ABSTRACT
This chapter deals with the proof of the factor-price equalization theorem and with the empirical relevance of its assumptions. It shows that, under the assumptions enumerated in free commodity trade necessarily completely equalizes factor prices between countries. However, factor prices are equal in both countries in the autarkic state, and they continue to remain equal after the possibility of trade is allowed. Factor prices can only be equal if, and only if, the factor-endowment ratios of the two countries are equal. However, this leads to the equal comparative-costs case with no trade —and factor prices are equal between countries in the autarkic equilibrium state to begin with. The introduction of oligopolistic market structures, wage and price rigidities, and so on, necessarily impede the equalization of factor prices via commodity movements, because under these circumstances, commodity prices are not equal to the costs of production.
