Factor endowment

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Factor endowments (. Engl factor endowment ) referred to in the economics all facilities of a country with the three factors of production : labor , soil and capital . Production factors are also called inputs. The factor endowment of an economy influences the advantageousness and direction of foreign trade. The term factor comes from the Latin word facere (to do, to make).

Explanation of terms

The tripartite division of the production factors into labor, land and capital goes back to the physiocracy of the 18th century. It established itself in classical economics. In more recent approaches, knowledge ( human capital ) or the management of a company are often viewed as a production factor.

job

Under Labor (economics) any human activity is understood that serves the satisfaction of needs and aims to generate income. The price of the work is the wage rate. This therefore includes both the services of the employed employees and the services of the company owners.

It should be noted that there are considerable differences in qualifications in the production factor labor, which are of considerable importance for the production of goods. For example, it has been shown that the United States and other developed countries have a relatively high level of highly skilled workforce. These countries are therefore characterized by a high level of human capital , while developing countries are abundantly equipped with unskilled, unskilled labor.

ground

The production factor soil originally only comprised agricultural and forestry areas, such as fields and forests. Currently, the production factor soil also describes the soil as a location for companies and the location for raw materials (coal, iron ore, etc.). In some approaches today the production factor soil is replaced by the production factor environment (natural resources), which then combines the factors soil, water, air and living nature.

capital

The production factor capital is subdivided into physical or real capital and money capital. Real capital includes all previously produced means of production that are involved in the further production of goods and services. The means of production can be divided into permanent means of production as well as non-permanent means of production. The permanent means of production include B. Machinery, other equipment, buildings and inventory. The non-permanent means of production are obtained from other companies and flow into the production process as preliminary work (e.g. raw materials, energy). Since physical capital consequently describes the “stock of production equipment”, it is comparable to the capital stock . Money capital is to be separated from real capital and assessed critically. It includes untied funds such as banknotes and cash register. Accordingly, it is not possible to manufacture means of production with money capital. However, it can be used as a medium of exchange, whereby money capital is converted into real capital through investments. Accordingly, it serves to renew and expand the capital stock. This has a positive effect on the other factors of production (labor and land), as new and innovative machines allow work to be done more quickly.

Characteristics of the factor endowment

Absolute factor equipment

The absolute factor endowment is expressed in absolute numbers, i.e. how many units of a production factor are actually present in an economy. Examples of this would be the absolute number of workers or machines. The factor equipment can therefore also be measured in the form of absolute numbers. The different production factors of the national economies can be compared. If one examines the employed persons in two countries, such as Germany and Austria, this can be done according to the absolute figures - Germany had 41.8 million employed persons in May 2013, this is 3.48 million in Austria in the same year. According to this, Germany would theoretically be the busy economy. However, it often makes sense to relate one factor of production to another in order to compare economies. However, this is the subject of the next section. Basically, the more production factors an economy has - seen in absolute terms - the more goods and services it can produce.

Relative factor endowment

In contrast to the absolute factor endowment, the relative factor endowment sets the number of existing production units of one production factor in relation to the number of units of another production factor. A quotient is thus formed from the production factors. This characteristic makes the factor endowment more measurable and comparable through the setting of ratios. To tie in with the above example, one could put the number of employed persons in relation to the area of ​​a country or the land and compare this with another economy. Germany, with a workforce of 41.8 million (as of May 2013) and a total area of ​​357,340 km², has a work-land ratio of 116.975 employees / km². For Austria, however, with 3.48 million persons in employment (as of 2013) and a total area of ​​83,858 km², a work-soil ratio of 41.498 persons in employment / km² can be determined. According to this, Germany would be the more labor-rich country compared to Austria, limited to this relationship.

Factor endowment and foreign trade

Model assumptions with identical factor equipment

Historical classification

The English economist David Ricardo (1772–1823) developed the principle of comparative cost advantages at the beginning of the 19th century, which is a key point of foreign trade theory. His work in this regard reached its peak in 1817 with the publication of his work On the Principles of Political Economy and Taxation .

