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Pavitar Parkash Singh, Lovely Professional University Unit 6 : Rybczynski Theorem

Unit 6 : Rybczynski Theorem Notes

CONTENTS
Objectives
Introduction
6.1 Rybcznski Theorem
6.2 Summary
6.3 Key-Words
6.4 Review Questions
6.5 Further Readings

Objectives

After reading this Unit students will be able to:
• Define Rybczynski Theorem.
• Explain Rybczynski Theorem.
Introduction

The Rybczynski theorem was developed in 1955 by the Polish-born English economist Tadeusz
Rybczynski (1923-1998). The theorem states: At constant relative goods prices, a rise in the endowment
of one factor will lead to a more than proportional expansion of the output in the sector which uses
that factor intensively, and an absolute decline of the output of the other good.
In the context of the Heckscher-Ohlin model of international trade, open trade between regions means
changes in relative factor supplies between regions, that can lead to an adjustment in quantities and
types of outputs between those regions, that would return the system toward equality of production
input prices like wages across countries (the state of factor price equalization).
It states that at constant prices, an increase in one factor endowment will increase by a greater
proportion the output of the good intensive in that factor and will reduce the output of the other
good. An increase in the supply of labour expands production possibilities disproportionately in the
direction of the production of labour-intensive good (wheat), while an increase in the supply of
capital expands them disproportionately in the direction of the production of capital- intensive good
(cloth).
Suppose the supply of capital increases by 10% and that of labour is unchanged. If both goods continue
to be produced, then factor prices will not change (because of factor-price equalisation theorem) and
so the techniques of production will also not change.
As a result of increase in capital,
1. the output of both goods cannot rise by 10% because this would require 10% more labour, and the
supply of labour has not changed;
2. output of both goods cannot rise by more than 10%,
3. output of both goods cannot fail to rise by 10% because otherwise the increased capital could not
all be utilised;
4. thus the output of one rises by more than 10% and that of the other does not. Because cloth is
capital intensive, it must be cloth output that rises more than 10%. The labour supply has not
changed, but the cloth industry has expanded and so has increased Us use of labour. Therefore,
the output of wheat must actually fall.

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