Comparison of Factor Endowment Theory

The role of trade theories on trade patterns of a country is significant. The factor endowment theory states that the abundance of resources or factors benefitted the country with comparative advantage. The comparative advantage over the production of oil and manufactured goods enhanced the growth of trade in Saudi Arabia and China respectively.

Running head: COMPARISON OF FACTOR ENDOWMENT THEORY
Comparison of Factor Endowment Theory
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1COMPARISON OF FACTOR ENDOWMENT THEORY
Introduction
Trade patterns of any country is evaluated by the international trade theory. There are
many assumptions of trade theory. One of the significant trade theory is based on factor
endowment theory and comparative advantage (Teodoro & Switzer, 2016). Both are co-related
terms and helps to determine the trade patterns of Saudi Arabia and China. The abundance of
resources like oil and skilled labour provides comparative advantage over the production of
crude oil and manufactured goods to Saudi Arabia and China respectively. Oil-rich country
Saudi Arabia initiated Saudi Vision 2030 to promote the concept of knowledge-based economy.
Body
The factor endowment theory deals with the abundance of various types of resources
within a country. It provides comparative advantage to the country to produce more.
Comparative advantage of a country is determined by the factor endowment theory. A country
focuses on production of goods on which it has comparative advantage (Tabuchi, 2017). As the
country is enormously endowed with the factors used for production of that good. Oil production
in Saudi Arabia is less expensive due to plentiful resources of oil. The comparative advantage
over oil financed the import purchases of the country. Comparative advantage of a country
lowers the opportunity cost of the particular goods with which it is richly endowed. Factor
endowments are dynamic. It changes with the growth and development of the country. Labour-
intensive country China, trained and skilled the labour force and it increases the wage rate to
encourage labourers (Esmaeili, 2014). Thus, China specialized in manufactured goods that are
more complex in nature as number of skilled labour force is very high in the country. The range
of manufactured goods by China includes steel, iron, textiles, aluminium, cement, toys,
chemicals, electronics, ships, rail cars and aircraft.

2COMPARISON OF FACTOR ENDOWMENT THEORY
International trade theory analyses the patterns of trade and the influence of trade on the
country. There are various trade theories which help to determine the impacts of trade policies.
The trade pattern of a country can be evaluated with the help of absolute advantage in production
(Cohn, 2016). When a country has absolute advantage over a product, it can produce that product
at a relatively lower marginal cost. Saudi Arabia can produce crude oil of higher quality at faster
rate for a higher profit than any other countries (An et al., 2014). China have absolute advantage
over manufacturing goods as it can produce the products at a lower cost and faster rate. New
trade theories are mainly based on higher returns to scale and monopolistic competition. The
theories state that in order to minimize transportation cost or higher returns to scale, it will not
move out of the country.
Other than labour intensive goods, China also has comparative advantage by geography.
It is the biggest producer of shoes, solar cells, ships, cell phones, computers and air conditioners.
Oil-export country Saudi Arabia also have comparative advantage over production of
petrochemicals. There may exists some other factors except factor endowment theory, which
motivates international trade. Trade is also encouraged by technological factors and arbitrary
borders. Branding also plays an important role in international trade. The factor endowment
theory has some limitations. It is not the only factor to determine trade patterns of any country.
Trade flows between China and other nations lead to changes in trade patterns of China
and industrial structural adjustments. The fast growth of foreign trade brought vital change in
trading structure. The economy of China shifted from labour intensive and resource exports to
technology-intensive and capital exports, as Saudi Arabia planned in Vision 2030 (Flynn, &
Giraldez, 2017). China adopted opening-up policy and reform process to shift from protectionist
to an outward-oriented open economy. However, during the transition period, the economy went

3COMPARISON OF FACTOR ENDOWMENT THEORY
through dependence on other countries to isolation.Though, Saudi Arabia enormously endowed
with crude oil and it helps the country in wealth creation. Government of Saudi Arabia planned
to reduce the dependence on oil. Thus, it launched Saudi Vision 2030 to diversify the trade
portfolio of the country (Moshashai, Leber & Savage, 2018). It planned to set up public service
sectors like education, health, infrastructure, tourism and recreation. The main objective behind
the initiative of Saudi Vision 2030 is to reinforce investment and economic activities, growing
non-oil sector trade between nations.
It proposed to increase the productivity of consumer goods, manufacturing equipment,
military and ammunition through increasing government spending. However, the production of
these goods will be expensive for the country as it does not have comparative advantage. The
limited natural resources and resources such as labour and capital will induce marginal cost and
opportunity cost of production. Government wants to increase its source of revenue from non-oil
industries through the development programme like Saudi Vision 2030 (Khan, 2016). The
structural disadvantages prevailed in the country may hamper the successful execution of the
development plan. These are insufficient bureaucracy, weak institution and significant gaps
between current educational system that hinder the growth of skilled labours and demand for
skilled labour force by the labour market of the country. Thus, the goal of Saudi Vision 2030
may not be successful, as so far the non-oil growth of the country is very insufficient.
Conclusion
The role of trade theories on trade patterns of a country is significant. There are various
assumptions under the different types of trade theory. The factor endowment theory states that

4COMPARISON OF FACTOR ENDOWMENT THEORY
the abundance of resources or factors benefitted the country with comparative advantage. The
comparative advantage over the production of oil and manufactured goods enhanced the growth
of trade in Saudi Arabia and China respectively. Although, Saudi Arabia planned to shift the
trade pattern from oil-producing country to knowledge-based economy. The comparison of
factor endowment theory between Saudi Arabia and China helps to understand the trade patterns
and growth of both economies.

5COMPARISON OF FACTOR ENDOWMENT THEORY
References
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