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Integrated Price-Trade Equilibrium by World Factor Endowments

Author

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  • Baoping Guo

    (College of West Virginia (renamed As Mountain State University in 2013, and now is the campus of West Virginia University Institute of Technology))

Abstract

Much literature demonstrated the existence of general trade equilibrium in the Heckscher-Ohlin model, but no analytical solution has been reported yet. Dixit and Norman made a breakthrough showing that whole factor-price equalization set in integrated world equilibrium (IWE) shares the same world price. Helpman and Krugman enhanced the result, presenting the equal trade volume lines in the IWE diagram. Their ideas explored the new property and clue of trading equilibrium. Inspired by their ideas, this paper derives the price-trade equilibrium using Helpman and Krugman’s equal trade volume lines and shows that world prices are the function of world factor endowments. The current study finds that the relative price of two factors at equilibrium is inversely propositional to their world factor endowments, which simulates the law of demand. The study demonstrates that the equalized factor prices ensure gains from trade for both countries. With the equilibrium, the Heckscher-Ohlin theorem and factor-price equalization theorem are linked together by term of trade. They can explain each other. Trefler illustrated that the factor price equalization hypothesis and the Heckscher-Ohlin-Vanek theorem hold in his equivalent-productivities system (effective endowments). The integrated price-trade equilibrium will be helpful to understand the equilibrium of factor price non-equalization.

Suggested Citation

  • Baoping Guo, 2023. "Integrated Price-Trade Equilibrium by World Factor Endowments," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 29(3), pages 193-205, August.
    • Handle: RePEc:kap:iaecre:v:29:y:2023:i:3:d:10.1007_s11294-023-09876-9
    DOI: 10.1007/s11294-023-09876-9
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    References listed on IDEAS

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