Question

In an idealized model international trade actually leads to equalization of the prices of factors such as labor and capital between countries. How will factor rewards (input prices) equalize between China and the U.S. in the long run with a trade? (make sure to use the correct model)

Answer 1

With the mounting international trade between the countries the equalisation of factor prices such as labour wages,capital will be equalised because of the equalisation of products and output goods .

The factor prices equalisation theory suggests that there will be equalisation of input prices if free trade between two countries with mutually needed goods and services equalise the product prices or if the two countries have multi national free trade agreements as part of their trade policies .This happens because the prices of output prices will be equalised once the countries recieve the goods on the same agreement.since USA and China are two biggest trading nations in the world and they also have extensive share in their mutual trade as developed economies so equalisation of factor prices must exist and it does to some extent but if go by the theory you notice that with identical production of goods and services we may not have equalisation of factor prices like wages and capital entirely because the costs vary from country(china) to country (US) hence Having the expenditure of both the countries on production in mind we can say that its not applicable in every aspect.but if you notice clearly that equalisation of factor prices may not be entirely achievable it surely decreases the gap between the factor prices between the countries with the modern international trade.though US and China have extensive trading they do not have free trading hence how do they equalise their product prices they try to price a product according to their wish but not according to anyone's need hence the theory of equalisation faces a challenge here.US depends on capitalist products hence the country trades capital intensive goods to China similarly china being a labour intensive nation tries trade Labour intensive goods so both the countries want to stabilise the prices owing to their future of economies.when we try to equalise the product prices the impact can be seen on the input costs such as labour wages and capital as timely payments of salaries and capital intensification are possible with constant prices.Both the countries maintaining trade balance now aiming to equalise the factor prices but with ongoing trade war may have a counter attack on it .Thank you.