Cost.
• The Utility and Demand.
• Extent of Competition in the market.
• Government and Legal Regulations.
• Pricing Objectives.
• Marketing Methods used.

What is meant by factor pricing?

In economic theory, a factor price is the unit cost of using a factor of production, such as labor or physical capital. Classical and Marxist economists argue that factor prices decided the value of a product and therefore the value is intrinsic within the product.

Why is the factor-price equalization theorem important?

The factor-price equalization theorem says that when the product prices are equalized between countries as they move to free trade in the H-O model, then the prices of the factors (capital and labor) will also be equalized between countries. Factor-price equalization arises largely because of the assumption that the two countries have

Why does factor price equalization occur in the H O model?

Factor-price equalization arises largely because of the assumption that the two countries have the same technology in production. Factor-price equalization in the H-O model contrasts with the Ricardian model result in which countries could have different factor prices after opening to free trade. Jeopardy Questions.

How does Samuelson’s factor price equalisation theory work?

Samuelson’s analysis of the factor price equalisation is based upon the following assumptions: (i) There are two countries, say A and B. (ii) These countries produce two commodities, say X and Y. (iii) The production of these commodities requires only two factors of production—labour and capital.

How is the relative factor price equalisation explained?

The relative factor price equalisation can be explained through the use of Edgeworth-type box diagram. First of all the effect of trade on factor- intensity and factor price ratio is analysed in the case of the labour-surplus country A. In Fig 8.4, the box ABCD is related to the labour-abundant country A.