Economics – Comparative Advantage
Assignment: Factor Endowment Theory
In a critical essay, you will select a country of your choice and will compare your chosen country to KSA in relation to the factor endowment theory. For each country, discuss:
What is the impact of resource endowments on comparative advantage?
Is the factor-endowment theory a good predictor of trade patterns?
What additional trade theories can be applied? Explain their main insights and challenges. As one of the trade initiatives in KSA, assess the aims of Saudi Vision 2030 in relation to factor endowment theory.
Directions:
Your essay is required to be four to five pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles.
Follow APA style guidelines.
Plagiarism is 0%.
Review the grading rubric to see how you will be graded for this assignment.
Assignment: Factor Endowment Theory
In a critical essay, you will select a country of your choice and will compare your chosen country to KSA in relation to the factor endowment theory. For each country, discuss:
1. What is the impact of resource endowments on comparative advantage?
2. Is the factor-endowment theory a good predictor of trade patterns?
3. What additional trade theories can be applied? Explain their main insights and challenges. As one of the trade initiatives in KSA, assess the aims of Saudi Vision 2030 in relation to factor endowment theory.
Directions:
Your essay is required to be four to five pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles.
Follow APA style guidelines.
Plagiarism is 0%.
Review the grading rubric to see how you will be graded for this assignment. 9/26/2020 Originality Report
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Critical Thinking-Module 03- Mohammed Al-Ghamdi – G200001237 – CRN 13936.docx
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1 Student paper 5 Student paper 6 Student paper
Running head: THE THEORY OF FACTOR ENDOWMENT 1
THE THEORY OF FACTOR ENDOWMENT 2
Factor Endowment Theory Mohammed Ali Hussien Al-Ghamdi
Steudent ID: G200001237
Saudi Electronic University
Course: ECN-500
CRN: 13936
Date: 26 September 2020
Factor Endowment Theory Factor Endowment Theory is considered as a significant trade feature that can be used by nations to determine how rich they are
likely to be wealthy based on the various resources the nation has. Based on the economic perspective, the distribution opinions, particularly labor to capital
distribution, has different ratios within different countries (Ragland et al., 2015). According to Ragland, argued that those nations whose prerequisite
components of manufacturing certain products and services mostly have much ratio gains compared to those nations who lack such resources. He gave some
examples such as Saudi Arabia, which have oil resources and tend to have a comparative advantage than those without oil resources. Factor Endowment
Theory has various benefits to the nations. Some of the benefits are that the theory is an essential factor in determining the comparative advantage in the
country. Factor Endowment Theory helps the national government to determine the possibility of having a comparative advantage when it uses the resources
that are much endowed in the nation, and the Factor Endowment Theory is also helpful during the evaluation of the nation comparative advantage using the
ratio obtained from the theory. Comparing the USA and KSA about the Factor Endowment Theory simplified by the state of the British economic scholar accepts
that some differences exist in the productivity of the nations. There are no particular products and commodities that the nation should export and import.
Comparing the relation to Factor Endowment Theory between USA and KSA, the paper will discuss some of the issues such as the effect of the theory on the
competitive advantage between the two nations, application of the theory together with some issues and insights experienced in the trade, among other
important questions. Impact of Resource Endowments on Comparative Advantage
A nation is believed to have a comparative advantage in producing its goods if its opportunity cost for producing a particular product or service is less than
any other product it could have created with the given resources. A nation with comparative advantage is considered to make a worthy trade-off. The
difference in value between the prices of an actual product using given resources minus the highest price that can be attained using similar resources is called
the opportunity cost. The factor endowment model suggests that a country only exports products that abundant and those that require less and cheap
i d ti h it i t d t th t d d d l bl i d ti (L 1989) C i th
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resources in production, whereas it imports products that are scarce and need more and valuable resources in production (Looney, 1989). Comparing the
Saudi Arabia Kingdom (KSA) to the United States of America (USA), Saudi Arabia has a comparative advantage in producing oil while the United States’
comparative advantage is in corn and other agricultural products. This means that KSA uses fewer resources to produce a barrel of oil, and the U.S. also
uses less to produce one bushel of corn. The factor endowment impacts a country’s comparative advantage directly, affecting the opportunity cost of
specialization in producing specific goods instead of others. KSA has a relative advantage in oil since its opportunity cost of concentrating on oil production
is lower than in other countries. Other factors, such as an abundance of land and capital, also affect the comparative advantage and may not be a constraint.
