Final answer:
The Factor Price Equalization theory suggests increased global efficiency and resource allocation due to free movement of production factors, related to the comparative advantage concept. Real-world trade, particularly among similar high-income countries like the US, Canada, and Mexico, also factors in geographic proximity and intra-industry dynamics.
Step-by-step explanation:
The Factor Price Equalization theory is an economic principle that states when factors of production (like labor and capital) are free to move among trading nations, it leads to increased efficiency and a better allocation of resources, which in turn optimizes the production of goods and services across countries. This theory is intertwined with the concept of comparative advantage, which asserts that global trade should be based on economies exploiting their differences in opportunity costs of production to gain efficiency.
However, evidence shows that significant trade occurs between high-income economies with similar factor costs, such as the trade relationships between the US, Canada, Mexico, Japan, and the EU. In this context, it is not just comparative advantage that drives trade, but also geographic proximity and the prevalence of intra-industry trade among nations with similar economies.