Factor Price Equalisation TheoremIn Hecksher-Ohlin's world, by trade, each countries' factor price (W/r) will be eventually the same. (Remember that in the H-O world, commodities can freely move while factors cannot. However, as a result of free trade of commodities, factor prices will be the same as well as commodity prices). The relation between factor price (W/r) and factor intensity (K/L)
If H country's total endowment ratio is kH, the wage-rental ratio in H will range (W/r)U < (W/r) < (W/r)L The relation between factor price (W/r) and commodity price (PX / PY)
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Now combine the two graphs:
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By trade, the two countries' commodity prices will converge (1) to the one world price (PX / PY)W. Eventually, (PX / PY)F = (PX / PY)W = (PX / PY)H after trade. When (PX / PY) = (PX / PY)W, the only corresponding factor price (1) is (W/r)W. With (W/r)W, both H and F use kX and kY for the two sectors' production. | |
We sustain the assumption that X is (always) more labour intensive. However, sometimes it is possible that two industries change the order of factor intensities. Suppose kY > kX when (W/r) is low, but kY < kX when (W/r) is high. Then the graph we saw before changes:
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The relation between (W/r) and (PX / PY) is not linear any more. When (W/r) is low, (1) as (W/r) increases, PX / PY increases because X is more labour intensive. Once (W/r) is higher (1) than (W/r)*, Y is more labour intensive. Therefore, as (W/r) increases, PY increases faster than PX, i.e. (PX / PY) decreases. In this case, even if there is one commodity price (PX / PYW in the world by trade, two factor prices (1) (W/r)' and (W/r)" can exist. We cannot guarantee that H and F have the same (W/r). | |
 Hecksher-Ohlin Model - Conclusion
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 Stolper-Samuelson Theorem
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 Basic Models
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Copyright © 1997, 1998, 2001 Dr MoonJoong Tcha
(mtcha@ecel.uwa.edu.au)
Web site created by
First Step Communications
As wage is relatively higher (W/r 
),
producers use more
K-intensive technology (k = K/L 
