Engelhardt attempts to show that Keynes's Marginal Efficiency of Capital (MEC) and the Net Present Value (NPV) always give identical rankings if
factor prices are flexible.
They can do this by adopting the "new structural economics" framework Lin proposes, which is organized around three ideas: that the economy's structure of factor endowments (land, labor, and capital) determines total budget, relative
factor prices, and comparative advantages; that each level of economic development is a point along the continuum from a low-income agrarian economy to a high-income industrialized economy; and that at each given level of development, the market is the basic mechanism for effective resource allocation, although the government should coordinate or provide improvements in infrastructure and compensate for externalities to facilitate industrial upgrading and diversification.
This theory suggests that as an economy opens up to trade, and specializes in the good that intensely uses its abundant factor, there is an equalization of
factor prices between the two countries.
The reason: both sectors adopt techniques appropriate to
factor prices, and as the wage/rental ratio is driven up by expansion of the labor-intensive commodity, both sectors respond by switching to more capital-intensive techniques.
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.
If the yuan is flexible, the pressure on rising production
factor prices will be milder," she said in the article, the fourth to be posted on the central bank's website since July 15.
The iterative process that leads from the oil shock to overall higher prices in the long run is not inflationary; it represents a rise in the relative price of commodities, holding
factor prices constant.
Thus they affect relative
factor prices, total production, and output prices.
Changing prices of goods generally have elastic effects on
factor prices.
Factor price equalization refers to an equality of
factor prices of homogeneous factors of production.
It is likely that relative levels of
factor prices will be an important determinant of where production is situated.
These limitations have to do with the measurability of the autarky
factor prices which are used to calculate the different countries' factor abundance and the value of their factor intensity variables.
