Question

1. What is factor price equalization and why do we care? Who gains and who loses if we move from a state in which factor prices are not equalized to one in which they are equalized. Should Canada push to have a multilateral agreement on investment to safeguard investors' returns at the cost of reduced domestic abilities to target domestic subsidies for locally owned industries?

Answer 1

Factor price equalusation theorem tells that when the prices of the commodities priduced are equalised then the price of the factors of production used like capital or labour will also be equalized between the two countries who are trading partners. It is of much importance as it acts as a balancing factor for both the countries otherwise they would have faced trade off. It helps in competitive advantage for both the countries also helps in checking the cost of production of goods and services that affects the market forces of demand and supply.

The gainers of factor price equalization are mainly the owners who are having large farms for production including the foreign workers who are working as they wilo demand for higher wages.

The loosers will be the sellers of the factors of production in a small industry of a tried industry. Therefore the workers in the declining industry will not get the wages.

No canada should not push for any agreement as it will not benefit the local industries resulting in unemployment.