Question

Which of the following statements about the factor-price equalization theory and the effects of transportation costs are correct? Check all that apply.

Differences in transportation costs do not affect the comparative advantage of trading nations.

Differences in transportation costs across countries affect the volume and composition of trade.

A product will be traded internationally as long as the importing country is willing to pay more than the exporter’s cost to produce the good plus the cost to transport it.

Transportation costs and other trade barriers cannot prevent product prices from equalizing.

Which of the following statements about transportation costs are correct? Check all that apply.

Transportation costs are determined by the distance between two points, weight, size, value, and the volume of trade.

Over the past 50 years, transportation costs of U.S. imports have fallen to less than half of what they used to be, relative to the value of imports.

Transportation costs have recently become a larger expense for the global economy than was previously observed.

International transportation costs are declining everywhere in the world. Falling transportation costs reduce the volume of international trade by eliminating the basis for the growth of trade.

Answer 1

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. The theorem assumes that there are two goods and two factors of production, for example capital and labor.

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. Crucially these assumptions result in factor prices being equalized across countries without the need for factor mobility, such as migration of labor or capital flows.

Differences in transportation costs do not affect the comparative advantage of trading nations. True.

Differences in transportation costs across countries affect the volume and composition of trade. False.

A product will be traded internationally as long as the importing country is willing to pay more than the exporter’s cost to produce the good plus the cost to transport it. False.

Transportation costs and other trade barriers cannot prevent product prices from equalizing. True.

Which of the following statements about transportation costs are correct? Check all that apply.

Transportation costs are determined by the distance between two points, weight, size, value, and the volume of trade. True

Over the past 50 years, transportation costs of U.S. imports have fallen to less than half of what they used to be, relative to the value of imports. False

Transportation costs have recently become a larger expense for the global economy than was previously observed. True

International transportation costs are declining everywhere in the world. Falling transportation costs reduce the volume of international trade by eliminating the basis for the growth of trade. False