The Heckscher-Ohlin-Samuelson (HOS) Trade Theory and Capital Theory

This paper examines the validity of the factor price equalisation theorem (FPET) in relation to capital theory. Starting from Samuelson (1953), a survey on the main literature of the FPET is provided under the Heckscher-Ohlin-Samuelson (HOS) model where capital is a primary factor. The paper also concerns the Cambridge capital controversies which demonstrate that marginal productivity theory does not hold in general whenever capital is taken not as a primary factor but as a bundle of reproducible material inputs. Consulting the controversies, the paper shows that if capital is reproducible, then the FPET does not hold in general even under the case that no capital intensity reversal occurs. It also demonstrates that the recent literature on the dynamic HOS trade theory focuses only on a limited case in which the difficulty raised by the capital controversies is carefully left aside, so that the FPET can hold even though capital is modeled as a reproducible factor. All of these arguments may suggest the necessity for constructing a basic theory of international trade, without relying on the factor price equalisation, in a model where capital is formulated as a bundle of reproducible inputs.