What is the Heckscher-Ohlin factor price equalization theorem?
The factor-price equalization theorem says that when the prices of the output goods are equalized between countries, as when countries move to free trade, the prices of the factors (capital and labor) will also be equalized between countries.
What is the prediction of the Heckscher-Ohlin model on convergence of factor prices and goods prices across countries after foreign trade?
Because the Heckscher-Ohlin model predicts that factor prices will be equalized across trading countries, it also predicts that factors of production will produce and export a certain quantity goods until factor prices are equalized.
What is Factor Price Equalization theorem?
As the amount of capital rises, labor’s marginal productivity rises. Simply stated the theorem says that when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the input factors (capital and labor) will also be equalized between countries.
What are the main assumptions of the Heckscher Ohlin model?
Assumptions of the Heckscher Ohlin Model There are two factors – capital and labor. There is a constraint in factors i.e., the factors are limited to the funding (endowment) of the country. Countries have similar production technology. Countries will share the same technologies.
Which one leads to factor cost?
Market price – Indirect taxes.
What are factor prices in economics?
In economic theory, a factor price is the unit cost of using a factor of production, such as labor or physical capital. There has been much debate as to what determines factor prices.
What may cause the factor-price equalization theorems to fail?
If there is reversal of factor intensity, the factor price equalisation theorem will fail to hold. If the labour-surplus country A specialises in the labour-intensive commodity X, the absolute and relative wage rates will rise in this country.