Question

This is Econ 310. CHAPTER 3

What is the Factor Endowment Theory?

Is the Factor Endowment

Theory a Good Predictor of Trade Patterns?

Answer 1

The factor endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage.

The factor endowment theory consists of two important theorems i.e. the Heckscher - Ohlin theorem and the factor price equilisation theorem.  The Heckscher - Ohlin theorem examines the resons for comparative cost differences in production and states that a country has comparative advantage in the production of that commodity which uses more intensively the country's more abundant factor.

The factor price equilisation theorem examines the effect of international trade on factor prices and states that free international trade equalises factor prices between countries, relatively and absolutely , and thus serves as a substitute for international factor mobility.

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Factor endowment theory is relatively successful in explaining trade between industrialized and developing countries . However, a large amount of international trade is not between industrialized and developing countries, but with industrialized countries with similar resource endowments . This suggests that the basis for trade is more complex than those illustrated in the basic factor endowment theory. Thus Factor Endowment Theory cannot be used as a good Predictor of Trade Patterns.