FACTOR ENDOWMENTS AND EFFECTS ON TRADE PATTERNS

Presented by Rudo Chengeta

Rudo Chengeta

Presentation Outline

1. 1. Introduction

4. 4. Factor Endowments in UK, China and USA

2. 2. Effects of FE on trading patterns

3. Literature Review3. Literature Review

5. Conclusion5. Conclusion

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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).

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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

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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.

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Effects of Factor Endowments…

ProductionMajor determinant of production

Factor Endowments

Trade

Affects trade, industrial output and policies

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Importance of Factor Endowments…

Trade

Consistent with Ricardo’s model

Abundant resources

International trade

Comparative cost advantage

Exchange Outputs

Differences in factor endowments

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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

Wheat (units)

Cloth (units)

Australia 40 (+20) 0 (-10)

China 0 (-5) 10 (+5)

Total output

40 (+15) (net gain)

10 (-5) (net gain)

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Competitive Advantage Theory…

Porter (1990) argues competitive advantage an important factor in international trade

Model based on lower costs technological innovation and product differentiation

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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

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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.

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Leontief’s O-M Theory …

American exports require higher proportion of labour to capital than imports. km = 1.30 kx

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

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Leontief’s Paradox…

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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.

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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

China India Taiwan Japan USA

1980 1.53 1.74 0.68 1.22 0.77

1981 1.62 1.87 0.70 1.20 0.75

1982 1.59 1.49 0.73 1.24 0.73

1983 1.58 1.58 0.67 1.17 0.71

1984 1.48 1.59 0.62 1.10 0.68

1985 1.19 1.67 0.61 1.09 0.65

1986 1.36 1.62 0.62 1.00 0.64

1987 1.40 1.71 0.64 0.94 0.65

1988 1.43 1.73 0.64 0.94 0.63

1989 1.43 1.81 0.59 0.91 0.69

1990 1.54 1.69 0.56 0.90 0.73

1991 1.60 1.69 0.59 0.90 0.75

1992 1.77 1.77 0.58 0.87 0.73

1993 1.80 1.73 0.54 0.86 0.75

1994 1.82 1.77 0.52 0.85 0.75

1995 1.82 1.67 0.55 0.88 0.75

1996 1.82 1.66 0.55 0.92 0.80

1997 1.85 1.71 0.56 0.92 0.81

Source: Statistical Yearbook of China 1998

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U.S.A Factor Endowments…

Comparative advantage

Technology intensive

More Scientific

HigherK/L Importratio

comparative advantage based on certain skills and certain natural resources

net exports intechnology-intensive products

reflect America's relative abundance of scientific and related personnel

K/L of import substitutes 30% higher than that of exports.

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Top US Trade Partners…

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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.