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

“FACTOR ENDOWMENT THEORY” 3
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
comparative advantage in minerals production as well as products and services which use capital
and labour-intensive production methods.