What is factor price 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.
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.
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 and other barriers to free trade, tends to equalize product prices and other factor prices.
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.
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.
Which is the components of factor price determination?
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 is the Stolper-Samuelson theorem international trade?
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 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.
What is HOS theory?
The Heckscher-Ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance between two countries, each with its resources.
Under what condition is factor price equalization may not be obtained?
What is factor pricing theory of distribution?
What are the assumptions of factor pricing theory?
The theorem assumes that there are two goods and two factors of production, for example capital and labour. Other key assumptions of the theorem are that each country faces the same commodity prices, because of free trade in commodities, uses the same technology for production, and produces both goods.
How is factor price determind explain?
The price of a factor is determined by the intersection of these demand and supply curves of the factor. In other words, given the demand and supply curves of a factor, the price of the factor will adjust to the level at which the amount of the factor supplied is equal to the amount demanded.
Who developed the Stolper-Samuelson theorem?
As first presented by Wolfgang Stolper and Paul A. Samuelson (1941), it dealt with a very special framework with many restrictive assumptions, most notably that the economy consists of only two broad sectors, and that production uses only two factors (often labeled capital and labor).
What is the Stolper-Samuelson theorem What are the underlying conditions and assumptions for the theorem?
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 is the factor price equalization theorem?
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.
What is meant by relative factor price equalisation?
The relative factor price equalisation can be explained on the assumption that the value of marginal product (MP) of each factor within each country is equal before trade under the conditions of prefect competition in product and factor markets and constant return to scale.
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 are the assumptions of the factor price theorem?
The theorem takes the assumption that the factor supplies remain fixed in the trading countries. In actual reality, however, there are changes in factor supplies and these changes will create difficulties in the equalisation of factor prices.