Factor Endowments

Factor endowments include labor, land and capital. Labor describes

characteristics of a country's workforce. Land describes the natural
resources available, such as timber or oil. Capital resources include
infrastructure and production capacity. The Heckscher-Ohlin model of
international trade emphasizes the characteristics of a country's labor,
land and capital to explain trade patterns. For example, a country with
abundant unskilled labor produces goods requiring relatively low-cost
labor, while a country abundant natural in resources is likely to export
them. The productivity of these factors is also essential. Suppose two
countries have an equal amount of labor and land endowments. Yet
one country has a skilled labor force and highly productive land
resources, while the other has unskilled labor and relatively low-
productivity resources. The skilled labor force can produce relatively
more per person than the unskilled force, which in turn impacts the
areas in which each can find a comparative advantage. The country
with skilled labor might design complex electronics, while the unskilled
labor force might specialize in basic manufacturing.
Barriers to trade also impact a country's balance of exports and
imports. Policies that restrict imports or subsidize exports impact the
relative prices of those goods, making it more or less attractive to
import or export. For example, agricultural subsidies might reduce
farming costs, encouraging more production for export. Import quotas
raise prices for imported goods, which reduces demand. Nations that
restrict trade through high import tariffs and duties may run larger
trade deficits than countries with open trade policies. This is because
impediments to free trade may shut them out of export markets. There
are also non-tariff barriers to trade. A lack of infrastructure can increase
the cost of getting goods to market. This increases the price for those
products and reduces a nation's global competitiveness, which in turn
reduces exports. Investment can work to reduce these barriers. For
example, investments in infrastructure can increase a nation's capital
base and reduce the price of getting goods to market.