However, physical obstacles such as less workforce and inflation rates have blocked KSA from reaching its full economic capacity. It hopes that massive
industrial development in petrochemical products will open more significant opportunities in manufacturing. The presence of approximately 40 percent crude
oil reservoirs globally is a resource endowment enough to support the venturing into the manufacturing industry of petrochemicals (Looney, 1989). It
exports oil in abundance and focuses all its resources on oil production. KSA labor force and skills are gradually growing, and the wages have risen due to
intensive capital procedures, which are steady relative to factor endowments. The competitiveness of the U.S and its comparative advantage on the
international scale is quite debatable and mostly expressed concerning its place in low-cost production. U.S comparative advantage and international cost are
affected by exchange rates and physical capital, as Dunmore (1986) says. Falling of the dollar increases its position in the global market while as the dollar rises,
its position falls. The U.S has a comparative advantage in producing corn and wheat. The average production of the U.S in labor has increased over time by
thirty-nine percent compared to other countries. Nonetheless, Dunmore (1986) also suggests that the U.S is not as competitive in agriculture as it was in the
1980s due to debts in the third world countries, foreign production, the rising value of the U.S.
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dollar, overseas policies in agriculture. Factor-Endowment Theory as a Good Predictor of Trade Patterns The flow of a nation’s exports and imports
illustrates the patterns of trade. Several national and international economies have grown through engaging in business. The factor endowment theory
demonstrates the various ratios of labor to capital. It also talks about changes in the prices of goods relative to wages and rents. Hecksher-Ohlin estimates
trade equilibrium between countries that vary in trade specialization (Suranovic, 1997). The model also expounds on how a country should trade with
imbalanced resources globally. The model predicts patterns of trade between nations. The price of a commodity from a capital-abundant country tends to be
low in a labor-abundant country and vice versa. So, firms will shift to markets with higher rates, thereby increasing trade flows to the level of equilibrium. For
Saudi Arabia, this model indicates it should venture into oil and gas industries more than other commodities due to its opportunity cost. The oil and gas
industries are more likely to succeed since they utilize both financial profits and raw materials. By the early 1970s, the expected Ohlin’s pattern of trade
had not yet been experienced in KSA, and the pricing system could not predict the best areas of investment due to lack of experience in substantial industrial
investments. Through the KSA’s five year plan, there were desirable results such as increased labor force by reduced foreign labor, with an annual rate of 8%.
The service industry and financial services had grown in terms of shares on total employment. The U.S agricultural industries are undergoing a moment of
market adjustments whereby the foreign demand for import is low, prices of land are equally falling, and farmers are quitting the industry. The value of U.S
agricultural exports has been declining since the 1980s by approximately 40 percent. Thus, comparative advantage is about a country’s specialization and
trade patterns from an ingenious world. Comparative advantage defines prices and how they should be without distortion by policies which are quite the
opposite from the real world. The U.S is not free of policies as well; hence, the government amends prices as often as is required. This theory then predicts the
U.S is an exporter of goods that are capital-intensive and an importer of labor-intensive products. What Additional Trade Theories Can Be Applied: Explain the
Main Insights and Challenges. Different trade theories, such as the Absolute Trade Theory by Adam Smith that focuses on the capacity of a country to produce
goods better than another country, can also apply in place of the factor endowment theory. For example, in this case, Saudi Arabia should specialize in oil
production better than the United States, and the United States should also focus on the production of agricultural products more efficiently than Saudi Arabia.
