What is meant by factor endowment?

Factor endowment refers to the factors of production that are available with a country to carry out production. Factor endowments differ from country to country and from territory to territory. Some countries may have more endowments of factors of productions while others may not have a lot of them.

Factor endowment theory depends on the fact that countries have different ratios of capital to labour. This difference in the ratios allows them to specialise in different goods. For instance, a country that has a higher ratio of capital to labour would be efficient in the production of capital-intensive goods. Similarly, countries that have a lesser ratio of capital to labour would be efficient in the production of labour-intensive goods.

This points to the fact that there are other factors influencing the trade between them rather than the availability of resources. Thus, factor endowment theory fails to apply to the practical world. It also does not account for the technological differences between two countries. Therefore, it is not the absolute basis of trade for countries.

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