Explain the weak and the strong forms of the factor-price equalization theorem and discuss their real-world relevance.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: According to the strong form of the theorem, the prices of a single factor in different countries will equalize across countries as a result of free trade. There is little evidence in the world of this strong form of factor-price equality. The reason is that many assumptions of this model are not satisfied in the real world. Countries use different production technologies, trade is not completely free, e.g., countries impose different barriers to free trade (tariffs, quotas, etc.), and not all goods and services are traded internationally (e.g. haircuts, health care, etc.).

The weak form of this theorem states that, as a result of free trade, the prices of a single factor will tend to become less unequal across countries. There is more evidence for this form of factor-price convergence. For instance, wage rates in the industrialized countries of Asia (e.g. Singapore, South Korea) are approaching the ones in the Western countries for comparable types of worker skills.