He argued that specialization of a specific commodity would develop more skilled labor and better production methods. However, the main challenge of the
theory was that it reasoned that government policy shouldn’t be used to regulate trade activities between countries. However, the idea cannot be applicable in
the modern-day world. A country’s trade ought to be governed by policies and restrictions for efficiency. Evaluate the Aims of Saudi Arabia Vision 2030 Relating
to Factor Endowment Theory Saudi Arabia Vision 2030 key goal is a reduction in its oil dependence, to diversify the economy and find other industries it can
specialize in, and improve public service, mostly in education, tourism, health, and infrastructure. It envisions strengthening its investment in different sectors
other than oil. Also, it purposes to create trade exchanges between countries using consumer goods, directing the government’s expenditure towards military
ammunition through the manufacturing of missiles. The vision has three major pillars: describes the state as the centre of the Islamic world, envisions being the
worldwide pillar of investment, and its determination in being the focal point of trade connecting Europe, Asia, and Africa (El Atouabi, 2014). The economic
targets emphasized on the Vision 2030 remain to be purely commercial. Saudi Arabia’s position continues to be the primary growth instrument in the United
Arab Emirates region. By diversifying its economy, it will create a free trade zone. The vision seeks a quick execution of economic transformations
that could otherwise be achieved over a more extended period, affecting credibility and efficiency. This is so because the modifications cannot be made without
altering the political status. However, the government is willing to broaden its scope in terms of communication and citizen engagement. KSA is already open to
international trade due to its revenues from oil. The vision is then a platform for even higher chances, especially bridging the gap between Europe, Asia,
and Africa. The concept also aims at tackling unemployment of youth, who, according to Moshashai (2018), covers about seventy percent of the
population;
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this means the labor force is set to grow. The non-oil industries are set to employ the local community using both direct and overseas investments.
Diversification of the economy will expand the manufacturing sector to higher heights, especially the military gear. Moshashai (2018) posits that Saudi imports
approximately ninety-eight percent of its military paraphernalia. This means that if it starts manufacturing its own, the labor force will be the most impacted
since it will employ more nationals.
References
Dunmore, J. C. (1986). Competitiveness and comparative advantage of U.S. agriculture (No. 791-2016-52215, pp. 21-34). El Atouabi, M. (2014).
Saudi Arabia’s Vision 2030: The Road to a New Economic Paradigm in the Middle East?. Looney, R. E. (1989). Saudi Arabia’s development strategy:
comparative advantage vs. sustainable growth. Naval Postgraduate School in Monterey, CA. Moshashai, D., Leber, A. M., & Savage, J. D. (2018). Saudi
Arabia devices for its economic future: Vision 2030, the National Transformation Plan, and Saudi fiscal reform. British Journal of Middle Eastern Studies, 1-21.
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. https://www.tandfonline.com/doi/abs/10.1080/0965254X.2014.1001860
Suranovic, S. (1997). International trade theory and policy analysis. Chapter-60:” The Heckscher-Ohlin (Factor Proportions) Model,” The International
Economics Study Center, The George Washington University, Available URL: http://internationalecon. com/v1. 0/ch5/ch5. HTML Accessed on, 20, 13.
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THE THEORY OF FACTOR ENDOWMENT
1
Original source
THE THEORY OF FACTOR ENDOWMENT
1
2
Student paper
THE THEORY OF FACTOR ENDOWMENT
2
Original source
Factor Endowment Theory 2
3
Student paper
Saudi Electronic University
Original source
Saudi Electronic University
4
Student paper
26 September 2020
Original source
26 September 2020
2
Student paper
Impact of Resource Endowments on
Comparative Advantage
Original source
The Impact of Resource Endowments
on Comparative Advantage
1
Student paper
A nation is believed to have a
comparative advantage in producing its
goods if its opportunity cost for
producing a particular product or
service is less than any other product it
could have created with the given
resources.
Original source
A country is believed to have a
comparative advantage in producing its
goods if its opportunity cost for
producing a particular product or
service is less than any other product it
could have created with the given
resources
1
Student paper
The difference in value between the
prices of an actual product using given
resources minus the highest price that
can be attained using similar resources
is called the opportunity cost. The
factor endowment model suggests that
a country only exports products that
abundant and those that require less
and cheap resources in production,
whereas it imports products that are
scarce and need more and valuable
resources in production (Looney, 1989).
