Gains of a country from its foreign trade are most likely to be unevenly shared between its regions and sub-regions, between owners of different factors of production, and between households and individuals.
It is also important to note that an increase in the rate of reward of a factor of production is not the same thing as an increase in its proportionate share in total national income.
Normally, the proportionate changes in the rates of reward and level of employment vary from one factor to the other; and this changes their respective proportionate shares in national income also.
i.ytimg.com
ADVERTISEMENTS:
Long run changes in the division of gains from trade between factors of production are all the more uncertain and difficult to predict. This is because of the interplay of a very large number of forces associated with the market, the nature of the changes, and official policies.
Thus, for example, in most modem economies, rate of capital accumulation exceeds that of population growth. Similarly, demand for different factors of production grows unevenly on account of technological and institutional changes, changes in labour laws, restructuring of the markets and so on.
In the same way, policies pursued by authorities generally aim at influencing the relative growth rates of different industries and technologies which, in turn, affect the prices of individual factors of production.
ADVERTISEMENTS:
It is noteworthy that in the final analysis, what matters are not the changes in the rates of rewards of factors of production but their impact on distribution of income and wealth at household and individual levels.
But assessing this impact is not an easy task because the ownership of factors of production varies over time and between economies.
Conventionally, western economists assume that an increase in the reward for capital benefits only the so-called capitalist class, while an increase in wage rate benefits the poorer families. But, even in advanced countries, this is not a very realistic assumption, for several reasons:
i. The public sector owns a sizeable portion of productive resources; and it provides goods and services free or at subsidised rates. Even if they are priced at full cost, the profit income does not go to individuals and households.
ADVERTISEMENTS:
ii. Workers also own a part of capital and, therefore, benefit from an increase in the reward to capital.
iii. Some sections of labour, particularly professionals, are paid very high wages.