Factor Endowment Theory Assignment 2022

Running head: CRITICAL THINKING 1
“FACTOR ENDOWMENT THEORY”
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“FACTOR ENDOWMENT THEORY” 2
Introduction
Various nations have an abundance of different resources. The factor endowment theory
recognizes that nations are endowed with abundant different types of resources (Ragland,
Widmier & Brouthers, 2015). Factor endowment is just a phrase for factors of production used
by a nation in manufacturing. These factors of production include land, capital, labour and
entrepreneurship. The theory determines comparative advantage for nations. The theory bases its
argument on the fact that a nation will have a comparative advantage in producing a certain good
if the good uses the factor which the nation is heavily endowed with. The theory deals with the
ratios of factors of production, for example, the ratio of capital to labour for a given nation. One
factor definitely has a higher ratio than the other. A comparison of Australia and the Kingdom of
Saudi Arabia has been done based on the factor endowment theory. The impact of resource
endowments for the two nations on their comparative advantage has also been discussed. The
effectiveness of the factor endowment theory as a trade pattern predictor along with other
applicable theories has also been done. A discussion of the Saudi Vision 2030 based on the
factor endowment theory has also been done.
“The impact of resource endowment on comparative advantage”
Considering resource endowment, a nation has a comparative advantage in producing a
certain good if the good uses the nation’s abundant factor or resource. This is because the nation
will be able to efficiently produce the good using the factor for which it is abundantly endowed
with. Resource endowment impacts a nation’s comparative advantage through the opportunity
cost of production specialization. The abundance and the productivity of a nation’s factors of

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production determine its opportunity cost of producing certain goods and services and hence
impact its comparative advantage.
i. The Kingdom of Saudi Arabia
The Kingdom of Saudi Arabia is heavily endowed with oil. The nation’s petroleum
reserves are ranked the second in the world and it’s the world’s largest petroleum exporter. Its
natural reserves are ranked fifth in the world. The nation is, therefore, an energy superpower and
the value of its natural resources is ranked the second in the world. Saudi Arabia has unskilled
labour force as a result of its poor education system. The nation depends on oversees labour
which is estimated to be 10.7 million with Saudis occupying only 3.1 million labour force. The
government of Saudi Arabia has improved entrepreneurship by easing business. It has also
increased its capital venture deals significantly. The nation, therefore, has a comparative
advantage in producing oil and petroleum products and also goods which use the capital
intensive production methods since the Saudi Arabian labour force is unskilled.
ii. Australia
Australia is abundantly blessed with mining minerals such as uranium, iron ore,
aluminum, nickel, silver, gold, diamonds, opal, copper, and silica among others. The nation has
intensive capital due to its continued innovation, especially in the mining industry. Its labour
force is also highly skilled since the nation’s education system has highly been improved with
compulsory education years being 16. The nation has a conducive environment for doing
business and its entrepreneurship is among the best in the world. The nation, therefore, has a

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comparative advantage in minerals production as well as products and services which use capital
and labour-intensive production methods.
“Is the factor-endowment theory a good predictor of trade patterns?”
Factor endowment theory is a good predictor of trade patterns. The theory bases its
argument on the fact that nations should major in producing goods which use its abundant
resources due to production efficiency which results in comparative advantage. Therefore,
considering the ratio of resource abundance for nations, the type of goods the nations are likely
to produce abundantly and trade-in, can be predicted with great certainty.
Additional trade theories which can be applied
“The Theory of Comparative Advantage”
This theory considers the opportunity cost in production. It is based on the fact that if a
nation can produce a certain good efficiently as compared to other goods, then it has a
comparative advantage in producing that good (Costinot & Donaldson, 2012). The theory can be
applied in predicting trade patterns since nations are likely to trade in goods for which they have
comparative advantage in production. The major challenge with this theory is that it assumes that
trade involves only two nations and that there are no trade barriers. International trade involves
many nations which may have trade barriers which may adversely affect trade even if
comparative advantage may exist.
“The Theory of Absolute Advantage”

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This theory considers the degree of production efficiency of two similar products by two
nations. A nation will have an absolute advantage in producing a certain good if it efficiently
produces that good as compared to the other nation (Schumacher, 2012) and therefore it would
be better if the other nation considered producing another good for which it has an absolute
advantage as well. This theory can be applied to predict trade patterns since nations are likely to
produce and trade goods for which they have absolute advantage. The major challenge of this
theory is its assumption of bilateral trade and the failure to consider barriers to trade which
adversely affect trading activities between nations.
“An Assessment of the aims of Saudi Vision 2030 in relation to factor endowment”
The Saudi Vision 2030 main aims include “a vibrant society, a thriving economy and an
ambitious nation”. Relating the factor endowment theory to the three aims, the government aims
at reducing the nation’s dependence on oil which accounts for almost half of its gross domestic
product. The government is also working towards improving its public service sectors of which
education is one of them in order to improve the skills of its labour force and reduce the oversees
labour dependence. The government also has a plan of increasing its expenditure on the
manufacturing equipment as a means of improving its capital. The government has also
encouraged the private sector and non-profit organizations to find opportunities for investment as
a way of promoting entrepreneurship in the nation.
Conclusion
The factor endowment theory bases its argument on the fact that nations are abundantly
endowed with different resources. The theory encourages nations to major in producing goods

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which use their abundant resources since the goods can be efficiently produced using abundant
resources. The factor endowment theory, absolute advantage and comparative advantage theories
can predict trade patterns with greater certainty. Australia and the Kingdom of Saudi Arabia have
been compared using the factor endowment theory and an assessment of the aims of the Saudi
Vision 2030 has also been done.
References
Costinot, A., & Donaldson, D. (2012). Ricardo's theory of comparative advantage: old idea, new
evidence. American Economic Review, 102(3), 453-58.
Ragland, C. B., Widmier, S. M., & Brouthers, L. E. (2015). A factor endowment approach to
international market selection. Journal of Strategic Marketing, 23(6), 497-511.
Schumacher, R. (2012). Adam Smith's theory of absolute advantage and the use of doxography
in the history of economics. Erasmus Journal for Philosophy and Economics, 5(2), 54-
80.