Question

Using relevant diagrams define and explain the Rybczynski theorem. What predictions does this theorem have for production possibility frontier, domestic production and trade.

Answer 1

The Rybczynski theorem demonstrates how changes in an endowment affects the outputs of the goods when full employment is maintained. The theorem is useful in analyzing the effects of capital investment, immigration and emigration within the context of a H-o model. Consider a diagram depicting a labor constraint in red (it's the steeper lower line) and a capital constraint in blue (the flatter line). Suppose production occurs initially on the PPF at point A. Next, suppose there is an increase in the labor endowment. This will cause an outward parallel shift in the labor constraint. The PPF and thus production will shift to point B. Production of clothing, the labor intensive good, will rise from C1 to C2. Production of steel, the capital-intensive good, will fall from S1 to S2 Qs If the endowment of capital rose the capital constraint would shift out causing an increase in steel production and a decrease in clothing production. Recall that since the labor constraint is steeper than the capital constraint, steel is capital-intensive and clothing is labor-intensive Qc This means that 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