Economics Essay: Factor Endowment Theory and Trade Patterns

This essay delves into the factor endowment theory, a cornerstone of international economics. It explains how nations' resource endowments—including land, labor, capital, and entrepreneurship—influence their comparative advantage and trade patterns. The essay uses Saudi Arabia and Canada as case studies, analyzing their respective resource strengths (oil for Saudi Arabia, skilled labor and land for Canada) and how these impact their ability to produce goods and services at a lower opportunity cost. It examines the role of factor endowment in predicting trade, discussing other relevant theories like absolute and comparative advantage. Furthermore, the essay assesses the aims of Saudi Vision 2030 in relation to the factor endowment theory, particularly the vision of a thriving economy, a vibrant society, and an ambitious nation. The essay concludes that the factor endowment theory, along with other trade theories, is a good predictor of trade patterns, emphasizing the importance of resource abundance in determining a nation's economic specialization and trade activities.

Running head: ECONOMICS 1
FACTOR ENDOWMENT THEORY
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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.

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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

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has the largest land in the world with low population. This gives it a comparative advantage in
manufacturing forest products such as wood and lumber as compared to Saudi Arabia (Hessing
& Summerville, 2014). Its education system is of high quality and majority of Canadians are
highly skilled and are absorbed into the job market. This gives the nation a comparative
advantage in producing labour-intensive products as compared to Saudi Arabia whose labour
force is unskilled due to its poor education system.
“Is the factor-endowment theory a good predictor of trade patterns?”
Factor endowment theory is a good predictor of trade patterns. The theory is used in
determining nations’ comparative advantage which is an important determinant of trade (Li, Xin,
& Wu, 2010). According to comparative advantage, it would be beneficial if nations
concentrated in producing goods and services for which they have a lower opportunity cost as
compared with their trading partners. Considering the factor endowment theory, trade patterns
can be predicted with great certainty since nations are likely to deal with the exportation of
products which are abundantly available in them and therefore the theory is a good trade patterns
predictor.
Other theories which can be applied
The theory of Absolute Advantage
This theory was put forward by Adam Smith during the year 1776 and can be applied in
predicting trade patterns. This theory bases its argument on the fact that if two nations major in
producing two similar products but one nation can efficiently produce the product as compared
to the other, then the nation with higher efficiency in production is said to have absolute

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advantage and hence it is advisable for the other nation to specialize in producing another
product (Dong-sung & Hwy-Chang, 2013). This theory can, therefore, predict trade patterns
between nations by evaluating their absolute advantages.
One challenge of this theory is that it only considers bilateral trade but not multilateral
trade. It also does not consider protectionist measures by nations since it assumes free trade
between nations but trade is highly affected by trade barriers.
The theory of Comparative Advantage
This theory was put forward by David Ricardo during the year 1817 and can also be
applied when predicting trade patterns (Carbaugh, 2013). The theory considers the production of
two products and states that if a nation can produce one good efficiently than another, then it has
comparative advantage in the good whose production is efficient and the nation should major in
producing that good (Costinot & Donaldson, 2012). It can be used in predicting trade patterns
since nations are likely to trade products for which they have comparative advantage.
Its major challenges are similar to those of the absolute advantage theory since it assumes
only two nations are involved in trade and that there are no barriers to trade (Schumacher, 2012).
Assessing the aims of Saudi Vision 2030 in relation to factor endowment
The three aims of the Saudi Vision 2030 are “a vibrant society, a thriving economy and an
ambitious nation”. Saudi Arabia is majorly endowed with oil which accounts for about 50% of
the nation’s gross domestic product. Considering the factor endowment theory and the aim of the
thriving economy, Saudi Arabia is working towards reducing its dependence on oil sector by
encouraging businesses in the nation, especially by the private sector. Also, considering the

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theory and the vibrant society, the nation is working towards moderating its Islamic religion in
order to improve its education system and improve the labour market skills. Considering the
theory and the aim of an ambitious nation, the nation is encouraging its citizens, the private
sector and the non-profit organizations to explore opportunities for investments in the nation as a
means of spurring entrepreneurship.
Conclusion
The factor endowment theory recognizes that different nations are endowed with different
abundant resources. It suggests that nations should trade products which are abundant for them
and which can be produced efficiently from the locally available factors of production. The
factor endowment theory together with other trade theories such as the absolute advantage and
comparative advantage theories can be used to predict trade patterns with greater certainty. Saudi
Arabia and Canada have been compared based on the factor endowment theory and the aims of
the Saudi Vision 2030 assessed.

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References
Alamri, M. (2011). Higher education in Saudi Arabia. Journal of Higher Education Theory and
Practice, 11(4), 88-91.
Carbaugh, R. J. (2013). International Economics. 14. Aufl., South-Western (Cengage Learning).
Che, N. X. (2010). Factor Endowment, Structural Change, and Economic Growth.
Costinot, A., & Donaldson, D. (2012). Ricardo's theory of comparative advantage: old idea, new
evidence. American Economic Review, 102(3), 453-58.
Dong-sung, C., & Hwy-Chang, M. (2013). From Adam Smith to Michael Porter: evolution of
competitiveness theory (extended edition) (Vol. 7). World Scientific.
Hessing, M., & Summerville, T. (2014). Canadian natural resource and environmental policy:
political economy and public policy. UBC Press.
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Li, X., Xin, Z., & Wu, J. (2010, May). The significance of the comparative advantages in factor
endowment to the industrial structure. In 2010 International Conference on Service
Sciences (pp. 242-247). IEEE.
Morrow, P. M. (2010). Ricardian–Heckscher–Ohlin comparative advantage: Theory and
evidence. Journal of International Economics, 82(2), 137-151.

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Ramady, M. A. (2010). The Saudi Arabian economy: Policies, achievements, and challenges.
Springer Science & Business Media
Schumacher, R. (2012). Free trade and absolute and comparative advantage: a critical
comparison of two major theories of international trade (Vol. 16). Universitätsverlag
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