Question

Explain the concept of embodied factors of production. What is their role in the process of factor price equalization?

Answer 1

Embodied factors of production are defined as the inputs which are required to make a good or service. These are Land, Labor, Capital, and Entrepreneurship. Land is a resource that can be used as agricultural land or as infrastructural development. The efforts of labor are required to bring the product outside in the market. To define capital, it is money as a whole. For example, a tractor can be purchased through money for farming is the capital. Entrepreneurship is a model that combines all other means of production into a good or service. For example Mark Zuckerberg (Facebook), Jeff Bezos (Amazon), etc.

Factor price equalization means when the prices of goods are equalized between countries due to international trade, the prices of the factors also get equalized between countries. This implies that free trade will equalize the wages of workers and the rentals earned on capital throughout the world. However, factor price equalization is not likely to apply perfectly in the real world.