Rybczynski theorem

Rybczynski theorem

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The Rybczynski theorem was developed in 1955 by the Polish
Poland
Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...

-born English
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...

 economist Tadeusz Rybczynski
Tadeusz Rybczynski
Tadeusz Rybczynski was a Polish-born English economist who is known for the development of the Rybczynski theorem .He studied at the London School of Economics. Immediately after discovering his famous theorem, he joined Lazard and spent the rest of his career there as an investment...

 (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
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

, 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
Factor price equalization
Factor price equalization is an economic theory, by Paul A. Samuelson , which states that the relative prices for two identical factors of production in the same market will eventually equal each other because of competition. The price for each single factor need not become equal, but relative...

).

Relationship between endowments and outputs


The Rybczynski theorem displays how changes in an endowment
Financial endowment
A financial endowment is a transfer of money or property donated to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust....

 affects the outputs of the goods when full employment
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

 is sustained. The theorem is useful in analyzing the effects of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

 investment, immigration
Immigration
Immigration is the act of foreigners passing or coming into a country for the purpose of permanent residence...

 and emigration
Emigration
Emigration is the act of leaving one's country or region to settle in another. It is the same as immigration but from the perspective of the country of origin. Human movement before the establishment of political boundaries or within one state is termed migration. There are many reasons why people...

 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 occurs initially on the production possibility frontier
Production possibility frontier
In economics, a production–possibility frontier , sometimes called a production–possibility curve or product transformation curve, is a graph that compares the production rates of two commodities that use the same fixed total of the factors of production...

 (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 rise from C1 to C2. Production of cars, the capital-intensive good, will fall from S1 to S2.

If the endowment of capital rose the capital constraint would shift out causing an increase in car production and a decrease in clothing production. Since the labour constraint is 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.