Business, Legal & Accounting Glossary
Factors of production are defined as economic resources.
Factors of production refer to inputs, which are used for the production of output (mainly goods and services) on a commercially viable scale.
Production refers to methods, which are employed for the transformation of inputs (both tangible and intangible ones) into outputs (commodities and services). Tangible inputs include raw materials and semi-finished goods. Intangible inputs include information and ideas. Prime factors of production include land, capital, labour and entrepreneurship. Here the land is a proxy for all available natural resources (used in a good’s production). Labour implies work performed by workers in an organization (barring that done by an entrepreneur). Capital represents the machinery used for production. An entrepreneur is that individual who bears all risk and plans and executes a production process with a view to earning a profit.
As per economic theory propagated by Heckscher-Ohlin, the difference in availability of factors of production is identified as a prime cause for international trade. Among two trading countries, for instance, one is endowed with greater availability of capital as compared to labour, while the situation is just the opposite for other nations. As per Heckscher-Ohlin theory of international trade, a country specializes in the manufacture of a good that it has in abundance. In other words, capital abundant countries specialize in the production of capital-intensive goods and labour abundant countries specialize in the production of labour-intensive goods. Now this trade theory postulates of product specialization and trade take both trading nations to a higher standard-of-living level and a greater level of welfare.
Some assumptions of Heckscher-Ohlin theory are mentioned below.
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This glossary post was last updated: 5th August, 2021 | 4 Views.