Question

Consider the following statement: “The factor price equalization theorem states that with free trade

the real wage earned by labor becomes equal to the real rent earned by landowners.” Is this statement correct,

incorrect, or uncertain? Explain your answer.

Answer 1

This statement is False.

As per factor price equalization the wages in the nation exporting labor extensive goods will be equal to the wages of the labors of capital extensive goods because the wages and factor return differentiation is a reason why nations have a comparative advantage in the goods they are exporting and trade is hapenign.

SO, the wages of the capital abundant nation will be equal to the wages of a labor abundant nation and not equal to land owners, the return of the land owners will be equal to the return of the land owner of the nation where the land is less abundant.