Chapter 6: Globalization of Trade and Foreign Investment: Its Implication for Factor Rewards and Economic Development
6. Globalization of trade and foreign investment: its implications for factor rewards and economic development John-ren Chen and Herbert Stocker INTRODUCTION The implications for factor rewards of changes in commodity prices are known as the Stolper-Samuelson theorem in the literature of international trade. Globalization, either induced by liberalization of international economic activities or by reduction in transportation costs has thus significant implications not only for commodity prices but also for factor price ratios (such as the wage-rental ratio). Globalization has in general increased the domestic prices of exported commodities and decreased the domestic prices of imported goods and therefore had important implications for the factor price ratios, which can be used to reflect the factor abundance of a country (Kemp, 1969). According to this definition a country is said to be relatively well endowed with labour if in autarky the wage-rental ratio is lower than abroad. This definition is more suitable than the capital-labour endowment ratio to represent the factor abundance of a country, especially for empirical research, because of international differences in consumer preferences. In this paper we will use the factor price ratio to represent factor abundance. In a globalized world economy, with high mobility of capital, international differences in capital rentals should be limited in magnitude and temporal. Therefore the wage rates can be used as a good approximation of wage-rental ratio which in turn is the main determinant of input ratios. Therefore it is interesting to study the effects of trade liberalization on factor prices and...
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