Trade, migration, and inequality in a world without factor price equalization

Abstract

The behavior of trading economies in the absence of factor price equalization is not well understood, although empirical evidence against factor price equalization is overwhelming. We map regions of diversification and specialization for competitive world economies with different factor endowment partitions. Goods and factor price responses as economies move within and across different regions of specialization are explored using a series of novel diagrams. The usefulness of endogenizing patterns of specialization is illustrated by considering the impact on inequality of migration flows (such as US-Mexico), the substitutability of trade and migration, and the impact of the entry of a large unskilled labor-intensive economy (such as China) on factor prices and factor flows.