Explanation

When working out the flows of foreign trade, economic theory tries to represent the complex reality through a simple impact analysis. Here, components should be considered that are assumed to be the main causes of the object of investigation. Of particular interest are the background to the selection of goods in the import and export of an economy, i.e. the question of the causes of trade flows. In his theoretical approaches, Ricardo attributes the production effort to work performance alone. If it is also assumed that the work units are of the same quality everywhere, the attempts to explain are reduced to the different production conditions. These production conditions are expressed through various types of production functions with the help of which goods of the same international type are produced. The extent to which transport costs influence foreign trade is not taken into account in the model. For the sake of simplicity, it is also assumed that costs and prices are equal - that is, perfect competition.

Production possibilities curve

If, in addition to Ricardo's assumptions, one assumes that the factor endowment is equally extensive in (simplified) two countries, additional statements can be made. In addition to the statement about the production potential, the assumption of fixed equipment with production factors enables only the effect of different production functions to be considered. Otherwise it could theoretically no longer be said to what extent foreign trade can be traced back to different production functions or different factors. This means that every country can distribute the labor factor among the goods as desired in terms of production technology. The graphical representation of such technical production combinations in the production of goods takes place by means of a so-called transformation curve or production possibility curve .

According to Ricardo, a country has a comparative advantage in the production of a good if the opportunity costs of producing it in that country are lower than in other countries.

The theory says that you can successfully participate in international trade even with a cost disadvantage for all products compared to other countries. Likewise, it is worthwhile for countries which can manufacture products cheaper than other countries to trade with the less competitive countries and to specialize themselves.

Example of Ricardo's thought: it is the production of wine and cloth. There is initially no trade and no division of labor between two countries (here Portugal and England). Both countries manufacture both products (wine and cloth) in their own country. England produces 1,000 rolls of cloth with 100 workers and 1,000 barrels of wine with 120 workers. In contrast, Portugal needs 90 workers for 1,000 rolls of cloth and 80 workers for 1,000 barrels of wine. Together the two countries produce 2000 rolls of cloth and 2000 barrels of wine.

It is true that Portugal has an absolute cost advantage in the production of wine as well as cloth due to the less required labor. Still, it is worthwhile for Portugal to specialize in the production of wine and leave the production of cloth to England. The products can then be imported from the other country. The labor in Portuguese wine production can be used more productively (more cheaply) than in cloth production. Conversely, England produces cloth with less labor than wine.

This picture shows the model assumptions listed in the text of identical factors using the example of Portugal and England.

So if Portugal concentrates on its comparative advantage, the wine production, then the 90 workers who were previously responsible for the cloth production of Portugal can also be specialized in the production of wine, so that 170 workers (90 + 80) can now produce the wine there . Invoice per capita (Portugal):

  • Before: 1000 barrels of wine divided by 80 workers = 12.5 barrels per head
  • Now: 170 workers multiplied by 12.5 barrels (per capita) = 2125 barrels

This means that Portugal can also produce 1125 barrels of wine through the specialization. That is 125 barrels more than both countries combined.

In contrast, the workforce from England specialize in cloth production. The 120 workers who were responsible for the wine are specialized in the production of cloth. So 220 workers (100 + 120) are now responsible for cloth production in England.

Invoice per capita (England):

  • Before: 1000 rolls of cloth divided by 100 workers = 10 rolls per head
  • Now: 220 workers multiplied by 10 roles (per head) = 2200 roles

This means that England can also produce 1200 rolls of cloth thanks to its specialization. That is 200 roles more than both countries combined.

So if each country specializes in the good that it can produce at lower cost relative to the other goods in its own country, the labor force is deployed most productively. The supply of goods that they no longer produce themselves is secured through trade with the other country. Consequently, countries that have an absolute cost disadvantage compared to other countries in the production of all goods can participate in the international division of labor in this way.

It should be noted that if Ricardo's model is adopted, every country will benefit from specialization. If the assumptions of the factor proportion model are assumed, there will be short-term losses in those sectors that have to compete with imports. In the long term, this means the failure of the scarce production factors of an economy that drives foreign trade. The statement that trading is beneficial for all parties cannot remain in this form.

Model assumptions with different factors

Historical classification

The importance of a country's factor endowment for foreign trade was first examined by the Swedish economist Eli Filip Heckscher (1879–1952). He developed essential points of the factor endowment theory of international trade, which was published in 1919. The Swedish economist Bertil Ohlin (1899–1979) was considered the successor to Eli Filip Heckscher. He developed and expanded the factor endowment theory in the 1930s.

