Ohlins Division Toll Equalization Theorem Amongst Diagram

Ohlin's Factor Price Equalization Theorem

In International Trade, commodities movement instead of factors.

According to Bertil Ohlin,

"Commodity travail acts every bit a substitute for component travail inward bringing virtually component toll equalisation."

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In a 2 province model alongside relatively large differences inward their endowments (capital together with labour), prior to merchandise the prices of these factors volition hold out different. With the opening of trade, each province volition export the production of its abundant inexpensive factor. When export need is added to domestic demand, prices of their abundant inexpensive component volition rise. The domestic need for the products of scarce factors tend to reject due to the availability of such products through imports. This inward turns atomic number 82 to reject inward the toll of the scarce factor. In each country, due to the prices of the abundant component rising together with scarce component falling the prices of both factors of production tend to movement towards the same level.

Under the ideal status of:

1. Perfect competition,
2. Free trade,
3. Identical production function,
4. No carry cost,
5. Constant returns to scale, and
6. Many other restrictive conditions.

International merchandise logically should number inward component toll equalization.

Diagram of Factor Price Equalization

Country I produces commodity a on isoquant aa (isoquant is an equal production curve) together with province II produces commodity b on isoquant bb. AB together with CD are their respective component toll lines. As it tin post away hold out understood from the higher upwards diagram, province I together with II are majuscule together with labour abundant respectively, thus their prices are depression inward respective countries.

Country I exports majuscule intensive 'a' commodity together with imports labour intensive 'b' commodity from province II. Thus prices of majuscule tend to growth inward province I together with of labour inward province II. At the same time, prices of scarce component inward both the countries autumn due to declining domestic demand. With no restrictions to trade, the procedure continues till prices of both factors inward both countries are equalised.

In higher upwards figure, the component toll trace of piece of job AB gradually rotates counter clockwise sliding alongwith aa isoquant. CD component toll trace of piece of job piece of cake rotates clockwise, sliding alongwith bb isoquant, until the 2 component toll lines (AB & CD) coincide at PL. PL is tangent to aa at T together with bb at S, indicating that component prices inward both the countries are the same.

Complete component toll equalisation depends on the validity of all assumptions. The equality of factors inward both countries must hold out the same. Factor intensity of commodities, at all prices, must rest the same (i.e. commodity a, which is majuscule intensive should rest the same at all educate of component prices).

In the existent world, inward the absence of the required assumptions together with conditions, what i could sense is alone the vogue towards component toll equalisation.