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Under Heckscher-Ohlin, the price of labor and other productive assets should equalize across national borders as...

Under Heckscher-Ohlin, the price of labor and other productive assets should equalize across national borders as a result of free and open trade. In the real world, we do not observe this to be universally true. Why are the prices of these factors of production not equalized in the real world? Give at least 2 explanations.

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Answer #1

The Heckscher-Ohlin models assumes perfect competition. Perfect competition requires perfect information, homogeneous goods, free-entry and exit of firms. however, none of this actually happens in real world. In real world, the markets are far from perfect. information flow is not that easy, goods are not homogeneous and it is costly for firms to enter and exit the market. Since these assumptions are not representation of real world, the results also does not hold.

The model further assumes that factors of production labor and capital are homogeneous and they are freely mobile across industries in a nation. However, in reality, no two labors and capitals are same. Due to transportation and other barrier costs, labor and capital are also not freely mobile. Thus, the results are not achieved in reality.

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