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Topic: Factor price equalization


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In the News (Fri 14 Jun 19)

  
  Encyclopedia: Factor price equalization
Factor price equalization is an economic theory, which states that the relative prices for two identical factors of production in the same market will eventually equal each other because of competition.
Whichever factor receives the lowest price before two countries integrate economically and effectively become one market will therefore tend to become more expensive relative to other factors in the economy, while those with the highest price will tend to become cheaper.
An often-cited example of factor price equalization is wages.
www.nationmaster.com /encyclopedia/Factor-price-equalization   (440 words)

  
 Chapter 4
With no trade, the price of a factor will be "high" in the country in which it is scarce, and "low" in the country in which it is abundant.
The shift to free trade increases the factor's price in the abundant country and decreases its price in the scarce country.
Under certain assumptions free trade will equalize not only commodity prices between countries but also factor prices, so that all laborers will earn the same wage rate and all units of land will earn the same rental return in both countries regardless of the factor supplies or the demand patterns in the two countries.
www.wright.edu /~tdung/Chapter4_Pugel.htm   (2004 words)

  
 International Trade and Factor Mobility
Factors will move out of the cotton into the steel industry, but since cotton is labor-intensive and steel is capital-intensive, at constant factor prices the production shift creates an excess supply of labor and an excess demand for capital.
Factor proportions in steel and cotton are given by the slopes of OP and O'P, respectively.
Relative factor returns in A and B move in opposite directions, so the price changes in A which stimulate a capital movement are reinforced by the price changes in B.
www.columbia.edu /~ram15/ie/ie-06.html   (5238 words)

  
 TRADE MODEL EXTENSIONS AND APPLICATIONS   (Site not responding. Last check: 2007-10-12)
If the relative price of the two traded goods changes for any reason, then the factor that is used relatively more intensively in the good that is now more expensive will benefit.
Factor price equalization implies that trade liberalization would reduce the real wages of the scarce factor and increase those of the abundant factor.
Factor Intensity Reversal: If a commodity is produced by a labor-intensive process in the labor-rich country and also by the capital-intensive process in the capital-rich country, then factor intensities are reversed in the production of that commodity.
www.eco.utexas.edu /graduate/Konstantinova/i4_HOS.htm   (3667 words)

  
 TAP: Vol 7, Iss. 25. The Crusade That's Killing Prosperity. Lester C. Thurow.   (Site not responding. Last check: 2007-10-12)
Others identify global "factor price equalization"--in an open global economy overseas workers with comparable skills but lower wages are forcing the wages of Americans down.
Having fallen during the previous recession, the producer's price index for finished consumer goods in December 1994 was below where it had been in April 1993 and annual rates of increase decelerated from 1.2 percent in 1993 to 0.6 percent in 1994.
Put all of these factors together and it is clear that the rate of inflation in the sectors where inflation is controllable with slower growth is certainly very low and probably actually negative.
www.prospect.org /print/V7/25/thurow-l.html   (3303 words)

  
 International Economics Glossary: F
The degree to which a factor of production, such as labor or capital, is able to move, either among industries or between countries, in response to differences in its factor price, thus tending to eliminate such differences.
One of the major theoretical results of the Heckscher-Ohlin Model with at least as many goods as factors, showing that free and frictionless trade will cause FPE between two countries if they have identical, linearly homogeneous technologies and their factor endowments are sufficiently similar to be in the same diversification cone.
In anti-dumping cases, the price to which the export price is compared, which is either the price charged in the exporter's own domestic market or some measure of their cost, both adjusted to include any transportation cost and tariff needed to enter the importing country's market.
www-personal.umich.edu /~alandear/glossary/f.html   (2666 words)

  
 Chapter 60 - The Heckscher-Ohlin (Factor Proportions) Model
Similarly, in the labor-abundant country the price of the labor-intensive good would be bid down relative to the price of that good in the capital-abundant country.
when the prices of the output goods are equalized between countries, as when countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.
However, once goods prices are equalized, as they are in free trade, the value of marginal products are also equalized between countries and hence the countries must also share the same wage rates and rental rates.
internationalecon.com /v1.0/ch60/60c010.html   (2647 words)

  
 Heckscher-Ohlin Model
There are four major components: (i) factor price equalization, (ii) the Stolper-Samuelson Theorem, (iii) the Rybczynski Theorem, and (iv) the Heckscher-Ohlin Trade Theorem.
However, even if some of the assumptions are violated, international trade has a tendency to equalize factor prices; it will remove the wage gaps between countries, despite the constraint that trading countries impose on the movement of factors, in particular, on the movement of workers.
The net effect is that all factor prices are the same within a country.
www.econ.iastate.edu /classes/econ355/choi/ho.htm   (2010 words)

