Economics Assignment 2022

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ECONOMICS ASSIGNMENT

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Contents
1.0 Introduction..........................................................................................................................3
2.0 Impacts of resource endowment to comparative advantage................................................3
3.0 Is the factor endowment theory is a good predictor.............................................................4
4.0 Additional trade theory for the explanation of trade pattern................................................4
5.0 Conclusion............................................................................................................................5
Reference....................................................................................................................................6

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1.0 Introduction
Trade is a transaction of goods and services between two economies of the world in exchange
for foreign currency. The theory of international trade shows that the gains from the trade are
positive for both the economies engaged in international trade. The paper aims to discuss
different concepts regarding international trade forcing on the concept of factor endowment
theory. The theory states that the comparative advantage of each of the economies decides the
specialisation in production and the transaction happens accordingly. In this study, trade
partnership of Saudi Arabia and India has been discussed to understand the trade pattern as
per the factor endowment theory.
2.0 Impacts of resource endowment to comparative advantage
The factor endowment theory talks about comparative and absolute advantages. Absolute
advantage is the benefit when an economy can produce a certain good at the lowest cost. On
the other hand, the comparative advantage is when a country can produce a certain good at
the lowest opportunity cost (Abedini & Péridy, 2018). If the opportunity cost is low, the
country will specialise in the production of that good and export it to the partner country.
Saudi Arabia
Saudi Arabia has an abundance of oil underneath its ground and this has been providing the
government of the country with high tax revenue (Ramady, 2013). There is another source of
income of the government as well such as the manufacturing sector which is very small in
size. Therefore, the opportunity cost of producing an extra barrel of oil is relatively low for
the small size of the manufacturing sector (Adão, 2015). Therefore, the high endowment of
oil in Saudi Arabia provides a comparative advantage to the country for producing oil in large
scale and exports it to India. Compared to India, the relative cost of producing oil is much