Factor Price Equalization Theorem Research Articles

Модель специфічних факторів виробництво: загальна концепція і часткові наслідки

The specific factor model is interesting for its partial consequences in crisis economies. The distribution of factors according to the levels of inter-branch and international mobility allows us to assess the extent to which the movement of homogeneous factors can replace the lack of specific ones in a separate field. Modeling the distribution of specific and homogeneous factors will allow to optimize the structure of export industries and to determine how the change in the global situation will affect the level of real wages in the industries and the cost of their capital. This will improve the planning of budgets at different levels and the deployment of productive forces. The purpose of the article is to study the possibility of applying the specific factor model to optimize Ukraine’s international trade and develop its export potential. The main research methods were theoretical generalization, economic-statistical analysis, graphic-analytical method. The information base of the research was Heckscher-Ohlin theory, factor price equalization theorem, the theory of specific factor, Jones magnification effect and a wide statistical database of Ukraine’s exports. To achieve the set goal, the following tasks were completed: an analysis of the structure of Ukraine’s export industries and individual products was carried out; the most appropriate pair of industries (goods) for modeling the distribution of specific factors was identified; formalized the basic concept of the classical specific factor model, taking into account the export structure of Ukraine; the partial effects of the distribution of specific factors between export industries and/or individual groups of goods are described; tools for the application of the specific factor model and its partial consequences in the process of post-war economic recovery of Ukraine were formed. The structure of Ukraine’s exports changed greatly in 2000–2021. Until 2012, the main export income was provided by metallurgy (31,15 % on average), and by 2021 its share fell to 18,31 %. Instead, the share of agricultural exports increased from 12,2 % to 36,35 %. The share of exports of the chemical industry decreased from 9,53 % to 4,5 %, exports of mechanical engineering and electronics almost completely disappeared. There were also significant changes in the structure of export of services: the IT sector took first place (14,19 %), the export of transport services decreased from 15,41 % to 5,38 %, and the tourism industry, after the peak of development in 2004–2013 (6,02 % of exports an average), was practically destroyed by the war and the epidemic of COVID-19 (0,53 % of exports in 2020). The use of the specific factor model in the conditions of the post-war development of Ukraine will allow to optimize the distribution of scarce resources between industries. At the same time, the criteria of export potential should be taken into account: 1) statistically significant indicators of the growth of physical and monetary volumes of exports; 2) the existence of a correlation between price indicators of the domestic and world markets and changes in demand indicators; 3) the possibility of quick involvement of additional factors in the event of increase in demand on the world market; 4) the existence of a relationship between the prices of export goods and the cost of factors; 5) comparison of growth rates of real wages and interest rates in export industries with average growth rates of commodity prices; 6) relatively low elasticity of demand in foreign markets compared to domestic. It is quite possible that we will have to temporarily abandon the export development of certain industries. In the future, it will be necessary to develop specific tools for the application of this model in practice, namely: 1) to carry out an audit of existing production factors; identify those of them that can be transformed from specific to universal by liquidating individual capital assets and retraining engineering and technical personnel; 2) identify the most promising industries and groups of goods within them, where it will be appropriate to direct scarce resources; 3) to build correlation dependences of changes in price levels and production volumes of selected industries and changes in real factor prices; 4) calculate changes in macroeconomic indicators that will occur as a result of using the tools of the specific factor model.

Reacting to Samuelson: Early Development Economics and the Factor-Price Equalization Theorem

ABSTRACT Paul Samuelson’s 1948 factor-price equalization theorem was his main contribution to international trade theory. He demonstrated conditions under which trade in goods would lead to full equalization of the remuneration of productive factors across countries. In practice, general factor-price equalization has not been a feature of the international economy, as Samuelson acknowledged. His theorem came out when development economics was starting to emerge as a new field of research and policy, largely based on observed international income asymmetries between poor and rich countries. The present paper provides an historical investigation into how development economists reacted mostly (but not always) critically to that theorem, with attention to the methodological issues involved and to Samuelson’s own perception of the theorem’s relevance.

