International Trade and Factor Mobility

International Trade and Factor Mobility

International Trade and Factor Mobility Reprinted in Readings in International Economics (eds. R. E. Caves and H. G. Johnson) Published for the American Economic Association by Richard Irwin, Inc. 1967 15 pages

Samuelson’s Factor Price Equalization theorem had initially been received as a surprising and counter-intuitive result. In this paper, Mundell presented an alternative interpretation of the theorem, which is now considered folk-wisdom.
Andrew K. Rose

Commodity movements and factor movements are substitutes. The absence of trade impediments implies commodity-price equalization and, even when factors are immobile, a tendency toward factor-price equalization. It is equally true that perfect factor mobility results in factor-price equalization and, even when commodity movements cannot take place, in a tendency toward commodity-price equalization.

There are two extreme cases between which are to be found the conditions in the real world: There may be perfect factor mobility but no trade, or factor immobility with unrestricted trade. The classical economists generally chose the special case where factors of production were internationally immobile.

This paper will describe some of the effects of relaxing the latter assumption, allowing not only commodity movements but also some degree of factor mobility. Specifically it will show that an increase in trade impediments stimulates factor movements and that an increase in restrictions to factor movements stimulates trade. It will also make more specific an old argument for protection.