Page 79 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 6 : Rybczynski Theorem

6.2 Summary Notes

• According to the Rybczynski (1955) theorem, applied to the standard two-country, two-good,
two-factor model, an increase in one factor will result in an absolute rise in the output of the
commodity which is relatively intensive in the increased facgor, and to an absolute fall in the
output of the other commodity.
• The generalization of the theorem by Jones (1965) states that “if factor endowments expand at
different rates, the commodity intensive in the use of the fastest growing factor expands at a
greater rate than either factor, and the other commodity grows (if at all) at a slower rate than
either factor.”
• The application of Jones' version of the theorem to a model with three goods, one of which is
non-traded, two factors and indecomposable inter-industry flows is studied here.
• The introduction of inter-industry flows makes necessary a distinction between net and gross
Rybezynski output effects and also between direct and total factor intensities of commodities. It
is found that a sufficient condition for the generalized Rybcynski theorem, defined in terms of
total factor intensities, to hold for both net and gross outputs, net output changes being
proportionately greater than gross changes, is that the net output change of the non-traded
good is bounded by the factor changes.
• This result is compared with earlier findings and the meaning of the sufficient condition is
discussed in terms of basic demand parameters.
6.3 Key-Words

1. New international economic order (NIEO) : The demands made developing nations as a group
at the United Nations for the removal of alleged
injustices in the operation of the present
international economic system and for the
implementation of specific measures to facilitate the
development of these nations.
2. Newly industrializing economies (NIEs) : Economies such as South Korea, Singapore, Taiwan
and Hong Kong which are growing very rapidly
based mostly on export growth.
3. Regions of recent settlement : The mostly empty and resource-rich lands, such as
the U.S., Canada, Argentina, Uruguay, Australia,
New Zealand and South Africa, that Europeans
settle during the nineteenth century.
4. Rybczynski theorem : A theorem postulating that at constant relative
commodity prices the growth of only one factor
leads to an absolute expansion in the output of the
commodity using the growing factor intensively
and to an absolute reduction in the output of the
commodity using the non growing factor
intensively.
6.4 Review Questions

1. What do you mean by the Rybczynski Theorem? Discuss.
2. Illustrate the diagram with the effects of factor growth on trade equilibrium.

LOVELY PROFESSIONAL UNIVERSITY 73