Question

1. What is the basis for comparative advantage in the Factor Endowment Model? In other words, what is different between countries that allow them to gain from trade with each other?

Answer 1

The Factor Endowment theory is used to decide by economists, which country should produce what type of goods and services. Comparative advantage refers to the advantage which a country has towards production of a good because of its resources which it usually has.

Every country is different in the pretext that the resources such as Capital and Labour are different in these countries. According to the Factor Endowment Theory, a country should produce more of those goods, at which it has an advantage in production so that the labour force can become specialized and the country can gain more profits from the same.

For example, when we compare two countries such as India and the United States, we are comparing the differences between labour and capital here.

The Capital in the United States is much higher than India or than most other economies across the globe. It thus, has an advantage of being able to produce goods such as computer systems, laptops etc the production requires significant capital which the country currently has.

In comparison, countries such as India are not capital rich and have an advantage in labour should invest in labour intensive techniques and products such as agriculture.

We can summarize the above discussion to say, that the factor endowment theory is a concept which compares resources between countries and advises them to produce those goods and services, the resources for which is in abundance in the country as it leads to better production levels as well as exports for the country.

Please feel free to ask your doubts in the comments section.