Manufacturing Wage Gap in Mexico and the United States

The main purpose of this paper is to estimate the pace and extent of the manufacturing wage gap for production and nonsupervisory workers between Mexico and the United States. In addition, a main tenet of international trade is being evaluated. The Factor Price Equalization (FPE) theorem is put to test for the pre-NAFTA (North America Free Trade Agreement) period of 1987-1994 and two NAFTA sub-periods, i.e., 1995-2006 and 2007-2013. Following the above-mentioned theorem, trade openness should render wages in both countries comparable and eventually converging. The estimation technique used to test this theorem relies on an error correction model in a time series setting, using monthly data. The introduction of a real exchange rate as an exogenous variable becomes relevant. A substantial wage gap between production workers is found, as convergence has not taken place. As a result, the FPE theorem is not valid for the present case. The wage gap between production workers remains to be substantial, with a tendency to expand.

Reacting to Samuelson: Early Development Economics and the Factor-Price Equalization Theorem

Paul Samuelson’s famous 1948 “factor price equalization theorem” was his main contribution to international trade theory. He demonstrated conditions under which trade in goods only would lead to full equalization of the remuneration of productive factors across countries. In practice, general factor-price equalization has not been a feature of the international economy, as Samuelson acknowledged. His theorem came out when development economics was starting to emerge as a new field of research and policy, largely based on observed international income asymmetries between poor and rich countries. The paper investigates how development economists reacted mostly (but not always) critically to that theorem, with attention to the methodological issues involved and to Samuelson’s own perception of the theorem’s relevance.

THE IMPACT OF GLOBAL COMPETITION ON THE STATE OF MANUFACTURING IN UKRAINE AND DEVELOPED COUNTRIES

At the end of the 20th century, the economic structure was changed fundamentally in some countries. It was mostly related to the growth of global competition. One of the consequences of this process was the decline in manufacturing production in developed countries and in the post-Soviet countries. The purpose of this article is to define the meaning and consequences of the decline in manufacturing production in developed countries and in post-Soviet countries on the example of Ukraine. Methodology. This study is based on some general theoretical approaches such as analysis and synthesis, induction and deduction, etc. Also, statistical analysis was used for discovering some economic trends. Structural analysis was helpful for examining shifts in economic structure. Correlation between different facts, which is crucial for the understanding of the transformation of manufacturing, was identified by applying the systems approach. The aim of the article is to reveal the impact of global competition on the state of manufacturing and to define the manufacturing development trend. Results of this research showed that the decline in the rate of profit causes the transformation of economic structure. Global competition made the production of some goods in developed countries less profitable due to the relatively high costs. The ability to transfer labour-intensive production to developing countries transformed economic structure in developed countries. It was the reason for a sharp decline in manufacturing production, which caused some economic and social problems. Post-Soviet countries had serious economic and social problems too. Liberalization of trade made these countries face with global competition. This competition revealed extremely weak competitive positions of a great range of products. There was a massive decline in manufacturing production in Ukraine. This study proves that the transformation of manufacturing is far from the end. First of all, it is related to the rising wages in developing countries. It makes labour-intensive production less profitable. The Factor Price Equalization Theorem shows that there is no further perspective to stay competitive using cheap labour force. That is why it is crucial to create favourable conditions for the development of innovations. By its nature, manufacturing is more diversified than other sectors, which gives more chances to produce innovations. Strong manufacturing basis is also beneficial for providing employment, better standards of living, and sustainable economic growth. Practical implications. Developed countries can apply new approaches to their economic policies because they already have a quite strong innovative basis. These approaches should take into account current trends, which are considered in this article. Ukraine, bearing in mind the deepening of its integration into the global economy, should substantially improve its competitive positions. That is why it is important to launch a long-term strategic program, which is relevant to Ukrainian specific conditions. Value of the study is in distinguishing of different nature of the same process in developed countries and in Ukraine. It helps to define some perspectives of economic development. The results of the study can be used for creating economic programs.

Equilibrium Price and Generalized Stolper-Samuelson Theorem and Generalized Rybczynski Theorem

Both the Heckscher-Ohlin theorem and the factor price equalization theorem depend on or related to trade equilibriums. The trade equilibrium is the price equilibrium of production, consumption and trade. This study provides a price solution for the Heckscher-Ohlin model by using HOV assumption that consumption share is the GNP share. It also identifies the price solution set for all possible values of the consumption share and proves that there is a unique equilibrium price for a given consumption share. New trade effects, the generalized Rybczynski theorem and the generalized Stolper-Samuelson theorem, based on the terms of trade, are developed. And the study demonstrates that the equilibrium price is the best price for the abundant factor and the worst price for non-abundant factor for each country from the view of factor endowments. The study receives that with economic growth and the changes of factor endowments, the new price equilibrium will create new gains from trade. Overall, this paper studies economic interactions after trade; it is a rarely touched area of the H-O studies.

