States that a countrys comparative advantage is determined by its initial resource endowments
Assumptions for the factor proportions theory
1. Both produce only 2 goods
2. Perfect competition in marketplace
3. No transportation costs or taxes in trade
4. Internation trade doesn't cause specialization
5. consumers have equal tastes and preferences in 2 sep countries
6. Homogeneous factors of Production: Capital and labor
7. Technologies same and constant return to scale
8. Labor and capital are mobile domestically
9. Labor and capital can't move bw 2 countries
10. production techniques: capital intensive in one and labor intensive in another
The higher your capital/ labor ratio the.....
higher your income bracket for a country.
If a coutry is capital abundant would the price be more or less for capital?
The factor-proportions theorum
A country will have a comparative advantage in goods whose production intensively uses its relatively abundant factor of production.
The gains from trade are realized when
a country exports goods based on its comparative advantage and imports goods based on its comparative DISadvantage.
a market structure in which firms produce a homogeneous good and each firm has no control over its own price
factors of production
resource inputs ex. labor and capital
constant returns to scale
a production condition in which proportionate changes in factors of production lead to proportionate changes in output
capital to labor ratio (K/L)
the amount of capital per unit of labor used to produce a good
Factor price equalization theorem
the premise that international trade will reduce or equalize factor prices bw countries
the percentage of output that is accounted for by each industry w/in a country
according to the factor price equalization theorem when a country specializes in a given product that they have a comparitive advantage in and then trades that given product for a product that they have a comparative disadvantage in what happens?
the industrial structure of the country will change so that relative factors such as capital and labor will conform to the relative factors of the country that they traded with.
What could limit the factor price equalization theorem