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

Expert Solution

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 .

Rahul Sunny answered 1 year ago

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