Final answer:
The theory based on resource endowments explains international and interregional production cost differences due to the supply of production factors. Countries optimize their unique resource endowments to develop a comparative advantage in producing certain goods or services, which shapes their economic performance and position in global trade.
Step-by-step explanation:
The theory based on resource endowments states that international and interregional differences in production costs occur because of differences in the supply of production factors. Resource endowments refer to the resources and goods a country or region naturally has which inform their levels of economic development that span primary, secondary, tertiary, and quaternary sectors. These sectors range from agriculture and manufacturing to services and research and development. Nations invest in the factors of production, which include land, labor, capital, and entrepreneurship, to optimize their comparative advantage in certain goods or services.
Every economy possesses unique characteristics, institutions, history, and political realities that shape their economic performance. Inputs such as capital deepening, human capital, and technology are crucial to productivity and thus to the level of economic development and average incomes. Scarcity and the economic decisions based on this scarcity consequently define a country's economy and its placement in the global market. International trade and the principles of comparative advantage therefore explain why countries may specialize in and export particular goods and services.