Original source
The difference in value between the
prices of an actual product using given
resources minus the highest price that
can be attained using similar resources
is called the opportunity cost The factor
endowment model suggests that a
country only exports products that
abundant and those that require less
and cheap resources in production
whereas it imports products that are
scarce and need more and valuable
resources in production (Looney, 1989)
5
Student paper
Comparing the Saudi Arabia Kingdom
(KSA) to the United States of America
(USA), Saudi Arabia has a comparative
advantage in producing oil while the
United States’
Original source
Comparing the Saudi Arabia Kingdom
(KSA) to the United States of America
(USA), Saudi Arabia has a comparative
advantage in producing oil while the
United States comparative advantage is
in corn production and other
agricultural products
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Student paper 94%
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1
Student paper
This means that KSA uses fewer
resources to produce a barrel of oil,
and the U.S.
Original source
This means that KSA uses fewer
resources to produce a barrel of oil,
and the US also uses less to produce
one bushel of corn
5
Student paper
The factor endowment impacts a
country’s comparative advantage
directly, affecting the opportunity cost
of specialization in producing specific
goods instead of others.
Original source
The factor endowment impacts a
countrys comparative advantage
directly, affecting the opportunity cost
of specialization in the production of
specific goods instead of others
1
Student paper
KSA has a relative advantage in oil since
its opportunity cost of concentrating on
oil production is lower than in other
countries. Other factors, such as an
abundance of land and capital, also
affect the comparative advantage and
may not be a constraint. However,
physical obstacles such as less
workforce and inflation rates have
blocked KSA from reaching its full
economic capacity. It hopes that
massive industrial development in
petrochemical products will open more
significant opportunities in
manufacturing.
Original source
KSA has a relative advantage in oil since
its opportunity cost of concentrating on
oil production is lower than in other
countries Other factors such as an
abundance of land and capital also
affect the comparative advantage and
may not be a constraint However,
physical obstacles such as less
workforce and inflation rates have
blocked KSA from reaching its full
economic capacity It hopes that
massive industrial development in
petrochemical products will open more
significant opportunities in
manufacturing
1
Student paper
The presence of approximately 40
percent crude oil reservoirs globally is a
resource endowment enough to
support the venturing into the
manufacturing industry of
petrochemicals (Looney, 1989).
Original source
The presence of approximately over 40
percent crude oil reservoirs globally, is
a resource endowment enough to
support the venturing into the
manufacturing industry of
petrochemicals (Looney, 1989)
5
Student paper
It exports oil in abundance and focuses
all its resources on oil production.
Original source
It exports oil in abundance and focuses
all its resources on oil production
1
Student paper
KSA labor force and skills are gradually
growing, and the wages have risen due
to intensive capital procedures, which
are steady relative to factor
endowments. The competitiveness of
the U.S and its comparative advantage
on the international scale is quite
debatable and mostly expressed
concerning its place in low-cost
production. U.S comparative advantage
and international cost are affected by
exchange rates and physical capital, as
Dunmore (1986) says. Falling of the
dollar increases its position in the
global market while as the dollar rises,
its position falls.
Original source
KSA labor force and skills are gradually
growing, and the wages have risen due
to capital intensive procedures which
are steady relative to factor
endowments The competitiveness of
the U.S and its comparative advantage
in the international scale is quite
debatable and mostly expressed
concerning its place in low-cost
production U.S comparative advantage
and international cost are affected by
exchange rates and physical capital, as
Dunmore (1986) says Falling of the
dollar increases its position in the
global market while as the dollar rises,
its position falls
9/26/2020 Originality Report
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Student paper 94%
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1
Student paper
The U.S has a comparative advantage in
producing corn and wheat. The average
production of the U.S in labor has
increased over time by thirty-nine
percent compared to other countries.
