The factor-endowment theory asserts that with specialization and trade there tends to occur an equalization in the relative resource prices of trading partners.

Question

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The factor-endowment theory predicts that countries will specialize in producing goods that are intensive in the factors of production they have in abundance, which will lead to an equalization in the relative resource prices of trading partners. For example, a country that has abundant labor relative to capital will specialize in labor-intensive industries, such as agriculture or textiles, and export those goods to countries where capital is abundant and labor is scarce. This will lead to higher wages and returns to capital in the labor-abundant country, and lower wages and returns to capital in the capital-abundant country, as the relative scarcity of these factors of production is alleviated through trade.

The Factor-Endowment Theory Asserts That with Specialization and Trade There