The fourth major theorem that arises out of the Heckscher-Ohlin model is
called the factor-price equalization theorem. Simply stated the theorem
says that when the prices of the output goods are equalized between
countries as they move to free trade, then the prices of the factors (capital
and labor) will also be equalized between countries.
This implies that free trade will equalize the wages of workers and
the rents earned on capital throughout the world.
The theorem derives from the assumptions of the model, the most critical of which is the assumption that the two countries share the same production technology and that markets are perfectly competitive.
In a perfectly competitive market the return to a factor of production
depends upon the value of its marginal productivity. The marginal productivity
of a factor, like labor, in turn depends upon the amount of labor being
used as well as the amount of capital. As the amount of labor rises in
an industry, labor's marginal productivity falls. As the amount of capital
rises, labor's marginal productivity rises. Finally the value of
productivity depends upon the output price commanded by the good in the
In autarky, the two countries face different prices for the output goods.
The difference in prices alone is sufficient to cause a deviation in wages
and rents between countries, because it affects the marginal productivity.
However, in addition, in a variable proportions model the difference in
wages and rents also affects the capital-labor ratios in each industry,
which in turn affects the marginal products. All of this means that for
various reasons the wage and rental rates will differ between countries
Once free trade is allowed in outputs, output prices will become equal in the two countries. Since the two countries share the same marginal productivity relationships it follows that only one set of wage and rental rates can satisfy these relationships for a given set of output prices. Thus free trade will equalize goods prices and wage and rental rates.
Since the two countries face the same wage and rental rates they will also produce each good using the same capital-labor ratio. However, because the countries continue to have different quantities of factor endowments, they will produce different quantities of the two goods.
International Trade Theory and Policy - Chapter 60-14: Last
Updated on 7/31/06