World Equivalent Factor Endowments Determine Local Factor Rewards When Countries Have Different Productivities

Guo, Baoping (2019): World Equivalent Factor Endowments Determine Local Factor Rewards When Countries Have Different Productivities.

Abstract

This study derived the solution of general trade equilibrium by the Trefler Hicks-Neutral HOV Model (Trefler model), which reflects productivities different across countries. The study found that the Trefler model is with a single diversification cone of commodity price , although it is with two diversification cones of factor endowments. This feature provides a chance to attain the general trade equilibrium and non-equalized factor price. The study uses a geometric approach on a generalized Integrated World Equilibrium (IWE) diagram, which presents the equivalent factor endowments defined by Trefler (1993). The non-equalized factor price at the equilibrium by the Trefler model is with two useful properties. The first one is that the equilibrium prices are the functions of world equivalent factor endowments so that it remains the same when the allocation of equivalent factor endowments changes. The second property is that the localized factor prices ensure gains from trade for countries participating in trade. A new logic explored is that the world equivalent factor endowments determine world commodity price and local factor rewards of all countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Factor content of trade; factor price non-equalization; General equilibrium of trade; Integrated World Equilibrium; IWE
• Subjects: F - International Economics > F1 - Trade > F10 - General; F - International Economics > F1 - Trade > F15 - Economic Integration

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