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Standard Trade Model: Factor Endowments

In economics a country’s factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all other things being equal. The development of sound institutions to access and equitably distribute these resources, however, is necessary in order for a country to obtain the greatest benefit from its factor endowment.

Nonetheless, the New World economies inherited attractive endowments such as conducive soils, ideal weather conditions, and suitable size and sparse populations that eventually came under the control of institutionalizing European colonists who had a marginal economic interest to exploit and benefit from these new discoveries. Colonists were driven to yield high profits and power by reproducing such economies’ vulnerable legal and political framework, which ultimately led them towards the paths of economic developments with various degrees of inequality in human capital, wealth, and political power.

A classical example often cited to emphasize the importance of institutions in developing a country’s factor endowment is that of North America (the United States and Canada) around the turn of the 20th century. It is commonly argued that these countries benefited greatly by borrowing many of Britain’s institutions and laws. While North America undoubtedly gained from this borrowing, this does not fully explain why the rest of the New World (which also enjoyed a large factor endowment and access to British institutions) did not develop in a similar way.

In fact, data shows that connection between the prosperity of the colonizing and the wealth of the colony was weaker than many thought. The future United States and Canada surpassed several British established colonies in the Caribbean, such as Barbados, Jamaica, Belize, and Guyana. In fact, the United States converged on the world economic leader, measured in GDP/capita, the UK. In 1910, the United States overtook the UK and began to diverge from it until about the 1950s. This shows that there must have been another explanation as to why the future United States and Canada developed at a faster rate than other colonies in the region

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