Ohlins Element Cost Equalization Theorem Alongside Diagram

Ohlin's Factor Price Equalization Theorem

In International Trade, commodities motion instead of factors.

According to Bertil Ohlin,

"Commodity crusade acts equally a substitute for ingredient crusade inwards bringing well-nigh ingredient cost equalisation."

capital in addition to labour), prior to merchandise the prices of these factors volition live on different. With the opening of trade, each province volition export the production of its abundant inexpensive factor. When export need is added to domestic demand, prices of their abundant inexpensive ingredient volition rise. The domestic need for the products of scarce factors tend to refuse due to the availability of such products through imports. This inwards turns atomic number 82 to refuse inwards the cost of the scarce factor. In each country, due to the prices of the abundant ingredient rising in addition to scarce ingredient falling the prices of both factors of production tend to motion towards the same level.

Under the ideal status of:

Perfect competition,
Free trade,
Identical production function,
No carry cost,
Constant returns to scale, and
Many other restrictive conditions.

International merchandise logically should result inwards ingredient cost equalization.

Diagram of Factor Price Equalization

Country I produces commodity a on isoquant aa (isoquant is an equal production curve) in addition to province II produces commodity b on isoquant bb. AB in addition to CD are their respective ingredient cost lines. As it tin live on understood from the to a higher house diagram, province I in addition to II are upper-case missive of the alphabet in addition to labour abundant respectively, therefore their prices are depression inwards respective countries.

Country I exports upper-case missive of the alphabet intensive 'a' commodity in addition to imports labour intensive 'b' commodity from province II. Thus prices of upper-case missive of the alphabet tend to growth inwards province I in addition to of labour inwards province II. At the same time, prices of scarce ingredient inwards both the countries autumn due to declining domestic demand. With no restrictions to trade, the procedure continues till prices of both factors inwards both countries are equalised.

In to a higher house figure, the ingredient cost draw of piece of occupation AB gradually rotates counter clockwise sliding alongwith aa isoquant. CD ingredient cost draw of piece of occupation piece of cake rotates clockwise, sliding alongwith bb isoquant, until the 2 ingredient cost lines (AB & CD) coincide at PL. PL is tangent to aa at T in addition to bb at S, indicating that ingredient prices inwards both the countries are the same.

Complete ingredient cost equalisation depends on the validity of all assumptions. The equality of factors inwards both countries must live on the same. Factor intensity of commodities, at all prices, must stay the same (i.e. commodity a, which is upper-case missive of the alphabet intensive should stay the same at all fix of ingredient prices).

In the existent world, inwards the absence of the required assumptions in addition to conditions, what i could sense is solely the style towards ingredient cost equalisation.