Factor endowments and the commodity composition of trade

Up until this point, we have not considered the causes of comparative advantage. This chapter introduces the factor-proportions model as an explanation for why a country has a comparative advantage or disadvantage in a particular product. It is shown that comparative advantage is related to the abundance of labor, capital, and other factors that a country possesses. Differences in factor abundance is shown to be the fundamental cause of trade. The theory is then extended to show that trade changes the returns to factors of production and, by extension, can change the distribution of income. This chapter introduces the factor-proportions model as an explanation for why a country has a comparative advantage or disadvantage in a particular product. It is shown that comparative advantage is related to the abundance of labor, capital, and other factors that a country possesses. The factor-proportions model developed in the chapter addresses the following questions: What determines a country's comparative advantage? How does international trade affect the size of an economy's various industries? How does international trade affect the payments or returns to the factors of production such as labor and capital? How does international trade affect the distribution of income within a country?. In the chapter, authors have been considering how trade influences the distribution of income. They have shown that trade will tend to increase the returns to the abundant factor of production and increase its share in the distribution of income.