According to the Factor-Price Equalization Theorem, what are the effects of trade on w and r...

According to the Factor-Price Equalization Theorem, what are the effects of trade on w and r in each nation?

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Expert Solution

w- wage rate , r - rental rate of capital

According to factor price equalization theorem, with the help of trade what happens is that inaya labour which country where the people actually start to produce more labor-intensive goods, what happens is that the demand for labour increases with which the wage rate increases and because there is a reduction in the capital intensive good production the demand for capital decreases with which the rental rate of capital decreases.

also in a capital rich country the country starts producing capital rich goods as a result of which the demand for capital increases with which the rental rate of capital also increases. similarly in the capital rich country the demand for labour decreases due to less production of labour which used as a result of which the wage rate decreases. because in capital rich countries the wage rate is high and it decreases and in labour rich countries, the wage rate is low and eventually increases such that both become equal. the similar thing happens with the rental rate of capital where is the capital rate is low for capital which countries and eventually increases and opposite happens to labour rich countries and eventually they both also become equal

Rahul Sunny answered 1 year ago

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