Ohlin's Factor Price Equalization Theorem
In International blogspot.com//search?q=what-is-trade-meaning-and-nature">Trade, commodities motion instead of factors.
According to Bertil Ohlin,
"Commodity crusade acts every bit a substitute for ingredient crusade inwards bringing most ingredient cost equalisation."
blogspot.com//search?q=what-is-trade-meaning-and-nature">capital as well as blogspot.com//search?q=what-is-trade-meaning-and-nature">labour), prior to merchandise the prices of these factors volition move different. With the opening of trade, each soil volition export the production of its abundant inexpensive factor. When export need is added to domestic demand, prices of their abundant inexpensive ingredient volition rise. The domestic need for the products of scarce factors tend to turn down due to the availability of such products through imports. This inwards turns Pb to turn down inwards the cost of the scarce factor. In each country, due to the prices of the abundant ingredient rising as well as scarce ingredient falling the prices of both factors of production tend to motion towards the same level.
Under the ideal status of:
- Perfect competition,
- Free trade,
- Identical production function,
- No carry cost,
- Constant returns to scale, and
- Many other restrictive conditions.
International merchandise logically should trial inwards ingredient cost equalization.
Diagram of Factor Price Equalization
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Country I produces commodity a on isoquant aa (isoquant is an equal production curve) as well as soil II produces commodity b on isoquant bb. AB as well as CD are their respective ingredient cost lines. As it tin move understood from the inwards a higher house diagram, soil I as well as II are upper-case alphabetic character as well as labour abundant respectively, so their prices are depression inwards respective countries.
Country I exports upper-case alphabetic character intensive 'a' commodity as well as imports labour intensive 'b' commodity from soil II. Thus prices of upper-case alphabetic character tend to growth inwards soil I as well as of labour inwards soil II. At the same time, prices of scarce ingredient inwards both the countries autumn due to declining domestic demand. With no restrictions to trade, the procedure continues till prices of both factors inwards both countries are equalised.
In inwards a higher house figure, the ingredient cost trouble AB gradually rotates counter clockwise sliding alongwith aa isoquant. CD ingredient cost trouble slow rotates clockwise, sliding alongwith bb isoquant, until the 2 ingredient cost lines (AB & CD) coincide at PL. PL is tangent to aa at T as well as bb at S, indicating that ingredient prices inwards both the countries are the same.
Complete ingredient cost equalisation depends on the validity of all assumptions. The equality of factors inwards both countries must move the same. Factor intensity of commodities, at all prices, must rest the same (i.e. commodity a, which is upper-case alphabetic character intensive should rest the same at all laid upward of ingredient prices).
In the existent world, inwards the absence of the required assumptions as well as conditions, what 1 could sense is solely the style towards ingredient cost equalisation.