Factor Price Equalization Theorem

Definitions

Economics

  • One of the major theoretical results of the Heckscher-Ohlin Model with at least as many goods as factors, showing that free and frictionless trade will cause FPE between two countries if they have identical,linearly homogeneous technologies and their factor endowments are sufficiently similar to be in the same diversification cone.
  • The tendency for trade to cause factor prices in different countries to become identical. Ohlin (1933) argued that trade would bring factor prices closer together. Samuelson (1948, 1949) showed formally the circumstances under which they would actually become equal.
  • acronymFPE
  • factor price equalization.
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