Page 76 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes By combining this result with the Heckscher-Ohlin theorem, we can see how economic growth affects
a nation's trade. If a country's capital increases by 10%, national income will rise by some smaller
proportion, because only part of national income comes from the earnings of capital. This increased
income will normally be spent on both goods, so that at constant prices, national demand for both
goods will rise by less than 10%.

Rybczynski Theorem discusses the effect of economic growth on a nation's trade.

According to Rybczynski Theorem, the supply of capital-intensive good (cloth) rises more than 10%,
while the supply of labour-intensive good (wheat) falls.
Thus, cloth supply rises relative to demand, and wheat demand rises relative to supply. Now, if the
country is capital intensive, then according to the Heckscher-Ohlin theory, it exports cloth and imports
wheat, so that the growth of capital causes the country to trade more at each price.
Thus, its offer curve shifts outward. If the country is labour abundant, its offer curve shifts inward. The
general conclusion is economic growth that accentuates country's relative factor abundance shifts its offer
curve it; economic growth that moderates the country's relative factor abundance shifts its offer curve in.
6.1 Rybczynski Theorem

The Rybczynski theorem displays how changes in an endowment affects the outputs of the goods
when full employment is sustained. The Qs
theorem is useful in analyzing the effects of The Rybczynski theorem
capital investment, immigration and
emigration within the context of a Heckscher-
Ohlin model. Consider the diagram below,
depicting a labour constraint in red and a
capital constraint in blue. Suppose production Labour constraint
occurs initially on the production possibility
frontier (PPF) at point A.
Suppose there is an increase in the labour
endowment. This will cause an outward shift
in the labour constraint. The PPF and thus
production will shift to point B. Production
of clothing, the labour intensive good, will S A
rise from C1 to C2. Production of cars, the 1
capital-intensive good, will fall from S1 to S2. S 2 B
Capital constraint
If the endowment of capital rose the capital
constraint would shift out causing an increase
in car production and a decrease in clothing C 1 C 2 Qc
production. Since the labour constraint is Figure 6.1
steeper than the capital constraint, cars are
capital-intensive and clothing is labor-intensive.
In general, an increase in a country's endowment of a factor will cause an increase in output of the
good which uses that factor intensively, and a decrease in the output of the other good.
The factor price equalization theorem assumes no change in factor supplies. We will now see what
happens to the trading relationships if in one of the two countries there is an increase in the labour
force or an increase in the capital stock. This is the essential basis of the so called Rybczynski theorem.
Let us start by assuming that in one of the two countries there is increase in labour supply. The
country’s original factor endowments are measured by the box ACBD in Diagram 1. The point of
origin for cloth (the labour intensive good) is A, and the point of origin for steel (the capital intensive

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