Chapter 3: Problem 3

How does the factor-endowment theory differ from Ricardian theory in explaining international trade patterns?

Short Answer

Expert verified

The main difference between the two theories lies in their underlying assumptions about the determinants of international trade. The Factor-Endowment theory stresses on countries' abundance of resources as a determinant in the trade of goods and services. The Ricardian theory, however, focuses on opportunity costs and comparative advantage, suggesting countries will engage in trade to maximize their efficiency and productivity.

Step by step solution

Understanding factor-endowment theory

Also known as the Heckscher-Ohlin theory, the factor-endowment theory postulates that countries will export goods that require resources or factors of production they have in abundance. For instance, a country well endowed with labor will export labor-intensive goods. Understanding this concept is crucial in explaining international trade patterns.

Understanding Ricardian theory

On the other hand, the Ricardian theory, formulated by David Ricardo, suggests that countries engage in trade based on their comparative advantage. A country with a comparative advantage in production of a certain good (i.e., it can produce the good at a lower opportunity cost than other countries), will tend to export that good. Hence the theory focuses on productivity differences between countries rather than differences in factor endowments.

Differences between the two theories

The main difference between the two theories is the factors they consider critical in international trade. The factor-endowment theory emphasizes resource availability in the countries engaging in trade. The Ricardian theory, however, focuses more on productivity and cost effectiveness in production. It's less about what resources a country has and more about how efficiently it can produce with what it has.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

How does the factor-endowment theory differ from Ricardian theory in explaining international trade patterns?

Short Answer

Step by step solution

Understanding factor-endowment theory

Understanding Ricardian theory

Differences between the two theories

One App. One Place for Learning.

Most popular questions from this chapter

Study anywhere. Anytime. Across all devices.