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Equalized Factor Price and Integrated World Equilibrium

Guo, Baoping (2015): Equalized Factor Price and Integrated World Equilibrium.

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Abstract

Dixit and Norman provided a remarkable result for the factor price equalization, as that world prices for commodities and equalized factor prices remain the same when the allocation of factor endowments of two countries changes within the parallelogram formed by the rays of diversification cone in Integrated World Equilibrium (IWE) diagram. What structure are for those prices? Why are the prices not touchable or visible even we knew that the entire parallelogram shares the same prices for giving two countries factor endowments? This paper explored the equalized factor prices and general trade equilibrium that embedded in the Dixit-Norman IWE diagram. The study demonstrated that the endogenous factor prices equalized are the function of world factor endowments. Moreover, the equalized price makes sure that countries participating in free trade gain from trade. This result is helpful for the studies of factor price non-equalization when countries have different productivities.

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