In the discussion of empirical results on the Heckscher-Ohlin model, we noted that recent work suggests that the efficiency of factors of production seems to differ internationally. Explain bhow this would affect the concept of factor price equalization.
Answer:
Not substantially, at least not in Heckscher-Ohlin. If efficiency of factors of production differs internationally, then prices will still equalize in the sense that the marginal price will equate with marginal returns from the factor. Where efficiency is low, the price of the factor will be low because the return is low.
If there is simply a case of decreased efficiency across all factors, income will be comparatively lower on a macro scale simply becaue the production possibilities frontier is not where it could be (ie, too much is lost due to inefficiencies). However, factor price equalization will still occur because factor pricing is RELATIVE, not absolute.
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