The Factor Price Equalization Theorem is a concept in international trade theory that explains how changes in trade patterns can impact factors of production, such as labor and capital, within a country.

The theorem suggests that factors of production in different countries will earn the same return when free trade is allowed, leading to various implications. In the context of this theorem, we will discuss why option (b) “scarce” is the correct answer and why the other options (a, c, and d) are not accurate.

Correct Answer (b): Scarce

According to the Factor Price Equalization Theorem, the factor that should oppose free trade policies in any given country is the “scarce” factor. This means that if a factor of production (e.g., labor or capital) is relatively scarce in a particular country, it would earn a higher return in a closed or protected domestic market compared to a globalized market with free trade.

Here’s a detailed explanation of why option (b) is correct:

1. Equalization of Factor Prices:

The Factor Price Equalization Theorem posits that under the conditions of free trade, factor prices, specifically wages and returns to capital, will tend to equalize between countries. This means that factors of production will earn similar returns across borders.

2. Abundant Factors:

If a factor is abundant in a country, it implies that there is a relatively large supply of that factor. In a scenario where trade is unrestricted, the return on abundant factors may decrease due to increased competition from countries with similar abundant factors.

However, this isn’t a cause for concern for the owners of these factors since they can still find employment opportunities or investment options elsewhere in the global market.

3. Scarce Factors:

On the other hand, if a factor is scarce in a country, it implies that there is a limited supply of that factor. When free trade allows factors to move across borders, owners of scarce factors would benefit from higher returns as they can offer their services or capital in markets where these factors are in high demand. This is because other countries are willing to pay a premium for these scarce factors.

4. Implications for Opposition to Free Trade:

Owners of scarce factors in a country may resist or oppose free trade policies. They are concerned that opening up to international trade will lead to an outflow of their scarce factors to countries with a higher demand for those factors, which could result in a decrease in their returns.

This opposition is driven by a desire to protect their relatively advantageous position in the domestic market.

5. Political and Policy Implications:

The opposition of scarce factor owners to free trade can have significant political and policy implications. They may lobby for protectionist measures, such as tariffs or quotas, to limit the flow of their scarce factors and safeguard their returns.

Incorrect Options and Explanations:

a. Abundant:

This option is incorrect because owners of abundant factors are generally not expected to oppose free trade. Free trade can create opportunities for owners of abundant factors to expand their markets and seek higher returns in other countries. Their factors are in surplus, so competition from other countries is less likely to have a negative impact on their returns.

c. Neither:

This option is incorrect because the Factor Price Equalization Theorem specifically suggests that owners of scarce factors should oppose free trade, while owners of abundant factors can benefit from it. The theorem provides a clear distinction between the two categories of factors in relation to free trade.

d. Can’t Tell Without More Information:

This option is incorrect because the Factor Price Equalization Theorem provides a well-established framework for understanding the impact of free trade on factors of production. It does not require additional information to determine that owners of scarce factors would oppose free trade policies.

In summary, the Factor Price Equalization Theorem is a key concept in international trade theory, and it indicates that owners of scarce factors of production should oppose free trade policies due to the potential negative impact on their returns.

This is because, under free trade conditions, scarce factors can earn higher returns in international markets where they are in high demand, leading to the opposition of owners of these factors to protect their advantages in the domestic market.