Factor price equalization theory, states that when factors are allowed to move freely among trading nations, efficiency increases, which leads to equality of factor prices among these countries.

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Factor price equalization theory argues that, when factors of production can move freely among countries, competition will lead to an equalization of factor prices among those countries. This is because factors of production, such as labor or capital, will flow to the places where they are most valued and can be most efficiently utilized, resulting in higher productivity and lower costs. As a result, countries with similar levels of development and access to capital and technology should see a convergence in their factor prices over time.

Factor Price Equalization Theory, States That When Factors Are Allowed