Factor Price Equalization in a Dynamic Economy

Abstract

Two of the most important propositions of the modern theory of international trade are extensions of the Heckscher-Ohlin analysis of comparative advantage: Free international trade completely equalizes factor prices (and thus ensures world Pareto optimality), and the removal of protective barriers decreases the return of the scarce factor in terms of both commodities and increases that of the abundant factor.' Both of these propositions were proved under seemingly general conditions, although in the context of a static model. But whether these results still hold in a dynamic economy has, almost without exception, gone uninvestigated in the literature.2 in a dynamic model, moreover, there is the additional question of whether international trade, even if it equalized rental rates on machines, would equalize rates of interest, in particular if the two countries had different rates of time preference. Recently, Samuelson (1965) showed that if there is nonspecialization (and the other assumptions of the Samuelson-HeckscherOhlin model are satisfied), then interest rates as well as rental rates are equalized. It has long been recognized, however, that if factor supplies are variable, specialization is much more likely to occur. Indeed, one of the principal reasons Ohlin (1933) did not argue for complete factor price equalization