  
 Nat' Academies Press, The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration ...
The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration Factor Price Equalization As the short-run specificity of Kx and Ky dissolve so that capital is mobile between industries, one ends up with the long-run Heckscher-Ohlin model.
Factor price equalization therefore implies that there are no incentives to migrate.
Borjas's immigration "surplus" is zero in the Heckscher-Ohlin model with its factor price equalization theorem.
books.nap.edu /books/0309059984/html/206.html   (7968 words)

  
 Factor Abundance in International Trade, Henry Thompson
Factor proportions trade theory is based on the idea that differences in relative endowments of productive factors across countries explain patterns of production and trade.
Empirical studies of factor proportions theory ideally would (but do not) include independent measures of factor abundance and factor intensity, as pointed out by Bowen, Leamer, and Sveikauskas (1987) and Leamer (1994).
Distance factor abundance is defined as the Euclidean distance from the unit value of a factor to the intersection of a factor abundance ray with the unit factor hyperplane.
www.auburn.edu /~thomph1/abundmj&frweb.htm   (2256 words)

  
 Fed-Soc.org - Domestic Regulation and International Trade: Where's the Race? - Winter 2000   (Site not responding. Last check: 2007-10-12)
So far as there are captive assets within the jurisdiction, their price will decline to reflect the lower expected return so that, in equilibrium with fully mobile capital, investment will generate the same real expected return.
The rise of non-price competition among airlines that were constrained in price competition under regulation is a frequently noted example.(27) Similarly, location of inefficient scale production in a nation too small to sustain efficient-scale production on the basis of home market consumption often reflects competitive adjustments to regulations that inhibit imports and limit domestic competition.
Land use regulations, for example, tend to be capitalized into the price of land, with new regulatory impositions effectively creating windfall losses (or gains) to affected landowners.(28) By and large, however, the effects of regulation will not be fully captured in ways that do not affect on-going business calculations.
www.fed-soc.org /Publications/practicegroupnewsletters/internationalnews/domestic-intv3i3.htm   (5649 words)

  
 [No title]
On one side of the argument are those who believe in factor price equalization.
Some trade experts have been in the forefront of those rejecting factor price equalization whereas many non-trade economists have taken up factor price equalization as an explanation for fallen demand for low skilled workers in the advanced countries.
In the past, other factors have been more important than trade in the well-being of the less skilled: technological changes independent of trade; unexpected political developments; polices to educate and train workers; union activities; the compensation policies of firms and welfare state and related social policies.
www.maxwell.syr.edu /maxpages/classes/ecn601s1/article2.doc   (1063 words)

  
 Publications of Henry Thompson
  Factor migration friendship is and intransitive relationship: if immigration of factor A raises the price of B and immigration of B raises the price of C, then immigration of A must lower the price of C.
Factor intensity reversals can occur with an industrial shutdown when there are 3 factors of production, contrary to the result with only 2 factors.
Free trade is expected to lead to convergence of similar factors across countries, the basic intuition of the Stolper-Samuelson and factor price equalization theorems.
www.auburn.edu /~thomph1/publications.htm   (4568 words)

  
 Solutions to Worksheet 1   (Site not responding. Last check: 2007-10-12)
The price of capital will rise in the US and the price of labor will fall in the US.
Ultimately the price of labor in both countries will become equal as will the price of capital [use the factor price equalization theorem to justify your answer].
This increases the price of capital and reduces the price of labor (Use the Stolper-Samuelson theorem to justify your answer).
academics.vmi.edu /econ_ab/ws306s1.htm   (632 words)

  
 Berger and Spoerer   (Site not responding. Last check: 2007-10-12)
Factor price equality across countries is an important implication of the Heckscher-Ohlin-Samuelson model of international trade.
Burgman and Geppert (1993) argue that this might be due to the neglect of the non-stationarity property of the time series under consideration.
There is some indication of long-run co-movements of real factor prices when using the statistically more powerful bivariate tests rather than a multivariate framework.
www.lrz-muenchen.de /~u5121aw/ceswww/l0102acoint.htm   (168 words)

  
 Factor-Price Equalization
Simply stated the theorem says that when the prices of the output goods are equalized between countries, as countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.
Different prices alone, because it affects the value of marginal productivity is sufficient to cause a deviation in wages and rentals between countries.
Once free trade is allowed in outputs, output prices will become equal in the two countries.
internationalecon.com /v1.0/ch60/60c170.html   (385 words)

  
 NBER Working Papers by Helen Simpson
This paper develops a general test of factor price equalization that is robust to unobserved regional productivity differences, unobserved region-industry factor quality differences and variation in production technology across industries.
We test relative factor price equalization across regions of the UK.
Our estimates suggest three distinct relative factor price areas with a clear spatial structure.
www.nber.org /cgi-bin/author_papers.pl?author=helen_simpson   (334 words)