Technology Effects on Trade Virtual Factor Advantages by Technological Differences

This paper studies a 2x2x2 Ricardo-Heckscher-Ohlin Model (briefly R-H-O model) by introducing different technologies into the Heckscher-Ohlin model. The key tool of this study is presenting a solution of common commodity prices embedded with two sets of local factor prices for each countries, which is an endogenous prices fully determined by technological coefficients and by factor endowments. A virtual R-H-O system is built by extending Fisher (2010)’s concept of the virtual factor endowments. The virtual R-H-O system is a typical H-O model mathematically, so the major H-O theorems can be generalized into the virtual R-H-O model directly without much difficulty. The Heckscher-Ohlin theorem is generalized as the virtual Heckscher-Ohlin theorem in the R-H-O model, which says that a country will export the commodity that uses its virtual abundant factor intensively. The virtual factor price equalization theorem says that the factor price of a country will be equalized with the virtual factor price of its counterpart country. This means that two local (real) factor prices are non-equalization. The Rybczynski theorem is generalized to a comprehensive trade effects on the changes of local output, commodity price, and two local factor prices. One interesting result is that both countries, participated trade with different technologies, can even export same (kind of) factor content of trade and import the same (kind of) factor content of trade. It implies that the capital-labor ratio embodied in consumptions for both countries may excesses capital-labor ratio embodied in products, for some cases. It is odd to common understanding of factor content of trade by Leamer theorem (1980). This explores a new trade function – virtual factor advantage. Trade compensates the scarce resource worldwide by virtual factor endowments. The countries can produce or consume more when they trade with virtual factor advantage. The virtual advantage is sourced from technological differences and is realized by trade. It proves a new angle to think the “missing trade” and Leontief’s paradox, since the factor contents of trade are balanced by virtual factor contents, not by real factor content of trade.

Moving up the value chain?

In this age of globalization, and as a result of the advent of information, communication and translation technologies, translation tasks tend to be outsourced or even crowd-sourced to countries with lower wages, and translation fees seem to be on a downward spiral. Downward pressure on translation rates appears to confirm the factor price equalization theorem, a key derivation of the Heckscher-Ohlin trade model in economics. This famous theorem in labor and international economics argues that the prices of factors of production such as wage rate (or return on human capital) are equalized across countries as a result of international trade activities. This paper begins by presenting the theoretical framework of the factor price equalization theorem. It then examines how this theorem can be applied to analyze certain recently observed phenomena in the market for professional services in general and in the translation market in particular, and discusses implications for professional translators, language service providers and translator training institutions.

A Partial Test of the Heckscher-Ohlin-Samuelson Model: US-Mexico Trade Relations and Labour in Mexico

Proponents of trade liberalization emphasize the role of trade and economic integration between less developed and more developed economies as an engine for development and improved standards of living. Nowhere is this argument more salient, and more controversial, than in the discussion of US-Mexico trade, and the North American Free Trade Agreement (NAFTA) specifically. As the Heckscher-Ohlin- Samuelson (HOS) model informs much of the rhetoric and policy surrounding the USMexico trade relationship, we attempt a partial test of the model and its assumptions regarding labour and employment in the case of the Mexican economy. Specifically, we focus on the Heckscher-Ohlin (HO) theorem and the Factor Price Equalization (FPE) theorem. We conclude that although economic analysts recognize that the model does not account the complexity of Mexico's domestic economy and international trade relationships, it continues to permeate rhetoric, remaining the dominant paradigm for proponents of NAFTA on both sides of the border.

A two-country model of trade and growth with intersectoral knowledge spillovers

We formulate a two-country, two-good, two-factor endogenous growth model with learning by doing and intersectoral knowledge spillovers. Our model exhibits no transitional dynamics because of constant returns to capital, the existence of only one state variable for each country, and the factor price equalization theorem. By applying our model to the problem of aid and growth, we show that a permanent increase in untied aid raises the common growth rate if and only if the propensity to consume the capital-intensive good in the recipient country is larger than in the donor country.

