Factor Endowment Theory and Trade Patterns of Saudi Arabia and USA

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ECONOMICS ASSIGNMENT
GLOBAL TRADE ECONOMICS

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Contents
Introduction................................................................................................................................3
Impacts of resource endowment on comparative advantage......................................................3
Justification of factor endowment theory as a predictor of trade...............................................4
Additional trade theories that can be applied.............................................................................4
Conclusion..................................................................................................................................5
Reference....................................................................................................................................6

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Introduction
International trade is a channel through which economies around the world engages in the
transaction of goods and services. The trade theories suggest that trade results in the increase
in the welfare of societies. The paper aims to focus on the specific trade theory of factor
endowment theory taking the case of Saudi Arabia and the USA. Using the theory, the paper
examines the impacts of the sub-concepts such as the comparative advantage on the trade
pattern between the two countries.
Impacts of resource endowment on comparative advantage
The trade theory of factor endowment states that a country must have a product for which the
opportunity cost of production is lowest compared to the other country. Dibooğlu & Aleisa
(2014) stated that opportunity cost is referred to as the cost given up by an economic entity in
the pursuit of consumption of another good. The comparative advantage is an advantage to a
country when it can produce a product at lower opportunity cost than the other countries. El
Mallakh (2015) noted that there is at least one product which will be there which requires low
opportunity cost for that country relative to another county.
Saudi Arabia
For Saudi Arabia, the endowment is mainly in the form of oil. Therefore the country has a
low opportunity cost in the production and process of oil. It provides the economy of Saudi
Arabia a comparative advantage over the partners such as the USA. Due to the abundance of
oil in the country, the cost of labour in the industry is also low and hence Saudi Arabia
produces oil for the USA (Ramady, 2013). Therefore, the huge endowment of oil helps in the
determination of the specialisation in the case of Saudi Arabia. The relative cost of exporting
the oil from the Saudi Arabian economy is lower than the other trader partners due to the
abundance of oil and the labours having expertise in the oil industry of the country.
USA
The abundance of the resources also influences the specialization of the USA as well. The
USA is known to have huge capital availability for large production of machinery. Abedini &
Péridy (2018) noted that the technology available to the US helps it to produce modern
machinery at a cheap cost. Thus, the opportunity cost of producing the machinery is low in
the economy of the USA and hence this country exports advanced machinery with state of the