Question

compare your Saudi Arabia and Brazil 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 Saudi Arabia assess the aims of Saudi Vision 2030 in relation to factor endowment theory.

It is required to be four pages in length and plagiarism is not allowed.

Answer 1

First let's understand what is factor endowment theory?

Factor endowment theory: It states that countries are abundant in different types of resources. So, it is obvious that countries will have different capital to labor ratio. It is used to understand countries's comparative advantage.

It is evident that there is difference between productivity of countries. Some countries have advantage because they are richly endowed with certain natural resources.

Countries like Saudi Arabia with plenty of oil reserves can produce oil very cheaply.

For Brazil, factor endowment lies in capital,land and unskilled labour.

For both the countries, their factor endowment helped them in comparative advantage and export of these resources for maintaining their financials.

Saudi Arabia's inexpensive production of oil helped them gain comparative advantage over other countries and export oil to finance their imports and gain high revenue.

Similarly, Brazil's factor endowment in land, capital and unskilled labour helped it to export these things to gain comparative advantage.

Yes, factor endowment theory is a good predictor of trade patterns. It is used to determine comparative advantage between countries. It states that the country will have comparative advantage in a resource with which it is heavily endowed. A country should focus on the good in which it has comparative advantage. Because it is heavily endowed with the resource that is involved in producing that good, it will have comparative advantage.

Other trade theories that can be applied are:

• Mercantilism
• Absolute Advantage
• Comparative Advantage
• International Product Cycle
• National Competitive Advantage

Mercantilism: It states that country's wealth is determined by its gold and silver holdings. Mercantilism perfectionist theory only benefits a selected few industries while advocates of free trade ensures how all the members of global community benefits.

Absolute Advantage: It involves ability of a country to produce a good more efficiently than other countries of the world. It assumed that only bilateral trade was possible between countries and only two goods are to be exchanged.

Comparative Advantage: It occurs when a country can not produce a good more efficiently than other country, however it can produce that good more economically than other goods.

But it didn't let countries know which product would give the country an advantage.

International Product Cycle: It states that product goes through different stages during its course. However, it is difficult for a country to know a product's stage in the life cycle.

National Competitive Advantage: It states that qualities of the home country are vital to the success of the company.

A nation's competitiveness is based on the ability of its industries to innovate and upgrade.

Saudi Arabia's vision 2030 is going to be the most comprehensive economic reforms package. It involves privatising entire sectors for raising non oil revenues and cutting subsidies. It also involves going public with national oil company I.e., Saudi Aramco. The oil industry is expecting a little downward trend in coming years and surge in youth in coming years. Thus Saudi is concentrating on unemployment.