International Economics Assignment (H.W 2) PT2

International Economics Assignment
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International Economics Assignment
Explain how the international movement of products and of factor inputs promotes an equalization of the factor prices among nations.
According to the factor equalization theorem, commodity prices and factor prices are equalized between countries when there is free trade. With the absence of trade, a country that has scarcity of factors of production will result in high price for that factor input, while the price will be low where a country has abundant factor. Countries specialize in production of goods where factor inputs are abundant which results to a rise in price. However, with free trade the factor price increases in the country with abundant factors, while it also decreases in a country with scarcity. Thus, ideally the factor prices are equal between two trading partners. Wages in the production of similar goods typically have this characteristic when countries enter into a trade agreement.
The factor endowment theory demonstrates how trade affects the distribution of income within trading partners Explain.
According to the factor endowments theory, comparative advantage occurs because of the differences in resource endowments between trading countries. Because of factor endowment, the returns to scale of the abundant factor input rise and that of the scarce factor input fall having a direct impact on income distribution. In labor abundant countries owners of capital also resist free trade on the grounds that it leads to lower interest rates where capital is abundant typically resists the effects on their wages (Carbaugh, 2011). Ultimately, increase in the returns where the country has abundant factor inputs is accompanied with fall in the scarce factor input, with the abundant factor having more trade gains.
How does the Leontief paradox challenge the overall applicability of the factor endowment model?
The Leontief paradox ...