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Homework answers / question archive / In a critical essay, discuss at least two trade theories that can explain Saudi Arabia’s international trade

In a critical essay, discuss at least two trade theories that can explain Saudi Arabia’s international trade

Economics

In a critical essay, discuss at least two trade theories that can explain Saudi Arabia’s international trade. Analyze their main insights and challenges. Are they good predictors of trade patterns? What implications does the Saudi Vision 2030 have on international trade?

you will select a country of your choice and will compare your chosen country to KSA in relation to the factor endowment theory. For each country, discuss:

What is the impact of resource endowments on comparative advantage?

Is the factor-endowment theory a good predictor of trade patterns?

  1. What additional trade theories can be applied? Explain their main insights and challenges. As one of the trade initiatives in KSA, assess the aims of Saudi Vision 2030 in relation to factor endowment theory.

 

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International Trade Theories

            International trade theories analyze the patterns of international trade, its welfare implications, and its origins. Economics and international trade theories were developed as a result of evaluating the various effects of trade policies. These are different theories that are set to explain international trade. There are various trade theories, both country-based and firm-based trade theories. The comparative advantage theory and resource endowment theory explain the international trade between Saudi Arabia and United Nations.

           Generally Saudi Arabia has both absolute and comparative advantage in the production of oil. According to the comparative advantage theory, if Saudi cannot produce other goods more competently than other countries, it is an excellent idea to produce the goods it’s efficient in, oil. Saudi should concentrate and specialize in producing oil because it has fewer disadvantages compared to mixing the market. Because oil production in Saudi Arabia is cheap compared to other goods, it has a comparative advantage in oil and exports oil to finance its import purchases (French, 2017). Similarly, Saudi Arabia has an absolute advantage in oil production because it does it in a more cheap way than other nations. The comparative advantage stands firmer because it has no other economic activity that is more profitable than oil.

           Considerable diversification has led to the wide range of production of oil in Saudi Arabia. However, the country is yet to succeed in world competition because it has relatively declined in demands for competition. International trade gives many benefits to a country's economy, and concentrating on what is cheap to export in your nation is an extra advantage (Elsalih et al., 2021). The Saudi Arabia vision 2030 tends to decrease the country’s dependence on oil and venture into other economic activities to diversify its economy. However, this vision may affect the production of oil because the efforts, labor, capital, and resources will be divided to cater to the rising new economic activities. The comparative theory is in fear of being impacted by the division of efforts. The action will not be a good predictor of oil trade patterns in Saudi Arabia.

           The factor endowment theory in international trade states that; each nation should export the products its good at producing cheaply. Factor endowment represents a country's resources in production, including land, labor, entrepreneurship, and money. Countries with varied and many factor endowments are viewed as wealthier and with the high ability to produce many products compared to nations with small endowments. These endowments also affect the ability and opportunity cost of producing a specific product compared to the production of others (Shahriar, 2019). As a result of the variations existing in nation’s endowments, the differences in availability of labor, capital, and resources determine the comparative advantage, the products to specialize in production, and what to manufacture concerning the economy.

           Generally, comparative advantage and factor-endowment theories are correlated, and the more significant the factor endowments compared to other nations, the higher the comparative advantage. The lower the opportunity cost of specialization compared to other nations, the higher the comparative advantage and vice versa. Comparative advantage is affected by factors like abundance, labor cost, land, productivity, and capital (French, 2017). Economies of scale and financial development can also affect a nation’s comparative advantage. Factor- endowment influences international trade in terms of comparison.

           Saudi Arabia is a good example of factor endowment about land because of its natural land and geographic scale. Saudi Arabia tends to export oil because it has abundant oil, utilizing its internal resources to produce what they have in abundance. Oil accounts for almost the entire percentage of exportation in Saudi Arabia, and the nation heavily relies on oil for its economic stability. The impact of resource endowment, in this case, is that there is enough oil in Saudi Arabia, and this gives the country a comparative advantage compared to other countries with little oil, hence struggling to produce it using expensive resources, labor, and capital (Ghacholiades, 2017). The factor endowment theory is a good predictor of trade patterns. Suppose there are no sufficient resources, capital, and labor. In that case, a country will experience high production prices, hence selling their products at a higher price than the countries with high factor endowments.