Trade theorems with search unemployment

Abstract We revisit the Heckscher‐Ohlin‐Samuelson model in the presence of labour market frictions à la Mortensen‐Pissarides. Relaxing the assumption of the one‐worker‐one‐firm matching rule, we show that the Stolper‐Samuelson theorem and the Rybczynski theorem may not hold in specific circumstances. We also demonstrate that the Factor Price Equalization theorem is valid only for capital and unemployed labour across countries, but not for employed labour. In equilibrium, trade patterns are determined by countries’ factor endowments and relative factor intensities in sectors (independent of factor intensities in production). Finally, our results suggest an additional explanation for the ‘missing trade’ phenomenon.

The economics of trade, biofuel, and the environment.

The introduction of renewable biofuels was associated with global food crisis and unintended environmental consequences. This paper incorporates energy environment and agricultural sector to the classic Hecksher-Ohlin model to address these issues. A household production function model was introduced to model consumer energy choices and concern about externalities related to climate change and open space. The conceptual model links energy and food markets and derives guidelines for the development of climate change and land-use policies. The results suggest that globalization and capital flows increase demand for energy, leading to decline in food production, increase in food prices, and loss of environmental land. Globally optimal outcomes may require introducing an emission tax and a land-use tax. The introduction of these policies may undermine the factor price equalization theorem. Policies that allow enhancing either agriculture productivity (e.g., agriculture biotechnology) or biofuel productivity (e.g., second-generation biofuels), are shown to lessen the resource constraint associated with the cost of introducing renewable energy.

Economic and political world order: Trends, issues and prospects

Bu bildiri yazmakta oldugum Dunya Duzeni adli kitaptan ozetlenerek derlenmistir. Asil temasi, 20. yuzyilin sonlarinda yaygin olan coskulu iyimserligin yerini, gunumuzde dus kirikligina birakmasi ile ilgilidir. Ne dunyaya cennetin anahtarini sunacagi sanilan kuresellesme sureci bir zamanlar uyandirdigi beklentileri gerceklestirebilmis, ne de “tarihin sonu” spekulasyonlari Kant’in “surebilir sulh” ruyasi yonunde yeni bir cigir acabilmistir. Bu ruyalar yerine yeni sorunlar ortaya cikmistir. Dunyadaki teknoloji akiskanliginin artmasi ile faktor-fiyat esitleme teoremi kendine gelmis, bunun sonucunda sanayilesmis ulkeler rekabet ustunluklerini yitirmis, gelismekte olan ulkelerin buyumeleri ise hizlanmistir. Bati’da buyuk sorun, buyume hizlarinin durgunluga dogru gitmesi ile ortaya cikan ayarlanma sorunlaridir. Ote yandan, her ne kadar bir cok geri kalmis ulkenin bir iki kusak icinde Bati ekonomilerinin maddi yasam duzeylerini yakalamalari bekleniyor ise de, bu buyumenin toplu yasam uygarligindaki iyilesmeleri de beraberinde getirecegi suphelidir. Uluslararasi alanda da, Sovyetler Birliginin yikilmasi ve Amerikanin askeri gucunun zayiflamasi sonucunda Soguk Savas dengesi ya da Amerikan Hegemonyasi yerine nasil bir uluslararasi duzenin ortaya cikacagi da henuz ufukta gorulmemektedir. Dunya duzeni hala dogum sancilari cekmektedir.

Factor Endowment, the Choice of Technology, and the Volume of Trade

This paper studies impacts of factor endowment on international trade in a general equilibrium model in which firms choose their technologies endogenously. Although countries only differ in factor endowment ex ante, countries may also differ in their chosen technologies. If industries choose different capital-labor intensities in equilibrium, the Heckscher–Ohlin theorem, factor price equalization theorem, the Rybczynski theorem, and the Stolper–Samuelson theorem hold. If industries choose the same capital-labor intensity in equilibrium, the volume of trade is zero. None of the four theorems applies.

Factor price equalization beyond a “cubic” world

The importance of factor price equalization (FPE) is widely recognized in economics. The FPE theorem states that, absent any factor intensity reversal, factor prices are equal across countries with identical technologies and product mixes. In a two-factor-two-good-two-country Heckscher-Ohlin model this is equivalent to countries’ factor endowments being contained in the diversification cone defined by goods’ factor intensities. This paper identifies a condition, stated in terms of the allocation of factor endowments across countries relative to the demand for and the factor intensities of goods, that is necessary and sufficient for FPE in a world with arbitrary number of countries, goods and factors.

