factor-price equalization

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A tendency for international trade to reduce international differences in relative factor prices. In the Heckscher–Ohlin model explaining inter-industry trade, countries specialize in the production and export of goods whose production requires relatively large inputs of their more plentiful factors of production, and import part or all of their requirements of goods requiring large inputs of their scarcer factors. Imports of goods intensive in scarce factors lower the demand for them, and therefore their factor prices. Exports raise the demand for, and thus the price of, abundant factors. Trade thus tends to reduce international differences in relative factor prices. If there were no transport costs and no restrictions on international trade, complete factor price equalization would result. In the presence of transport costs and trade barriers, trade tends merely to reduce international factor price differences.

Subjects: Economics.

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