21. FACTOR PRICES AND CONVERGENCE IN THE LONG RUN

We examine a dramatic historical episode of factor price convergence in the late nineteenth century. Our focus is convergence between Old World and New, and the analysis centers on land and labor. Wage-rental ratios boomed in the Old World and collapsed in the New, moving the resource-rich, labor-scarce New World closer to the resource-scarce, labor-abundant Old World. We use econometrics and simulations to identify pro-convergence forces which include commodity price convergence, factor accumulation, and factor-saving biases. The results confirm that open-economy characteristics and international market integration are important sources of convergence