Does the Factor Price Equalisation Theorem Predict Absolute Global Wage

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The Answer is The Factor Price Equalization Theorem (FPE) is an economic theory proposed by Paul Samuelson in 1948, which suggests that with free trade and under certain conditions, the prices of identical factors of production, such as labor and capital, will equalize across countries. This theorem is derived from the Heckscher-Ohlin model, which assumes that countries have different relative abundances of factors of production and that goods require these factors in different proportions.

The FPE theorem predicts that when countries engage in free trade, they will specialize in producing goods that intensively use the factors of production they have in abundance. As a result, the demand for these factors will increase in the countries where they are abundant, leading to an increase in their prices. Conversely, the prices of factors that are scarce will decrease due to reduced demand. Over time, this process is expected to lead to the equalization of factor prices across countries.

However, the FPE theorem does not predict absolute global wage equalization. Here are several reasons why:

1. **Assumptions of the Model**: The FPE theorem is based on a set of very strict assumptions, including perfect competition, no transportation costs, identical production technologies across countries, no tariffs or other trade barriers, and factors of production that are immobile internationally but perfectly mobile domestically. In the real world, these assumptions rarely hold true.

2. **Factor Mobility**: While capital is relatively mobile in the global economy, labor is not. Immigration laws, cultural barriers, language differences, and other factors limit the ability of workers to move freely across borders. This immobility means that labor markets are not fully integrated globally, which prevents absolute wage equalization.

3. **Technology and Productivity Differences**: Differences in technology and productivity levels across countries can lead to differences in wages. Higher productivity can result in higher wages, even if the factor prices are equalizing.

4. **Non-Traded Goods and Services**: The FPE theorem primarily applies to traded goods. However, a significant portion of the economy consists of non-traded goods and services, which are not subject to international competition in the same way. This can lead to wage differences that are not affected by international trade.

5. **Institutional and Regulatory Factors**: Labor laws, minimum wage regulations, unions, and other institutional factors can lead to wage differences that are not explained by the FPE theorem.

6. **Income Distribution and Skill Levels**: The FPE theorem does not account for income distribution within countries or differences in skill levels. Even if factor prices equalize, wage disparities can still exist due to the distribution of skills and the relative bargaining power of workers.

In summary, while the Factor Price Equalization Theorem suggests that free trade can lead to a convergence of factor prices, including wages, it does not predict absolute global wage equalization. The real-world complexities and deviations from the model's assumptions mean that absolute wage parity across countries is unlikely to be achieved solely through free trade.

Does the Factor Price Equalisation Theorem Predict Absolute Global Wage

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Does the Factor Price Equalisation Theorem Predict Absolute Global Wage

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