Friends, Enemies, and Factor Diversification: Implications for Protectionist Pressures

Friends, Enemies, and Factor Diversification: Implications for Protectionist Pressures

This paper examines the relationship between changes in commodity prices and changes in factor prices when individuals can diversify their factor ownership portfolios. In a closed economy, it is always possible to find a distribution of factor ownership which makes everyone indifferent to any small, exogenous price change and which satisfies the conditions for full employment of each factor Such a distribution of factor ownership would dissipate interest in any price change since it would leave everyone`s real income unchanged. In an open economy, it may not be possible to find such a distribution of factor ownership.