Comparison of Factor Endowment Theory

Running head: COMPARISON OF FACTOR ENDOWMENT THEORY
Comparison of Factor Endowment Theory
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COMPARISON OF FACTOR ENDOWMENT THEORY1
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.

COMPARISON OF FACTOR ENDOWMENT THEORY2
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