Does Growth Encourage Factor Price Equalization?

Abstract

This paper first notes the importance of “one‐cone” versus “multi‐cone” equilibria in the Heckscher–Ohlin model of international trade, then asks whether economic growth in neoclassical growth models leads toward one or the other. The one‐cone equilibrium arises with internationally similar factor endowments. It has a single set (cone) of relative factor endowments, within which countries diversify and have global factor price equalization (FPE) under free trade. The multi‐cone equilibrium arises with larger factor endowment differences. It has FPE within cones, but not between them. The two configurations differ in important ways. The paper examines several neoclassical trade‐and‐growth models, distinguished by their assumptions about saving, asking whether factor endowments converge into a single cone. None of the models suggests convergence, while some strongly imply that countries will end up in different cones. This suggests a preference for the multi‐cone version of the model.

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