Nonetheless, Dunmore (1986) also
suggests that the U.S is not as
competitive in agriculture as it was in
the 1980s due to debts in the third
world countries, foreign production, the
rising value of the U.S.
Original source
The U.S has a comparative advantage in
producing corn and wheat The average
production of the U.S in terms of labor
has increased over time by thirty-nine
percent compared other countries
Nonetheless, Dunmore (1986) also
suggests that the U.S is not as
competitive in agriculture as it was in
the 1980s due to debts in the third
world countries, foreign production, the
rising value of the US dollar, overseas
policies in agriculture
5
Student paper
Factor-Endowment Theory as a Good
Predictor of Trade Patterns The flow of
a nation’s exports and imports
illustrates the patterns of trade.
Original source
The flow of a nations exports and
imports illustrates the patterns of trade
1
Student paper
Several national and international
economies have grown through
engaging in business. The factor
endowment theory demonstrates the
various ratios of labor to capital. It also
talks about changes in the prices of
goods relative to wages and rents.
Hecksher-Ohlin estimates trade
equilibrium between countries that
vary in trade specialization (Suranovic,
1997).
Original source
Several national and international
economies have grown through
engaging in business The factor
endowment theory demonstrates the
various ratios of labor to capital It also
talks about changes in the prices of
goods relative to wages and rents
Hecksher-Ohlin estimates trade
equilibrium between countries that
vary in trade specialization (Suranovic,
1997)
1
Student paper
The model also expounds on how a
country should trade with imbalanced
resources globally. The model predicts
patterns of trade between nations. The
price of a commodity from a capital-
abundant country tends to be low in a
labor-abundant country and vice versa.
So, firms will shift to markets with
higher rates, thereby increasing trade
flows to the level of equilibrium.
Original source
The model also expounds on how a
country should trade with imbalanced
resources globally The model predicts
patterns of trade between nations The
price of a commodity from a capital-
abundant country tends to be low in a
labor-abundant country and vice versa
So, firms will shift to markets with
higher rates, thereby increasing trade
flows to the level of equilibrium
1
Student paper
For Saudi Arabia, this model indicates it
should venture into oil and gas
industries more than other
commodities due to its opportunity
cost.
Original source
For Saudi Arabia, this model indicates it
should venture into oil and gas
industries more than other
commodities due to its opportunity
cost
5
Student paper
The oil and gas industries are more
likely to succeed since they utilize both
financial profits and raw materials.
Original source
The oil and gas industries are more
likely to succeed since they utilize both
financial profits and raw materials
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Student paper 100%
Student paper 100%
Student paper 100%
Student paper 100%
Student paper 99%
1
Student paper
By the early 1970s, the expected Ohlin’s
pattern of trade had not yet been
experienced in KSA, and the pricing
system could not predict the best areas
of investment due to lack of experience
in substantial industrial investments.
Through the KSA’s five year plan, there
were desirable results such as
increased labor force by reduced
foreign labor, with an annual rate of
8%. The service industry and financial
services had grown in terms of shares
on total employment. The U.S
agricultural industries are undergoing a
moment of market adjustments
whereby the foreign demand for import
is low, prices of land are equally falling,
and farmers are quitting the industry.
Original source
By the early 1970s, the expected Ohlin’s
pattern of trade had not yet been
experienced in KSA, and the pricing
system could not predict the best areas
of investment due to lack of experience
in substantial industrial investments
Through the KSAs five year plan, there
were desirable results such as
increased labor force by reduced
foreign labor, with an annual rate of 8%
The service industry and financial
services had grown in terms of shares
on total employment The U.S
agricultural industries are undergoing a
moment of market adjustments
whereby the foreign demand for import
is low, prices of land are equally falling,
and farmers are quitting the industry
1
Student paper
The value of U.S agricultural exports
has been declining since the 1980s by
approximately 40 percent.
Original source
The value of U.S agricultural exports
has been declining since the 1980s by
approximately 40 percent
5
Student paper
Thus, comparative advantage is about a
country’s specialization and trade
patterns from an ingenious world.