The factor endowment approach is known as the Heckscher-Ohlin theorem and is considered a modern theory of international trade. The theory has been refined and expanded by many economists in a process that is still ongoing.

Explanation

In the Heckscher-Ohlin theorem , the assumptions from the Ricardo model are reversed. Identical production functions are assumed. The countries are simply endowed with production factors to different degrees. It does not matter whether a country has more or less of both production factors. The differences in the respective conditions are decisive. The wealth of a factor of production is consequently not defined by absolute numbers, but by proportions.

  • example

Assuming the US has 80 million workers and 200 million hectares of land, this corresponds to a work-to-land ratio of 1: 2.5. Britain has a labor-to-soil ratio of 1: 1 with 20 million workers and 20 million hectares of land. According to this, Great Britain is rated as busy even though it has fewer workers than the United States in absolute terms.

In reality, the factor endowments between countries often vary considerably. For example, country A, which is referred to here as domestic, has a relatively large amount of labor and country B, which is referred to here as foreign, has a relatively large amount of capital and land. It is also assumed that there are land-intensive goods such as wheat and labor-intensive goods such as cloth. The countries specialize in such a way that they increasingly produce those goods that make intensive use of the factor that is relatively abundant in the country. The home country will therefore specialize in the production of cloth, while the foreign country will specialize in the production of wheat. The "surpluses" not sold in their own country are exported.

If an economy is relatively busy, then labor will be cheaper than capital. Labor-intensive goods can thus be produced more cheaply. Analogously, one can imagine this statement about a relatively capital-rich economy in which capital-intensive goods can be manufactured more cheaply. The relationship between the relative abundance of factors and the factor intensity in production results in comparative cost advantages and international price advantages, which in turn lead to competitive advantages in international markets.

This explains why the exports of most developing countries consist of land-intensive or labor-intensive products, while the highly industrialized countries export a large part of capital-intensive products.

To simplify matters, Cobb-Douglas production functions are often used in the models . These assume that the production factors used are substitutional factors. See also the article on factor substitution . For example, one country, in contrast to another, may be endowed with factors of production such as labor and capital to different degrees. It is therefore possible to look at the production of several goods with different production functions in both countries.

Influence on production potential and national income

If there is an increase in the factor endowment in a country, for example through an increase in the labor potential, the production potential also rises. As a result, the transformation curve shifts outwards, since larger quantities of good 1 and good 2 are present. As a result, this in turn leads to an increase in the production volume of the export and import goods and then also affects the export and import volume of a country. The larger the amount of export goods, for example, the more of this could then be sold abroad. Since national income in turn represents the sum of all goods produced by domestic and foreigners in an economy and the quantity of some of these goods has increased, national income also rises as a result of the increase in production potential. In conclusion, it can be seen that a change in the factor endowment affects the national income.

literature

  • Wilfried J. Ethier: Modern foreign trade theory . 2nd Edition. Oldenbourg, Munich 1991, ISBN 3-486-21777-1 .
  • Klaus Rose and Karlhans Sauernheimer: Theory of Foreign Trade . 13th edition. Vahlen, Munich 1999, ISBN 3-8006-2450-8 .
  • Udo Broll: Introduction to real and monetary foreign trade . 1st edition. Oldenbourg, Munich 1995, ISBN 3-486-23187-1 .
  • Manfred Borchert: Foreign trade . 7th edition. Gabler, Wiesbaden 2001, ISBN 3-409-63907-1 .
  • Gustav Dieckheuer: International economic relations . 3. Edition. Oldenbourg, Munich 1995, ISBN 3-486-23148-0 .

