Factor endowment theory
This theory explains that a country will export goods that intensively use its abundant factors of production and import goods that intensively use its scarce factors.
What is the Factor Endowment Theory?
This theorem predicts that trade liberalization benefits the owners of abundant factors and harms the owners of scarce factors in a country.
What is the Stopler-Samuelson Theorem?
This is the definition of comparative advantage in international trade.
What is the ability of a country to produce a good at a lower opportunity cost than another country?
According to the Factor Endowment Theory, if a country has an abundance of this, it will likely export agricultural products.
What is land?
According to the Stopler-Samuelson Theorem, when a country opens up to trade, the real wage of this factor (abundant in the country) will increase.
What is the abundant factor (e.g., skilled labor or capital in developed countries)?
This key economist is credited with developing the theory of comparative advantage.
Who is David Ricardo?
The theory argues that countries will specialize in producing and exporting goods that require a lot of this factor, such as skilled workers or engineers.
What is human capital or skilled labor?
This is the predicted effect on the real wage of the scarce factor in a country that opens up to trade, according to the Stopler-Samuelson Theorem.
What is a decrease in real wages?
According to the principle of comparative advantage, a country should specialize in producing and exporting goods that it can produce at this relative cost compared to other countries.
What is a lower opportunity cost?
This country is often used as an example of a nation with abundant natural resources, which allows it to specialize in oil production.
What is Saudi Arabia?
The Stopler-Samuelson Theorem is based on the idea that trade affects the return to factors differently depending on their abundance. In the context of a country with abundant capital and scarce labor, this factor would benefit from trade.
What is capital?
If two countries have identical opportunity costs for producing two goods, then neither country would have this in the production of those goods.
What is a comparative advantage?
The Factor Endowment Theory suggests that a country's comparative advantage comes from its relative abundance of these resources, and the resulting exports can lead to increased national income.
What are factors of production (land, labor, capital, and technology)?
This is the primary reason why the Stopler-Samuelson Theorem predicts that trade liberalization may lead to income inequality within countries.
What is the unequal distribution of factor endowments and their differing impacts on wages and income?
This happens when two countries trade based on comparative advantage, leading to a gain in overall production and consumption for both, even if one country is more efficient at producing both goods.
What is the gains from trade?