<P> The 2x2x2 model originally placed no barriers to trade, had no tariffs, and no exchange controls (capital was immobile, but repatriation of foreign sales was costless). It was also free of transportation costs between the countries, or any other savings that would favor procuring a local supply . </P> <P> If the two countries have separate currencies, this does not affect the model in any way--purchasing power parity applies . Since there are no transaction costs or currency issues the law of one price applies to both commodities, and consumers in either country pay exactly the same price for either good . </P> <P> In Ohlin's day this assumption was a fairly neutral simplification, but economic changes and econometric research since the 1950s have shown that the local prices of goods tend to correlate with incomes when both are converted at money prices (though this is less true with traded commodities). See: Penn effect . </P> <P> Neither labor nor capital has the power to affect prices or factor rates by constraining supply; a state of perfect competition exists . </P>

Which of the following is not one of the propositions of the distribution of consumption model