ECON 6: Comparative Analysis of KSA and Japan's Economies and Trade

This essay provides a comparative analysis of the economies of Saudi Arabia (KSA) and Japan, focusing on the application of the factor endowment theory to explain their respective comparative advantages in international trade. The essay argues that KSA has a comparative advantage in oil-related ...Read More

Running Head: ECONOMICS 1
Global Economy
Institutional Affiliation
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Date

ECONOMICS 2
Introduction
In this paper, the country of choice for comparison with Kingdom of Saudi Arabia (KSA)
is Japan. The factor endowment theory states that economies or countries own various types of
natural and artificial resources. However, the comparison between the countries’ possession of
resources varies from one resource to another. Most of the countries have got different portions
of labour and capital. In the economics context, resource endowment theory is used to attain
comparative advantage (Haber &Menaldo, 2011). With this, the theory by Hechsher- Olin states
that a single country is likely to get comparative advantage in the product which uses the
resource that is abundantly endowed. Besides, when determining comparative advantage, it is
very vital to recall that it is the portions of the resources that are considered. It is evident that
when a country is endowed heavily with resources that is to say capital and labor, it ma y have
more than one product than another country. However, when a country has got the advantage in a
product that utilizes the resource with which it is endowed heavily, the country is advised to
focus on the production of the specified good. This is because such a country is endowed with
such a factor, thus producing efficient good that may require factors of production (Kumai,
2018). For instance, the country which has got high portion of capital to labor is likely to be
more efficient in production of computers than it would be for maize production. On the other
hand, if such a country put emphasis in production of maize, it is likely to divert its capital that is
not for maize production into the sector where it is not efficiently used.
Comparison between KSA and Japan
It is evident that both countries of KSA and Japan have got different comparative
advantage of each other in different products. In this case, the Kingdom of Saudi Arabia has got
comparative advantage in exporting oil related products than Japan (Forense, 2018). However,

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Japan has also got comparative advantage over the exportation of automobiles compared to
Kingdom of Saudi Arabia (Haber & Menaldo, 2011). This is because the costs of producing
mineral fuels, fertilizers are relatively low since KSA has got resources than Japan which is not
heavily endowed with oil. Therefore, in relation to resource endowment theory, each country has
got comparative advantage in a product or a good that it is endowed heavily with its resources or
factors. When A country specifies in one product, it therefore depicts that a government is in
struggle of strengthening its export base.
Impact of resource endowments on comparative advantage
It is evident that a comparative advantage exists only when the opportunity cost of
specializing in a given commodity is lower than that of other countries. The occurrence of
comparative advantage is ideally affected by the resource endowment. It is believed that
abundance and cost of land, labor and capital reduces the cost of production thus having low
opportunity cost in relation to other country (Haber &Menaldo, 2011). Besides, there are other
factors that affect country’s comparative advantage and these may include the level of financial
system and the economies of scale. For instance, the oil producing countries that is to say Saudi
Arabia have got comparative advantage in chemicals and other related products (Kumai, 2018).
This is because its locally produced oil provides raw materials that are very cheap for chemicals
as compared to other countries with Oil. Due to this result, Saudi Arabia is competitive with
Japan and other countries without oil with their firms in chemical production, this is because
Saudi Arabia’s chemicals are not expensive thus making its opportunity cost very low (Aslaksen,
2010).

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The Goodness of Factor-Endowment theory as a predictor of Trade Patterns
Factor-endowment theory without any doubt is a predictor of the trade patterns among
the nations in the world. The endowment of natural resources plays a significant role in various
economies. However, the contribution of resource endowment theory may contribute to the
development of economies either positive or negative ways. Arguably, many countries such as
Saudi Arabia, Norway and Australia have acquired positive gains over the long period out of
their resource endowments (Aslaksen, 2010). However, some countries such as Azerbaijan,
Russia and Kazakhstan have acquired economic growth rates at the cost of institutional
development. In addition, some nations such as DR Congo, Sierra Leone and Angola’s natural
resources have been the habitat for conflicts with negative effects towards the society instead of
economic development.
Other theories about International trade and their challenges
The additional theories include theory of mercantilism and theory of absolute advantage.
The mercantilism theory gives the measures of wealth of the country by considering the size of
treasures accumulated (Aslaksen, 2010). It therefore encourages the nations to accumulate their
wealth statuses in order to increase on the exports and decrease imports.
Another theory is absolute advantage, his refers to the potential of the nation to produce a
product more effectively and efficiently than any other country
There are different challenges of theories of specialization and international trade. These
include the following; specialization in one good by the country may not result in efficient gains
as they advocate. In addition, the theories that production is done at full employment conditions,
this is not a true condition

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KSA initiatives
It is clear that one of the main KSA initiatives in place is the vision 2030. The 2030 gives
the roadmap to be followed that makes the goals set to be achieved in stipulated years. In
addition, the breakdown of the initiative of KSA is intended to cover all sectors in the country
(Kumai, 2018). These initiatives include diversification of the economy, free trade zones,
tourism and education reforms. It is evident that when such initiatives are properly attained, KSA
is likely to achieve its objectives in 2030. Trade initiative of KSA is hoped to provide good terms
with international market over its products through reduction tariffs (Forense, 2018). Also, the
free trade zone initiative is hoped to encourage more foreign direct investments in the country,
thus increasing on the productivity level of the country.
Conclusion
In summary, it is believed that the comparative advantage of KSA is in production of
chemical related products compared to Japan which is not endowed with oil. Besides, when the
country is endowed with resources inform of capital, technology, land and labor has got lower
opportunity costs since the cost of production are lowered.

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References
Amadeo, K.(2019). Comparative Advantage Theory and Examples. Retrieved from:
https://www.thebalance.com/comparative-advantage-3305915
Aslaksen, S. (2010). Oil and Democracy – More than a Cross-Country Correlation? Journal of
Peace Research, vol. 47(4).
Forense. (2018). 5 initiatives KSA must adopt/invest in. Retrieved from: https://forense.app/5-
initiatives-ksa-must-adopt-invest-in/
Haber, S. H. &Menaldo, V. A., (2011). Do Natural Resources Fuel Authoritarianism a
Reappraisal of the Resource Curs. Journal of American Political Science Review, Vol.
105, No. 1.
Kumai, P. (2018). Essay on Theories of International Trade. Retrieved from:
http://www.economicsdiscussion.net/essays/international-trade-essays/essay-on-theories-
of-international-trade/17910