Which of the following statements describes the conditions that result in factor price equalization? A: Productivity...

Which of the following statements describes the conditions that result in factor price equalization?

A: Productivity rates are equal across countries and product prices are equal across countries.

B: Productivity rates are equal across countries, but product prices are different.

C: Product prices are equal across countries, but productivity rates are different.

D: Productivity rates and product prices are different across countries.

Expert Solution

Option A - Productivity rates are equal across countries and product prices are equal across countries.

Explanation : Factor price equalization is an economic theory by Paul A Samuelson, 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 labour. Other 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. These assumptions result in factor prices being equalized across countries without the need for factor mobility, such as migration of labor or capital flows. The idea behind this theory is that when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the factors such as labor and capital will also be equalized between countries.

Rahul Sunny answered 1 year ago

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