Question

Will free trade and perfect competition lead to an equalization of wage rates internationally? Explain

Answer 1

As per the factor price equalization theory when free trade is permitted for outputs, the output prices will become equivalent in the 2 nations. As the 2 nations share similar marginal productivity relations, it ensues that only 1 set of wage & rent rates can satisfy these relations for a particular set of product prices. Hence free trade will make equal products’ prices & wage & rent rates.

In the actual world scenario, it is tough to tell if technologies of production are different/ alike / identical. Backing identical production technology, we can claim that state-of-the-art capital can be shifted anywhere across the globe. Alternatively , we might oppose by stating that only because the equipment is alike does not imply the labour will work the equipment in a similar manner. There will most probably be some distinctions in organizational capabilities, personnel habits & motivations.

A way to apply this framework outcomes to the actual world might be to state that to the extent that nations share similar production abilities, there will be a trend for factor rates to converge as freer trade happens .