           However, factor endowments can be changed for they are not static. For instance, the issues on the quality of labor can be improved by education or generally passing the required skills to laborers. Investments and changes in capital utilization can change the issue of capital and increase infrastructure (Ghacholiades, 2017). The shift in factor endowments to the better direction affects the nation’s comparative advantage. As a country, Saudi Arabia should first concentrate on oil production as its chief export product to reduce the expected challenges of dividing capital and labor to other productions.

           Comparing Saudi Arabia to the United States, Saudi Arabia has oil while the United States has a large land that can be utilized in agricultural production. If, for instance, the United States decides to start producing oil, it will definitely fail or get many challenges before the production process is done. This failure will result from low factor endowment because the United States has no oil resource but has productive land (Ghacholiades, 2017). On the other side, agricultural production can be appreciated in the United States because they will capitalize on the available soil-rich regions by taking advantage of the large population for labor force and using coasts for exports. Labor is the key factor in producing agricultural products in the United States and oil production in Saudi Arabia. The availability of an abundant labor force lowers the opportunity cost if it specializes in the production of labor-intensive products like agricultural products in the United States.

           Absolute advantage theory can also be applied in Saudi Arabia because it produces oil more cheaply than other countries. Saudi Arabia can produce a barrel of oil in an hour compared to the two hours taken by the United States to produce the same (Dean et al., 2020). In relation to absolute advantage, Saudi Arabia can produce oil at a lower cost per unit, using lower inputs, with an efficient process, and low capital utilization, compared to the United States, which will have a high opportunity cost in oil production. The Saudi Arabia vision 2030 may, however, affect the absolute advantage of the country in the production of oil because the available capital and labor will be divided to cater for the upcoming economic activities hence increasing the opportunity cost in oil production.

Generally, comparative advantage, absolute advantage, and factor-endowment theories are the main theories used for the oil trade in Saudi Arabia. Comparing Saudi Arabia to the United States shows that their main trading products are oil and agricultural products. Oil production in Saudi Arabia may be affected by the vision 2030. Concentrating on oil production may reduce these effects. However, the vision 2030 may be of no consequence if more effort is applied to let the opportunity cost of oil production remain low.

International Trade Theories

Introduction

  • International trade theories analyze the patterns of international trade
  • There are various trade theories, both country-based and firm-based trade theories.

Paragraph 1

  • Generally Saudi Arabia has both absolute and comparative advantage in the production of oil.
  • The comparative advantage stands firmer because it has no other economic activity that is more profitable than oil.

Paragraph 2

  • Considerable diversification has led to the wide range of production of oil in Saudi Arabia.
  • The action will not be a good predictor of oil trade patterns in Saudi Arabia.

Paragraph 3

  • The factor endowment theory in international trade states that; each nation should export the products its good at producing cheaply.
  • The products to specialize in production, and what to manufacture concerning the economy.

Paragraph 4

  • Generally, comparative advantage and factor-endowment theories are correlated
  • Factor- endowment influences international trade in terms of comparison.

Paragraph 5

  • Saudi Arabia is a good example of factor endowment about land because of its natural land and geographic scale.
  • The factor endowment theory is a good predictor of trade patterns.

Paragraph 6

  • However, factor endowments can be changed for they are not static.
  • The shift in factor endowments to the better direction affects the nation’s comparative advantage.

Paragraph 7

  • Comparing Saudi Arabia to the United States, Saudi Arabia has oil
  • The availability of an abundant labor force lowers the opportunity cost if it specializes in the production of labor-intensive products

Paragraph 8

  • Absolute advantage theory can also be applied in Saudi Arabia because it produces oil more cheaply than other countries.
  • The Saudi Arabia vision 2030 may, however, affect the absolute advantage of the country

Conclusion

  • Generally, comparative advantage, absolute advantage
  • Oil production in Saudi Arabia may be affected by the vision 2030. Concentrating on oil production may reduce these effects.