Micro Convergence and Macro Convergence: Factor Price Equalization and Per Capita Income

Abstract

Factor price equalization implies the equality of prices of the same productive factors across countries owing to free trade. The present paper examines the relationship between factor price equalization and the equality of per capita (per worker) incomes in the contexts of the static Heckscher–Ohlin trade model and the dynamic two‐sector neoclassical growth model. Factor price equalization is shown to be neither necessary nor sufficient for equality of per capita incomes across trading countries.