supporting documents

  1. ^ Artur Woll: Wirtschaftslexikon . 10th edition. Oldenbourg, Munich 2008, p. 625.
  2. ^ Artur Woll: Wirtschaftslexikon . 10th edition. Oldenbourg, Munich 2008, p. 34, p. 625.
  3. ↑ Gustav Dieck Heuer: International Economic Relations. 5th edition. Oldenbourg, Munich 2001, p. 98.
  4. ^ Artur Woll: Wirtschaftslexikon . 10th edition. Oldenbourg, Munich 2008, p. 625.
  5. ^ Artur Woll: Wirtschaftslexikon . 10th edition. Oldenbourg, Munich 2008, p. 625.
  6. ↑ Prof. Dr. Norbert Pfitzer: Capital . Website from Springer Gabler Verlag. Gabler Economic Lexicon. Accessed on June 10, 2015. Quotable URL: http://wirtschaftslexikon.gabler.de/Archiv/54789/kapital-v6.html
  7. ↑ Prof. Dr. Siegfried von Känel : Capital (Production Factor ) ( Memento of the original from June 2, 2013 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. . IWK website - Prof. Dr. Siegfried von Känel e. Kfm., Accessed on June 10, 2015.  @1@ 2Template: Webachiv / IABot / www.iwk-svk-dresden.de
  8. ↑ Production factor . Wikipedia website. Retrieved June 10, 2015.
  9. ↑ https://www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2013/06/PD13_215_132.html "Press Release No. 215 of June 27, 2013" website of the Federal Statistical Office. Retrieved May 31, 2015.
  10. ↑ http://de.statista.com/statistik/daten/studie/217682/umfrage/erwerbstaetige-in-oesterreich/ Retrieved on May 31, 2015.
  11. ↑ https://www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2013/06/PD13_215_132.html "Press Release No. 215 of June 27, 2013" website of the Federal Statistical Office. Retrieved May 31, 2015.
  12. ↑ Archived copy ( memento of the original from July 6, 2017 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. Retrieved May 31, 2015. @1@ 2Template: Webachiv / IABot / www.statistik-portal.de
  13. ↑ http://de.statista.com/statistik/daten/studie/217682/umfrage/erwerbstaetige-in-oesterreich/ Retrieved on May 31, 2015.
  14. ↑ http://www.austria.info/at/wissenswertes-zu-oesterreich/staatsform-und-einwohner-2006789.html Accessed on May 31, 2015.
  15. ↑ Fritz Söllner: The history of economic thinking. 2nd Edition. Springer-Verlag, Berlin Heidelberg 2001, p. 39.
  16. ↑ Manfred Borchert: Foreign Trade . 7th edition. Gabler, Wiesbaden 2001 p. 25.
  17. ↑ Manfred Borchert: Foreign Trade . 7th edition. Gabler, Wiesbaden 2001, pp. 26-27.
  18. ↑ Manfred Borchert: Foreign Trade . 7th edition. Gabler, Wiesbaden 2001, pp. 28-30.
  19. ↑ Malte Fischer: David Ricardo, The Free Trader . Wirtschaftswoche website. Retrieved June 11, 2015.
  20. ^ Paul R. Krugman and Maurice Obstfeld: Internationale Wirtschaft. 8th edition. Pearson, Munich 2009, p. 111
  21. ↑ Wilfried J. Ethier: Modern foreign trade theory . 2nd Edition. Oldenbourg, Munich 1991, p. 138.
  22. ↑ Wilfried J. Ethier: Modern foreign trade theory . 2nd Edition. Oldenbourg, Munich 1991, p. 139.
  23. ↑ Klaus Rose and Karlhans Sauernheimer: Theory of foreign trade . 13th edition. Vahlen, Munich 1999, p. 413.
  24. ^ Paul R. Krugman and Maurice Obstfeld: Internationale Wirtschaft . 7th edition. Pearson, Munich 2006, p. 115.
  25. ^ Wolfgang Maennig and Bernd Wilfling: Foreign trade theory and politics . Vahlen, Munich, pp. 111-112.
  26. ↑ Oliver Lorz and Horst Siebert: Foreign trade. 9th edition. UVK / Lucius, Munich 2014, p. 52
  27. ↑ Udo Broll: Introduction to Real and Monetary Foreign Trade. 1st edition. Oldenbourg, Munich 1995, pp. 40, 41.
  28. ↑ Manfred Borchert: Foreign Trade . 7th edition. Gabler, Wiesbaden 2001, p. 59.
  29. ↑ Gustav Dieck Heuer: International Economic Relations . 3. Edition. Oldenbourg, Munich 1995, p. 76.