Page 71 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 5 : Role of Dynamic Factors : Tastes, Technology and Factors Endowments in Trade

treatment for their manufactured exports to DCs and reforms of the international monetary system Notes
that would take their interests into consideration.
For a discussion of multinational corporations and international labor migration.
5.6 Factors Endowment in Trade

In economics a country's factor endowment is commonly understood as the amount of land, labor,
capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries
with a large endowment of resources tend to be more prosperous than those with a small endowment,
all other things being equal. The development of sound institutions to access and equitably distribute
these resources, however, is necessary in order for a country to obtain the greatest benefit from its
factor endowment. The Heckscher-Ohlin model (H-O model) is a general equilibrium mathematical
model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of
Economics. The model essentially says that countries will export products that use their abundant
and cheap factor(s) of production and import products that use the countries' scarce factor(s).
Nonetheless, the New World economies inherited attractive endowments such as conducive soils,
ideal weather conditions, and suitable size and sparse populations that eventually came under the
control of institutionalizing European colonists who had a marginal economic interest to exploit and
benefit from these new discoveries. Colonists were driven to yield high profits and power by
reproducing such economies' vulnerable legal and political framework, which ultimately led them
towards the paths of economic developments with various degrees of inequality in human capital,
wealth, and political power.
Factor endowments in the New World

A classical example often cited to emphasize the importance of institutions in developing a country's
factor endowment is that of North America (the United States and Canada) around the turn of the
19th to 20th century. It is commonly argued that these countries benefited greatly by borrowing
many of Britain's institutions and laws. While North America undoubtedly gained from this borrowing,
this does not fully explain why the rest of the New World (which also enjoyed a large factor endowment
and access to British institutions) did not develop in a similar way. In fact, data shows that connection
between the prosperity of the colonizing and the wealth of the colony was weaker than many thought.
The future United States and Canada surpassed several British established colonies in the Caribbean,
such as Barbados, Jamaica, Belize, and Guyana. In fact, the United States converged on the world
economic leader, measured in GDP/capita, the UK. In 1910, the United States overtook the UK and
began to diverge from it until about the 1950s. This shows that there must have been another
explanation as to why the future United States and Canada developed at a faster rate than other
colonies in the region.

Cuba and Brazil primarily grew lucrative products such as cotton, coffee, and sugar,
which required hand picking and most efficiently picked when picked by hands in
unison, whereas the United States was generally a wheat producer.

Kenneth Sokoloff and Stanley Engerman argue in their article "History Lessons: Institutions, Factor
Endowments, and Paths of Development in the New World" that the difference between North
America and the rest of the New World was not just in institutions but in the nature of their respective
factor endowments. Countries like Brazil and Cuba had an extremely large yet concentrated factor
endowment that tended toward exploitation, a hierarchical social system and exhibited economies of
scale. The true advantage of the United States and Canada lay in a more equitable distribution of
factors that could not be exploited on an extremely large scale. This distribution led to a more open
and opportunistic economy, and eventually to long-term prosperity. For example, because wealth
and power were distributed relatively equally in the United States and in Canada, these two countries

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