What is the factor price equalization theorem?
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 the Stolper Samuelson Factor Price Equalization Theorem?
The Stolper–Samuelson theorem is closely linked to the factor price equalization theorem, which states that, regardless of international factor mobility, factor prices will tend to equalize across countries that do not differ in technology.
What is the assumption of Stolper Samuelson theorem?
The neoclassical H-O trade model used by Stolper and Samuelson (1941) assumes that goods of a particular industry are perfect substitutes, regardless of the country of origin, and that costs of production depend on wages of factors, whose supply in each country is fixed.
What is David Ricardo’s theory of comparative advantage?
Ricardo’s widely acclaimed comparative advantage theory suggests that nations can gain an international trade advantage when they focus on producing goods that produce the lowest opportunity costs as compared to other nations.
What may cause the factor price equalization theorems to fail?
If there is reversal of factor intensity, the factor price equalisation theorem will fail to hold. If the labour-surplus country A specialises in the labour-intensive commodity X, the absolute and relative wage rates will rise in this country.
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.
Why is Stolper-Samuelson theorem important to international trade barriers?
The Stolper-Samuelson theorem states that there are winners and losers from the liberalization of international trade. Losses, according to the framework, are in the form of lower wages for workers employed in import-competing sectors.
What makes the Stolper-Samuelson theorem different than the Ricardo-Viner model?
The theorem assumes that capital is mobile across industries and sectors. The Ricardo-Viner theorem, however, assumes that factors are specific to their industries, and that capital might not be mobile. This theorem states that where capital is mobile across industries, the Stolper-Samuelson conclusion holds true.
What is Stolper-Samuelson effect?
The Stolper-Samuelson theorem demonstrates how changes in output prices affect the prices of the factors when positive production and zero economic profit are maintained in each industry.
What is the main lesson from Ricardo’s theory of comparative advantage?
The core message of Ricardo’s theory of comparative advantage is not that labor is the only factor of production in the world, but rather that relative productivity differences, and not absolute productivity differences, are the key determinant of factor allocation.
What does Ricardo’s theory say?
In Ricardo’s theory, which was based on the labour theory of value (in effect, making labour the only factor of production), the fact that one country could produce everything more efficiently than another was not an argument against international trade.
Why factor prices do not Equalise in the Heckscher-Ohlin factor price Equalisation theorem?
The H-O model assumes that technology is the same between countries in order to focus on the effects of different factor endowments. If production technologies differ across countries, as we assumed in the Ricardian model, then factor prices would not equalize once goods’ prices equalize.
Key Takeaways. 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.
Why can’t factor prices be equalised in the real market?
In the real market situations like oligopoly or monopolistic competition, there are rigidities in the product and factor markets that prevent the possibility of equalisation of factor prices.
What is Samuelson’s factor price equalisation theory?
Samuelson’s factor price equalisation theory assumes that production functions are identical in the two trading countries. Even if the two countries have the same resources, yet their productive capacities are different because of natural, technical and sociological differences between them.
What is Meade’s theorem of price equalisation?
The factor price equalisation theorem assumes that there is a first-degree homogeneous production function, which implies that the production is governed by the constant returns to scale. If the economies of scale are present, according to Meade, the theory will become invalid for two reasons.