Which theory suggests that nations will develop comparative advantages based on their locally abundant factors?

The factor endowment theory holds that countries are likely to be abundant in different types of resources. In economic reasoning, the simplest case for this distribution is the idea that countries will have different ratios of capital to labor. Factor endowment theory is used to determine comparative advantage. The Hechsher-Olin Theory holds that a country will have a comparative advantage in the good that uses the factor with which it is heavily endowed. When calculating comparative advantage, it is essential to remember that it is the ratios of factors that matter; a country could be heavily endowed with both labor and capital, but it proportionally may have more of one than another than would another country. If a country has a comparative advantage in a good that uses the factor with which it is heavily endowed, it should focus it's production on that good. Because it is heavily endowed with that factor, it will be most efficient at producing the good that requires that factor for production. For example, a country with a high ration of capital to labor will be more efficient at producing computers than it would corn. If that country instead focused on producing corn, it would have to divert capital which is not meant for corn production into an area where it is inefficiently used.

Critiques of the Factor Endowment Theory

The factor endowment theory, while used to explain overarching notions of comparative advantage, in reality only accounts for a small percentage of world trade. At one time, there were big disparities between labor and capital in the US and East Asia. East Asia began to grow much faster than the US, however trade increased as the two countries became more similar, even though the factor endowment theory would predict that trade should have lessened. This suggests that there must be something other than factor endowments motivating international trade. The assumptions that drive the factor endowment theory may be flawed. It first assumes the same technology, and also assumes arbitrary borders. However, factors like borders play a large role in how much trade occurs; Seattle, for instance, conducts more trade with Boston than it does with Vancouver. Branding also plays a large role in trade; France has been very successful in differentiating its product, wine, from that of other countries, so regardless of factor endowments France will likely continue to specialize in wine and the rest of the world will likely keep buying it from them.

Glossary Chapter 5 Absolute advantage The economic advantage one nation enjoys because it can produce a good or service more efficiently than anyone else. Administrative policy A bureaucratic rule that makes it harder to import foreign goods. Antidumping duty A cost levied on imports that have been “dumped,” or sold below cost to unfairly drive domestic firms out of business. Balance of trade The country-level trade surplus or deficit. Comparative advantage The relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Deadweight costs Net losses that occur in an economy as the result of tariffs. Export To sell abroad. Factor endowment theory (or Heckscher–Ohlin theory) A theory that suggests that nations will develop comparative advantages based on their locally abundant factors. Factor endowments The extent to which different countries possess various factors of production such as labor, land, and technology. First-mover advantage Advantage that first entrants enjoy and do not share with late entrants. Free trade The idea that free market forces should determine the buying and selling of goods and services with little or no government intervention. Import To buy from abroad. Import quota A restriction on the quantity of goods that may be brought into a country. Import tariff A tax imposed on imports. Local content requirement A rule that stipulates that a certain proportion of the value of a good must originate from the domestic market. Mercantilism A theory that holds that the wealth of the world (measured in gold and silver) is fixed and that a nation that exports more than it imports will enjoy the net inflows of gold and silver and become richer. Merchandise trade Tangible products being bought and sold. Non-tariff barrier (NTB) A means of discouraging imports using means other than taxes on imported goods. Opportunity cost The cost of pursuing one activity at the expense of another activity. Product life cycle theory A theory that suggests that patterns of trade change over time as production shifts and as the product moves from new to maturing to standardized stages. Protectionism The idea that governments should actively protect domestic industries from imports and vigorously promote exports. Resource mobility The assumption that a resource used in producing a product in one industry can be shifted and put to use in another industry. Service trade Intangible services being bought and sold. Strategic trade policy Economic policy that provides companies a strategic advantage through government subsidies. Strategic trade theory A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success. Subsidy A government payment to domestic firms. Tariff barrier A means of discouraging imports by placing a tariff (tax) on imported goods. Theory of absolute advantage A theory that suggests that under free trade, each nation gains by specializing in economic activities in which it is the most efficient producer. Theory of comparative advantage A theory that suggests that a nation gains by specializing in production of one good in which it has comparative advantage. Theory of national competitive advantage of industries (or diamond theory) A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a diamond when diagrammed. Trade deficit An economic condition in which a nation imports more than it exports. Trade embargo A politically motivated trade sanction against foreign countries to signal displeasure. Trade surplus An economic condition in which a nation exports more than it imports. Voluntary export restraint (VER) An international agreement that shows that an exporting country voluntarily agrees to restrict its exports.

Which theory suggests that nations will develop comparative advantage?

Which theories are the theory of comparative advantage based on?

Which theory is based on the notion that competitive advantage is dependent on the four?

What is the classical theory of comparative advantage?