Original source
Thus, comparative advantage is about a
countrys specialization and trade
patterns from an ingenious world
1
Student paper
Comparative advantage defines prices
and how they should be without
distortion by policies which are quite
the opposite from the real world. The
U.S is not free of policies as well; hence,
the government amends prices as often
as is required. This theory then predicts
the U.S is an exporter of goods that are
capital-intensive and an importer of
labor-intensive products.
Original source
Comparative advantage defines prices
and how they should be without
distortion by policies which are quite
the opposite from the real world The
U.S is not free of policies as well hence,
the government amends prices as often
as is required This theory then predicts
the U.S is an exporter of goods that are
capital-intensive and an importer of
labor-intensive products
1
Student paper
What Additional Trade Theories Can Be
Applied: Explain the Main Insights and
Challenges. Different trade theories,
such as the Absolute Trade Theory by
Adam Smith that focuses on the
capacity of a country to produce goods
better than another country, can also
apply in place of the factor endowment
theory. For example, in this case, Saudi
Arabia should specialize in oil
production better than the United
States, and the United States should
also focus on the production of
agricultural products more efficiently
than Saudi Arabia.
Original source
What Additional Trade Theories Can Be
Applied Explain the Main Insights and
Challenges Additional trade theories
such as the Absolute Trade Theory by
Adam Smith that focuses on the
capacity of a country to produce goods
better than another country can also
apply in place of the factor endowment
theory For example, in this case, Saudi
Arabia should specialize in oil
production better than the United
States and the United States should
also focus on the production of
agricultural products more efficiently
than Saudi Arabia
9/26/2020 Originality Report
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Student paper 100%
Student paper 99%
Student paper 99%
Student paper 100%
Student paper 98%
1
Student paper
He argued that specialization of a
specific commodity would develop
more skilled labor and better
production methods. However, the
main challenge of the theory was that it
reasoned that government policy
shouldn’t be used to regulate trade
activities between countries. However,
the idea cannot be applicable in the
modern-day world. A country’s trade
ought to be governed by policies and
restrictions for efficiency.
Original source
He argued that specialization of a
specific commodity would develop
more skilled labor and better
production methods However, the
main challenge of the theory was that it
reasoned that government policy
shouldnt be used to regulate trade
activities between countries However,
the idea cannot be applicable in the
modern-day world A countrys trade
ought to be governed by policies and
restrictions for efficiency
1
Student paper
Evaluate the Aims of Saudi Arabia
Vision 2030 Relating to Factor
Endowment Theory Saudi Arabia Vision
2030 key goal is a reduction in its oil
dependence, to diversify the economy
and find other industries it can
specialize in, and improve public
service, mostly in education, tourism,
health, and infrastructure. It envisions
strengthening its investment in
different sectors other than oil. Also, it
purposes to create trade exchanges
between countries using consumer
goods, directing the government’s
expenditure towards military
ammunition through the
manufacturing of missiles. The vision
has three major pillars:
Original source
Evaluate the Aims of Saudi Arabia
Vision 2030 Relating to Factor
Endowment Theory Saudi Arabia Vision
2030 key goal is a reduction in its oils
dependence, to diversify the economy
and find other industries it can
specialize in, and improve public service
mostly in education, tourism, health,
and infrastructure It envisions
strengthening its investment in
different sectors other than oil Besides,
it also purposes to create trade
exchanges between countries using
consumer goods, directing the
governments expenditure towards
military ammunition through the
manufacturing of missiles The vision
has three major pillars
1
Student paper
describes the state as the centre of the
Islamic world, envisions being the
worldwide pillar of investment, and its
determination in being the focal point
of trade connecting Europe, Asia, and
Africa (El Atouabi, 2014). The economic
targets emphasized on the Vision 2030
remain to be purely commercial. Saudi
Arabia’s position continues to be the
primary growth instrument in the
United Arab Emirates region.
Original source
describes the state as the center of the
Islamic world, envisions being the
worldwide pillar of investment, and its
determination in being the focal point
of trade connecting Europe, Asia and
Africa (El Ato
