Question

State the Factor Price Equalization theorem accurately. How can it be interpreted? Under what main conditions will this theorem hold and how does it work?

Please be as specific as possible

Answer 1

Under international trade, the factors which have identical price can be equally provides across the country. The major factors of production are wage rate and rent of capital. In this theory, the country comprises and focus on the production of labour intensive goods were characterised as labour abundantly country. This country will export labour intensive goods. On the other hand, the capital abundantly countries will produce capital intensive goods and export them. This is because of that the capital will be cheaply available in that country compared to labour. Depends on the demand for international trade, the prices of the factors will increase. The changing prices will bring the equality of prices of factors.

The increasing capital intensity in one country shows the rise of price f labour relative to capital. On the other hand, in another country, the price of capital rises with respect to price of labour. This kind of changes makes equality in the market. In real world, these factor price equalisation theories are not applicable. The free mobility between the factors will helps to attain the equality of the prices. The free trade between the countries will reduce the original factor price inequality and make complete price equality through higher level of specialisation.