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? ,[object Object],[object Object],[object Object]

Determinants of Factor Endowments… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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… ,[object Object],[object Object],[object Object],[object Object],[object Object],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… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Factor Accumulation… ,[object Object],[object Object],[object Object],[object Object],[object Object]

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

U.K’s Factors… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Factor Endowments: China… ,[object Object],[object Object],[object Object],[object Object],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.

Conclusion… ,[object Object],[object Object],[object Object]

Factor Endowments And Effect On Trade

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