What is meant by factor price equalization?

Factor price equalization is an economic theory, by Paul A. Samuelson (1948), which states that the prices of identical factors of production, such as the wage rate or the rent of capital, will be equalized across countries as a result of international trade in commodities.

What is factor price equalization and why is it politically important?

The factor price equalization theory is a theory that explains the effects of trade and globalization on the price of goods. It predicts that trade will make less scarce the less-skilled workers in advanced countries and skilled workers in developed countries, therefore reducing their wages.

Does factor price equalization occur in the real world?

Since in the real world, above conditions are not fulfilled, complete factor price equalization does not take place. However, this does not invalidate the factor price equalization theorem. Indeed, every theory is based upon some assumptions.

Does factor price equalization hold if there are more factors than goods?

It means the labour-surplus country will export only labour-intensive commodity and the capital-surplus country will export the capital- intensive commodity. If there is reversal of factor intensity, the factor price equalisation theorem will fail to hold.

What is Factor Price Equalization Theorem?

When two countries enter a free trade agreement, wages for identical jobs in both countries tend to approach each other. The result was first proven mathematically as an outcome of the Heckscher–Ohlin model assumptions.

What is factor equalization theorem?

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.

Does Factor Price Equalization hold in the Ricardian 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.

Which is the limitation of Ho theory?

The H-O theory cannot provide a complete and satisfactory explanation of trade in such cases. In fact, the specialisation is governed not only by factor proportions but also by several other factors like cost and price differences, transport costs, economies of scale, external economies etc.

What is factor endowment theory?

The factor endowment theory holds that countries are likely to be abundant in different types of resources. If a country has a comparative advantage in a good that uses the factor with which it is heavily endowed, it should focus it’s production on that good.

What is meant by factor intensity?

Factor intensity. The relative importance of one factor versus others in production in an industry, usually compared across industries. Most commonly defined by ratios of factor quantities employed at common factor prices, but sometimes by factor shares or by marginal rates of substitution between factors.

What are the criticism of Ho theory?