What are critical conditions for factor price equalization

Reference no: EM132196966

Question: Suppose that one capital abundant country exports capital-intensive goods and imports labor-intensive goods. In this case, trade leads to decrease of abundant factor (capital) and to increase of scarce factor (labor) in this country. As a result, trade makes the factor price equalized between two countries. Answer the following questions.

a) What are the three critical conditions for this factor price equalization?

b) Explain in detail why trade makes the factor price between two countries equal using a graph (use a model with two countries, two goods, and two factors).

c) In a country exporting labor-intensive goods and importing capital-intensive goods, trade leads to increase in wage and to decrease in rent. Then, does trade no longer increase the real income of all factors without intervention of government? Suggest your own opinion using a graph.

d) Until now, we suppose factors are mobile across sectors in the long-run. In the short-run, however, it is virtually impossible for â€œsome factorsâ€ to move across sectors in real economy. Recently in Korea, some factors severely resist to trade liberalization under FTA negotiations. Provide logical basis for this resistance.

Reference no: EM132196966

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