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Rybczynski Theorem in Trade Economics

The Rybczynski theorem states that growth in one factor of production leads to an absolute expansion in the output of the good that uses that factor intensively and an absolute contraction in the output of the good that uses the other factor intensively. In a small country, factor growth leads to changes in production but not relative prices. If the growing factor is abundant, there is an increase in production and trade of the good intensive in that factor. If the factor is scarce, production and trade of the intensive good decreases. Growth in the labor force is likely to decrease welfare as measured by per capita income due to constant returns to scale.

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667 views3 pages

Rybczynski Theorem in Trade Economics

The Rybczynski theorem states that growth in one factor of production leads to an absolute expansion in the output of the good that uses that factor intensively and an absolute contraction in the output of the good that uses the other factor intensively. In a small country, factor growth leads to changes in production but not relative prices. If the growing factor is abundant, there is an increase in production and trade of the good intensive in that factor. If the factor is scarce, production and trade of the intensive good decreases. Growth in the labor force is likely to decrease welfare as measured by per capita income due to constant returns to scale.

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muyi kunle
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© © All Rights Reserved
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The conclusion that growth in one factor leads to an absolute expansionin the product that

uses that factor intensively and an absolute contraction in output of the product that uses the

other factor intensively is referred to as the Rybczynski theorem after the British economist

T. M. Rybczynski. The economics that lie behind the Rybczynski theorem is

straightforward. Because, by the small-country assumption, relative product prices cannot

change, then relative factor prices cannot change because technology is constant. If relative

factor prices are unchanged in the new equilibrium, then the K/L ratios in the two industries

at the new equilibrium are the same as before the growth. The only way this can happen,

given the increased amount of labor, is if the capital-intensive sector

FIGURE 1 Factor Growth and Production: The Small-Country Case


With an increase in labor only, the PPF shifts outward proportionally more for labor-

intensive good B than it does for capital-intensive good A. Because this does not affect

relative world prices in the small-country case, the increased availability of labor leads to an

expansion of output of the labor-intensive good. Because some capital is required to produce

the additional output of B and this can be acquired only by attracting it from the capital-

intensive good, the production of A must decline as the production of B increases. Both

production points represent tangencies. between (PB/PA)int and the old PPF and new PPF,

respectively.

What effect does factor growth have on trade in the small-country case?

The production impact of factor growth on trade depends on whether the growing factor

(labor in our example) is the abundant or the scarce factor. If it is the abundant factor, there

is an ultra-protrade production effect, assuming the country is exporting the commodity that

is intensive in the abundant factor, in the manner of Heckscher-Ohlin. If it is the scarce

factor, there is an ultra-antitrade production effect. Other things being equal, therefore,

the expansionary impact on trade is greater with growth in the abundant factor than in

the scarce factor.

Consider the effect of growth on welfare.

If we adopt per capita income as the measure of welfare in the case of labor force growth,

what can be concluded about the impact of such growth on welfare? We have assumed that

our production is characterized by using two inputs and that there are constant returns to

scale. The definition of constant returns to scale states that if all inputs increase by a given
percentage, output will increase by the same percentage. If, however, only one input

expands, output will expand by a smaller percentage than the increase in the single factor.

Thus, if we use per capita income as our measure of well-being, we conclude that an

increase in population (labor) will lead to a fall in per capita income and hence in country

well-being, other things being equal.

Leontief ’s suggested reconciliation was to argue that because American workers were so

productive relative to workers in the rest of the world, the United States should more

properly be viewed as being relatively labor abundant. Under these alternative

circumstances, then, Leontief ’s findings become consistent with the HO theory

On a two-factor basis, U.S. imports appeared to be relatively capital intensive. On a three-

factor basis, in fact, these products were relatively natural- resource intensive. Some more

recent tests of the HO model have attempted to take into account Vanek’s reconciliation by

excluding from the data natural-resource-intensive imports and exports. In some cases,

when this is done, the paradox disappears.†

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