Explain how free international trade tends to lead to factor price equalization under the assumptions of the HO model. What does this process predict about which groups should be in favor of or opposed to free international trade?

Question

What will be an ideal response?

Answer 1

Free international trade leads in each country to the expansion in the production of that country's comparative advantage good and a contraction in the production of its comparative disadvantage good. At existing commodity prices there will be an excess demand for the country's abundant factor and an excess supply of its scarce factor. This will cause a change in relative prices in both countries moving each toward the other's. In the end, because factors are equally productive across countries (identical technology), prices will be equalized. Therefore, scarce factors should oppose free trade because it lowers their payments, while abundant factors should favor free trade.