Factor Endowment Theory

Running head: ECONOMICS 1
FACTOR ENDOWMENT THEORY
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FACTOR ENDOWMENT THEORY 2
Introduction
Nations are endowed with various different resources. According to the factor
endowment theory, nations have abundant different resource types. Factor endowment refers to
factors of production which namely include land, labour, capital and entrepreneurship. The factor
endowment theory majors most on capital to labour ratios that a given country has. The theory is
used in explaining the nations’ comparative advantage. According to the theory, a nation is said
to have a comparative advantage if it majors in production of goods and services which utilize
the factors of production for which it is heavily endowed with (Che, 2010).
In this essay, Canada and the Kingdom of Saudi Arabia have been compared based on the
factor endowment theory. The impact of their resource endowments on comparative advantage
for these two nations and relevant other trade theories have also been discussed. Also, a
discussion on whether the factor endowment theory can be a good predictor of the trade patterns
has been done. The aims of the Saudi Vision 2030 in relation to the factor endowment theory
have also been discussed.
“The impact of resource endowment on comparative advantage”
A nation is said to have a comparative advantage in producing a certain good or service if
it can produce the good or service at a lower opportunity cost as compared to the other nations
(Morrow, 2010). Comparative advantage enables a nation to sell its commodities cheaply as
compared to its trading partners and hence increase its sales and make more profit. Resource
endowment impacts comparative advantage in that the abundance and productivity of the factors
of production is a key determinant factor of comparative advantage.

FACTOR ENDOWMENT THEORY 3
The Kingdom of Saudi Arabia
The Kingdom of Saudi Arabia is among the richest economies not only in the Middle
East and North Africa region but also in the whole world. It is ranked position 18 in terms of the
gross domestic product in the world and position 9 out of the 14 nations in the Middle East and
North Africa region. In terms of resource endowment, Saudi Arabia is abundantly endowed with
oil (Ramady, 2010). The nation is ranked position two in terms of petroleum reserves and is the
largest petroleum exporter in the world. The nation is also ranked position five in terms of
natural gas reserves and is an energy superpower with the value of its natural resources being
ranked position two in the world. In terms of labour, Saudi Arabia has continued to suffer from
unskilled labour force due to its poor education system (Alamri, 2011). Majority of Saudi
Arabian young locals lack skills which match the desired labour market requirements and hence
most employers depend on labour force from oversees. Entrepreneurship is on the rise in Saudi
Arabia and the nation’s capital venture deals have increased by one percent as compared to 2017.
Therefore, considering resource endowment, The Kingdom of Saudi Arabia has comparative
advantage in oil and petroleum products and capital intensive goods since its labour force is still
lagging behind.
Canada
Canada is among the richest nations not only in the Americas region but also in the whole
world. The nation is ranked position one in the Americas region and position ten in the world in
terms of gross domestic product. Considering the resource endowment, Canada is endowed with
Petroleum reserves and is among the top exporters of natural gas. The nation is also considered
an energy superpower but it’s below Saudi Arabia in terms of energy production. The nation also