Which of the following are correct in the case of Factor-Price Equalization Theorem? 1. It postulates…
Statements 1 and 2 concern factor-price equalization: trade brings factor prices closer together and, under the theorem’s assumptions, eliminates their differences.…
Choose your answer
Which of the following are correct in the case of Factor-Price Equalization Theorem?
1. It postulates that trade will lead to the elimination of pre-trade differences in relative and absolute factor prices between nations.
2. It postulates that trade will lead to the reduction in the pre-trade differences relative and absolute factor prices between nations.
3. It postulates that each nation will export the commodity intensive in its relatively abundant and cheap factor.
4. It postulates that each nation will import the commodity intensive in its relatively scarce and expensive factor.
Answer and explanation
Correct answer A
Statements 1 and 2 concern factor-price equalization: trade brings factor prices closer together and, under the theorem’s assumptions, eliminates their differences. Statements 3 and 4 describe the commodity-trade pattern associated with factor abundance, rather than the factor-price equalization result.
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Kerala SET (LBS Centre)