  
 [No title]   (Site not responding. Last check: 2007-10-12)
In the supply and demand model, a price of the traded good that was below the international equilibrium price would result in a a) shortage, so the price would increase.
Since the price of shirts is 1 shirts, the wage is 1/4 shirts.
Since the price of shirts remains 1 (in terms of shirts), the wage stays at ½.
www.macalester.edu /courses/econ221/c221f03e1s.doc   (1800 words)

  
 Marginal Revolution: Free trade and factor price equalization
The more basic point, however, is that contra Paul Craig Roberts and Charles Schumer, the theory of free trade does not rely on factor immobility.
the same prices for wages and capital of equal productivity everywhere in the world even when the factors themselves are immobile.
But factor price equalization is exactly what would be produced by factor mobility.
www.marginalrevolution.com /marginalrevolution/2004/01/free_trade_and_.html   (337 words)

  
 Department of Economics Series Ref: 038   (Site not responding. Last check: 2007-10-12)
This paper considers linkages between national labour markets in a global economy, extending the existing analyses to the empirically important case where factor price equalization does not hold.
Removing the assumption of factor price equalization allows the divergent wage experience as well as unemployment experience of Europe and America to be explained.
Under these conditions the entry of labour intensive NICs into world markets pushes down American wages and alters its economic structure (which were unchanged under factor price equalization), and reduces European unemployment (which increased under factor price equalization).
www.economics.ox.ac.uk /Research/WP/PaperDetails.asp?PaperID=51   (141 words)

  
 "U.S. Software Outsourcing" by Bhaskar Roy @ CoolAvenues.com
One important piece of the modern neo-classical theory of international trade is the celebrated Factor Price Equalization Theorem, developed independently by Lerner (1952, though written in 1932) and Samuelson (1948, 1949, 1953).
A similar result - a tendency towards equalization of the profit rate - was obtained by Mainwaring (1978) in a Ricardian-Sraffian framework, but in this paper it has been tried to prove that this theory may not work in case of software outsourcing to India.
But as per this theory factors are not movable.
www.coolavenues.com /know/fin/bhaskar_1.php3   (341 words)

  
 "Endowments Do Matter" Relative Factor Abundance and Trade   (Site not responding. Last check: 2007-10-12)
A test of the Heckscher-Ohlin-Vanek [HOV] hypothesis for the cases when factor price equalization does not hold is developed.
For all the possible country pairs of the BLS (1987) and Trefler (1995) data set, I test whether trade reveals the relative factor abundance of one country compared to another.
For the factor pairs capital-labor, labor-land and land-capital, I investigate whether the higher endowment ratio of one country compared to another is reflected in their multilateral trade.
ideas.repec.org /p/fth/michin/429.html   (249 words)

  
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Abstract: This Paper develops a general test of factor price equalization that is robust to unobserved regional productivity differences, unobserved region-industry factor quality differences and variation in production technology across industries.
Although the UK is small and densely populated, we find evidence of statistically significant and economically important departures from relative factor price equalization.
Bernard, A., Redding, S., Schott, P. and Simpson, H. 'Factor Price Equalization in the UK?'.
www.cepr.org /home/cite.asp?Type=DP&Item=3523   (169 words)

  
 The Rybczynski Theorem, Factor-Price Equalization, and Immigration: Evidence from U.S. States
Treating U.S. states as HO regions, we search for evidence of regional output-mix effects using a new data set that combines state endowments, outputs, and employment in 1980 and 1990.
Second, variation in state unit factor requirements is consistent with relative factor-price equalization (FPE) across states, which is a sufficient condition for our output-mix hypothesis to hold.
Overall, these findings suggest that states absorb regional endowment shocks through mechanisms other than changes in relative regional factor prices.
ideas.repec.org /p/nbr/nberwo/7074.html   (1130 words)

  
 EconPapers: Factor Price Equalization in the UK?
Keywords: relative factor prices; diversification cones; technology; economic geography (search for similar items in EconPapers)
Working Paper: Factor price equalisation in the UK (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
econpapers.repec.org /paper/ecjac2003/21.htm   (274 words)

  
 List of economics topics -- Facts, Info, and Encyclopedia article   (Site not responding. Last check: 2007-10-12)
(A kind of hedged investment meant to capture slight differences in price; when there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher price) Arbitrage
(A legal process intended to insure equality among the creditors of a corporation declared in bankruptcy) Bankruptcy
(additional info and facts about Factor price equalization) Factor price equalization
www.absoluteastronomy.com /encyclopedia/l/li/list_of_economics_topics.htm   (4499 words)

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