Factor Endowments And Effect On Trade

FACTOR ENDOWMENTS AND EFFECTS ON TRADE PATTERNS Presented by Rudo Chengeta

Presentation Outline 1. Introduction 4. Factor Endowments in UK, China and USA 2. Effects of FE on trading patterns 3. Literature Review 5. Conclusion

Introduction: What are factor endowments?
Factors available for production (Reeve 2002, Davis & Weinstein 2000)
Combination of these resources (land, labour, capital and enterprise)
Relationship between ends (wants) and scarce means (resources) which have alternative uses. (Prof. Samuelson).

Determinants of Factor Endowments…
geographical features
e.g climatic conditions and natural resources
historical development and political stability
social and demographic issues
economic development
entrepreneurial skills and freedom

Factor Endowments: Key Terms… Factor Intensity Factor intensity is the relative importance of one factor versus others in production in an industry, usually compared across industries. (Glossary of International Economics) Factor Abundance Factor abundance relates to available factors in large supply and is usually meaningful only in relative terms, compared to demand and/or to supply at another place or time.

Effects of Factor Endowments… Production Major determinant of production Factor Endowments Trade Affects trade, industrial output and policies

Importance of Factor Endowments… Trade Consistent with Ricardo’s model Abundant resources International trade Comparative cost advantage Exchange Outputs Differences in factor endowments

Comparative Advantage Theory…
Developed by David Ricardo in 1817
Based on relative efficiencies of production
Each country has a comparative advantage
Opportunity cost.
Specialisation pays
10 (-5) (net gain) 40 (+15) (net gain) Total output 10 (+5) 0 (-5) China 0 (-10) 40 (+20) Australia Cloth (units) Wheat (units)

Competitive Advantage Theory…
Porter (1990) argues
competitive advantage
an important factor
in international trade
Model based on
lower costs
technological innovation and
product differentiation

Factor Accumulation…
Romalis (2004) provides a quasi-Rybczynski prediction
if a country accumulates a factor more rapidly than the rest of the world, then that country's production and exports will systematically shift toward industries that more intensively use that factor.
Comparative advantage changes over time through factor accumulation.
Expanded Euro-economy: UK, Germany, Poland, Spain and Ireland.
Asia better example of factor accumulation as the process takes time

Heckscher-Ohlin (H-O) theorem… Factor Exports (H-O theorem "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good." Factor proportions model which links exports and imports to factor endowments A country exports those commodities produced with relatively large quantities of the country’s relatively abundant factor.

Leontief’s O-M Theory … American exports require higher proportion of labour to capital than imports. k m = 1.30 k x Leontief used 1947 American economic data and aggregated industries into 50 sectors America is not more capital -intensive than the rest of the world Test Findings Conclusion

Leontief’s Paradox…

U.K’s Factors…
Britain largely trading on
ideas, knowledge and
technology-related products.
Business and financial services is the largest sector of the UK economy.
The UK financial services sector enjoys a significant net trade surplus, FSA (2005)
London is the world's largest financial centre.

Factor Endowments: China…
Rich in human resources – population 1.3 billion in July 2008
Factor endowments vary widely between regions
Developing industrial research institutes and more advanced factories
Table shows comparative advantage index of labor force intensive products
Source: Statistical Yearbook of China 1998 0.81 0.92 0.56 1.71 1.85 1997 0.80 0.92 0.55 1.66 1.82 1996 0.75 0.88 0.55 1.67 1.82 1995 0.75 0.85 0.52 1.77 1.82 1994 0.75 0.86 0.54 1.73 1.80 1993 0.73 0.87 0.58 1.77 1.77 1992 0.75 0.90 0.59 1.69 1.60 1991 0.73 0.90 0.56 1.69 1.54 1990 0.69 0.91 0.59 1.81 1.43 1989 0.63 0.94 0.64 1.73 1.43 1988 0.65 0.94 0.64 1.71 1.40 1987 0.64 1.00 0.62 1.62 1.36 1986 0.65 1.09 0.61 1.67 1.19 1985 0.68 1.10 0.62 1.59 1.48 1984 0.71 1.17 0.67 1.58 1.58 1983 0.73 1.24 0.73 1.49 1.59 1982 0.75 1.20 0.70 1.87 1.62 1981 0.77 1.22 0.68 1.74 1.53 1980 USA Japan Taiwan India China

U.S.A Factor Endowments… Comparative advantage Technology intensive More Scientific Higher K/L Import ratio comparative advantage based on certain skills and certain natural resources net exports in technology-intensive products reflect America's relative abundance of scientific and related personnel K/L of import substitutes 30% higher than that of exports.

Top US Trade Partners…

Conclusion…
Factor endowments are an important determinant in production and affects trade patterns in different countries.
The theoretical and empirical literature on factor endowments confirm this.
The literature survey is very useful for drawing up research methods and basis for arguments and comparisons for research purposes.

Thank You !

Factor Endowments And Effect On Trade

by RChengeta on Mar 23, 2009

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