According to the HOS model, free trade of goods is equivalent to free factor movements; hence, free trade leads to factor price equalization. The empirical refutation of its predictions indicate that the assumptions of the model are wrong in explaining trade between the First World and the Third World.
The Possibility of Factor Price Equalization, Revisited.
First of all, the abstract theories behind the formal models lead to the theorem of
factor price equalization between trading partners, and these factor prices are endogenous to the system, that is, determined within the solution of the system.
Trade liberalization can also lead to convergence through
factor price equalization. In essence, countries or regions with a comparative advantage in lowwage labour will export labour intensive goods, and countries with high-wage labour will import labour intensive goods.
This sea of excess labor accentuates the downward pressures of a skill-intensive technology shift and global
factor price equalization. Tight labor markets would offset much if not all of the impact on the bottom 60 percent of the wage distribution, but they don't exist.
`International Factor Mobility, Mnimum Wage Rates and
Factor Price Equalization: A Synthesis', Quarterly Journal of Economics, 3, 551-70.
The third section solves for the competitive equilibrium of a small, underdeveloped and open economy with and without
factor price equalization. In both sections the static equilibrium is characterized first, and the path of economic growth is derived afterwards.
In my [Resource and Energy Economics, 2001] paper, I erroneously claim to have derived
factor price equalization across countries from the ratios of marginal productivities and marginal utilities in a Heckscher-Ohlin-Samuelson-Jones free-trade solution.
The inelasticity of these [Delta]w/[Delta]v terms is called near
factor price equalization (NFPE).
The
factor price equalization theorem in its most stringent form precdicts that if goods sell for the same price regardless of where they are produced, then workers who produce them will earn equal wages.
Contrary to the original proof of this theorem, given by Vanek(4),
factor price equalization is not assumed in Bertrand's model.
In other words, poor economies tend to grow faster than rich economies because factor migration and the trading of final goods leads to
factor price equalization. Those authors find strong evidence to support the convergence hypothesis.