AN INTERVIEW WITH PAUL A. SAMUELSON

AN INTERVIEW WITH PAUL A. SAMUELSON

An extended Heckscher-Ohlin model with transaction costs and technological comparative advantage

This paper introduces technological differences and transaction costs into the Heckscher-Ohlin (HO) model and examines the HO theorem, factor price equalization theorem, the Stolper-Samuelson theorem and the Rybczynski theorem. It shows that the HO theorem can be refined, and that the factor price equalisation theorem, the Stolper-Samuelson Theorem and the Rybczynski theorem do not always hold. It also shows that transaction costs play an important role in determining the equilibrium trade pattern.

Building the Northeast Asian Community

I. Introduction: Regionalism, Globalization, and the Need for a Northeast Asian Economic Organization Asia is one of the most socio-politically divided regions in the world. Without regional cooperation,1 it faces difficulty in the world market, sometimes receiving unfair treatment. Asia contains more than half of the world's population,2 but Asian countries have a relatively small share of international organizations.3 Given these facts, it is meaningful to explore the need and legal basis for a Northeast Asian Community (NEAC), which would be an economically integrated regional trade association composed of Korea, China, and Japan.4 Within the last decade, the possibility of an East Asian regional trade agreement (RTA) or a much broader Asia-Pacific integration has been debated extensively.5 [End Page 257] Though not currently regionalized, Asia could be divided into three groups.6 In the Southeast Asian region, there is the Association of Southeast Asian Nations (ASEAN).7 ASEAN established the Asian Free Trade Area (AFTA) in 1993 and included Cambodia as its tenth member in 1999. In 1983, Australia and New Zealand organized the Australian/New Zealand Closer Economic Trade Relations Agreement (ANZCERTA) which has strengthened their cooperation with Asian countries, following the United Kingdom's entry into the European Union (EU).8 South Asia, the second regional group, is made up of India, Pakistan, Sri Lanka, and Bangladesh, whose economic contribution in Asia is relatively small. The group remains divided by religious conflicts and a contentious history. A third regional group, Northeast Asia, has the potential to develop into a similar economic community because of the increasing necessity of integration among neighboring countries. A recently proposed formation of an East Asian Economic Caucus (EAEC)9 aimed to create an extended form of ASEAN, with China, Japan, and South Korea as its core states.10 A regional community requires a certain degree of cultural homogeneity, what is sometimes called "an inherent regional civil society."11 Given the strong societal differences between Northeast and Southeast Asia, it [End Page 258] would be more workable to establish the NEAC, while Southeast Asia strengthens AFTA, than to extend ASEAN to encompass Northeast Asia.12 With the end of the Cold War, Asia-Pacific (including the Americas and Oceania) intergovernmental cooperation systems emerged from the Asia Pacific Economic Cooperation (APEC) process, in 1989. APEC is a loose organization which has regional, multilateral, and interregional characteristics.13 "The subsequent Asia-Europe meeting (ASEM) established an inter-regional dialogue system between East Asia with the European Union."14 A regional community like the EU15 established in Northeast Asia would provide several key benefits. Economically, the Northeast Asian countries would receive increased efficiency through economies of scale; increased productivity stimuli; strengthened bargaining power in the international market; and the "trade creation effect." Even though economic theory does not support such integration in every instance, a regional community, on the whole, improves its productive abilities with the creation of gains from trade. The Heckscher-Ohlin (H-O) theory (also called the factor-price equalization theorem), which is based on the theory of comparative advantage, postulates that welfare improvement within a community can be achieved through the exchange of goods created by each state's plentiful factors of production and through price equalization.16 Free trade in a regional community brings optimum allocative efficiency by use of specialized factors of production. Given an extended opportunity, the use of these specialized factors would result in economies of scale and productivity stimulation. This theory, however, is premised on [End Page 259] the idea that each country participant has different, plentiful factors of production and that these factors are homogenous. A RTA brings with it two kinds of trade effects. One is the trade creation effect: this refers to the expansion of trade with efficient suppliers inside the community. The other is the "trade diversion effect," which refers to a shift in trade from the efficient suppliers outside the community to inefficient suppliers located...

