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What Is a Factor Endowment?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 September 2016
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A factor endowment is a type of calculation that has to do with resources a nation has readily on hand for use in various forms of internal development. Several different types of resources are usually considered to be part of the endowment, including the extent of the potential labor force within the nation, the overall population of the country, and the amount of money that is circulating in the economy, both in terms of consumer spending and the financial resources of the companies that are based in and operating within that nation. A factor endowment will also often include consideration of land, with both developed and undeveloped real estate considered part of the calculation.

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The process of properly evaluating a factor endowment goes beyond merely identifying resources that are on hand, and also includes a need to determine what types of circumstances exist that could either impede the most efficient use of those resources, or make it easier to utilize those assets to best advantage. To this end, consideration of the current political climate is often important, especially if the government is considered to be in a state of flux or otherwise unstable at the moment. Laws and regulations that are currently in force, as well as pending legislation, may also exert some influence on how effectively the resources of a nation are actually used. Even factors such as the distribution of the population and the level of entrepreneurial leadership within the business community will have a significant effect on the factor endowment of a country.

Assessing the factor endowment is essential for the well-being of any nation. By identifying the scope of resources that are on hand to support the economic stability and growth of the country, while also allowing for other factors that can affect how well those resources are used, it is possible for a government to create laws and regulations that both protect those resources and also allow them to be used to best effect. For example, if one of the endowments of a given nation happens to be extensive waterways that allow for energy production while also providing a reliable means of transportation of goods to various points within the country, the laws can be adjusted to protect those waterways even while establishing criteria for making the most efficient use of those systems.

Understanding factor endowment within a nation also aids in creating foreign trade opportunities by identifying how resources can be used to produce goods and services that would be attractive to buyers in other lands. At times, the bounty in one nation can be traded actively with that of a different nation that enjoys different types of endowments, effectively providing the population of both nations access to a wider range of goods and services. As a result, producers have the chance to not only sell products domestically but also to international clients, while also being able to purchase goods and services that are not in sufficient supply within the nation.

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