<P> Whichever factor receives the lowest price before two countries integrate economically and effectively become one market will therefore tend to become more expensive relative to other factors in the economy, while those with the highest price will tend to become cheaper . </P> <P> An often - cited example of factor price equalization is wages . When two countries enter a free trade agreement, wages for identical jobs in both countries tend to approach each other . After the North American Free Trade Agreement (NAFTA) was signed, for instance, unskilled labor wages gradually fell in the United States, at the same time as they gradually rose in Mexico . The same force has applied more recently to the various countries of the European Union . </P> <P> The result was first proven mathematically as an outcome of the Heckscher - Ohlin model assumptions . </P> <P> Simply stated the theorem says that when the prices of the output goods are equalized between countries as they move to free trade, then the prices of the input factors (capital and labor) will also be equalized between countries . </P>

Why are prices of factors of production not equalized