Does Growth Encourage Factor Price Equalization?
This paper first notes the importance of "one-cone" versus "multi-cones"equilibria in the Heckscher-Ohlin Model of international trade, then asks whether the process of economic growth as modeled in neoclassical growth models tends to lead the world more toward one or the other. The one-cone model has been the workhorse of international trade theory for many years. It is characterized by a single set (cone) of relative factor endowment combinations within which countries can diversify their production of all goods. If all countries' actor endowments are within that cone, then there is global factor price equalization (FPE) under free trade. The multi-cone model has received attention more recently, and includes separate cones of diversification within each of which there is FPE, but across which factor prices differ. There are several important differences between these two models. The paper examines several neoclassical models of trade and growth, distinguished by their assumptions about the determinants of saving, to see what they imply about the convergence or non-convergence of country factor endowments into a single cone. None of the models suggest convergence, while some of them strongly imply that different countries will end up in different cones. This therefore suggests that the multi-cone version of the Heckscher-Ohlin model should be preferred.
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