Econ 4510 International Trade

Toward an Integrated Economy

2/7/15

Factor Price Equalization A retrospect

The Factor-Price Equalization Theorem can be
looked upon
as:
1) A monumental lack of realism, or
2) A tendency of historical development

Diversification cone

LaborAbro
ad

E
0

CapitalAbro
ad

E
CapitalHo
me

Factor
Price
Equalizati
on

LaborHo
me

At E0 given by history, Country 1s endowment vector, O 1E0,

will be too capital intensive to make factor prices equal.
Therefore, the first best of an integrated equilibrium will not
be reached, in a sense that national boundary stands in the
way.
Yet, O1E0 may include multiple components, say,
E00E0 for for manufacturing and O1E00 for R. & D. where the latter
is far more capital intensive. A machine for a single researcher
in the lab could have served for many workers in the plant, if
plants are not internationally immobile, stuck in the high
wage country 1. Some manufacturing wil be outsourced.

Diversification cone

LaborAbro
ad

E
0

E00

CapitalAbro
ad

E
Factor
Price
Equalizati
on

CapitalHo
me

O1

LaborHo
me

Dixit-Norman and Helpman-Krugman

From Dixit and Norman (1980) to Helpman and Krugman
(1985), effort were made, in comparative statics to
describe how inter-industry trade, intra-industry trade,
trade with multinational corporations until the trading
tasks are present in real life, as devices to achieve everfiner of division of labor, virtually getting rid of the
restrictiveness of national borders. This may be seen as
economists strive to describe in ever closer way in real life,
in what may be called comparative statics, under
alternative organization forms.

Alternative Factor-Price-Equalization Zones (shown with NWborders only

The Fragmentation of trade and production

Jones and Kierzkowski (1990)
The insight of Jones and Kierzkowski (1990) is that:
1) The observed alternative institutions present a historical
trend: fragmentation
2) At each stage, institutions function with costly service links
between production blocks (logistics is not free), forming
fixed costs for implementing optimization.
3) The advance in technology implies the falling of the costs
o service links, and hence fragmentation over time.