Too Sensational: On the Choice of Exchange Rate Regimes

Too Sensational: On the Choice of Exchange Rate Regimes By W. Max Corden. Cambridge, MA: MIT Press. 2002. Pp. xiv, 274. $29.95.This volume is the 10th in the series of Ohlin lectures initiated in 1988 at the Stockholm School of Economics. This volume, like the others (the first of which was Bhagwati's 1988 lively Protectionism) is characterized by clear and imaginative thought with no equations. Corden describes his method as story telling informed by theory (p. xiii). The jacket of Bhagwati's book was a cartoon from Punch, which showed the British Prime Minister being led to free trade. My choice for the jacket of this book would have been something like The Economist's November 28, 1968, cover, which showed the heads of Charles DeGaulle, Richard Nixon, and Harold Wilson bobbing among the waves, with the caption It's much better to float. That is the message of the book for most countries: floating is better than a fixed-but-adjustable exchange rate regime, or a FBAR, to use Corden's abbreviation.Instead, the jacket of the book displays the quote from Oscar Wilde's The Importance of Being Earnest that introduced one of the chapters in an early edition of Samuelson's textbook. Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat sensational. Even these metallic problems have their melodramatic side. Since my introductory course in economics, I had wondered about what that quote meant. Now 42 years later, I discover that the rupee had been pegged to silver, the pound to gold, and when the price of silver plummeted in the 1870s, the rupee depreciated. Indian goods became more competitive, creating competitiveness problems for British industry, and the home charges, which India had to take to Britain, were denominated in sterling, creating fiscal problems for India. Corden notes that the more recent FBARs have also been too sensational (p. x). This is his way of saying it is important to keep exchange rates in line with fundamentals, or It's much better to float.Corden credits Ohlin with seeing clearly in 1931 the importance of adjusting the Swedish Kroner in order to stabilize the Swedish price level, yet another contribution in addition to his ideas on the factor price equalization theorem and the transfer problem, and his service as leader of Sweden's liberal party for 34 years. Corden quotes Keynes in 1923 as favoring price level stability as more important than exchange rate stability and believing that the most cogent rationale for a gold standard was the rather weak discipline argument, strapping down Ministers of Finance (p. 13).Corden reminds us of core ideas about exchange rate regimes. For example, there is Milton Friedman's point that there is a presumption that currency speculation will be stabilizing, for destabilizing speculation is unprofitable. He laments the jerkyness of FBARs. He suggests that either flexible nominal wages or inflexible real wages creates an overwhelming case for an absolutely fixed (exchange rate) regime. In the former case, exchange rate change is not needed to maintain competitiveness, and in the latter it is not useful. A peg to an individual currency is preferable to pegging to a currency basket in that the former saves transaction costs and is easier to monitor. What follows is a collection of Corden's insights that 1 found particularly interesting.Not many economists living in the real world would dispute that in the short run there is some degree of sluggishness downward of nominal wages in most, if not all, countries (p. 89). And based on overwhelming empirical evidence, Keynesian analysis and policies as presented here are still appropriate for short-to-medium-term situations (p. 90). Also, the Barro-Ricardo complication that forward-looking tax payers will offset fiscal actions is only partial at best, leaving Keynesian demandside prescriptions in tact. …

General equilibrium with trade balance and real interest rate parity

This paper demonstrates, in the context of a two-sector OLG neoclassical growth model, conditions under which international trade in consumption goods alone may be sufficient for the equalization of real returns to physical capital across countries; that is, under which commodity arbitrage is sufficient for real interest rate parity (RIRP). This role for repeated commodity arbitrage is established via a dynamic extension of the factor price equalization (FPE) theorem which is valid at all dates comprising the equilibrium path as well as its steady state. The results are at odds with the conventional view regarding RIRP which arises from open one-sector growth models, in which case steady state trade balance and RIRP are irreconcilable, and are also a contradiction to frequent assertions of lon-run specialization in two-sector frameworks. An equilibrium path for an integrated world economy yields an endogenous, time-variant cone of diversification which implies sufficient conditions for the dynamic paths of a cross-section of economies to exhibit FPE, and hence RIRP with trade balance, at all points in time. These conditions require that the savings rates and initial capital-labor ratios of individual countries do not deviate too significantly from world averages, and that both sectors absorb capital easily. The first of these requirements is sufficient to establish steady state FPE and RIRP in the general specification. The first two requirements are sufficient for the entire equilibrium path to be characterized by FPE and RIRP in a log-linear example.