Essay on the the Rybezynski Theorem of International Trade

Ohlin's factor price equalization theorem is based on the assumption of constant factor supply. T. M. Rybezynski tried to examine this theorem by removing the underlying assumption.

Rybezynski's theorem seeks to examine the effect of change in factor supplies in one of the two trading countries in their trade relationships.

Like Ohlin's model, we may assume a box diagram to elucidate Rybezynski's theorem.

The country is relatively capital abundant and labour scarce. It exports cloth which is a capital- intensive product and imports wine which is a labour-intensive good. O is the point of origin of cloth. B is the point of origin of wine which is the import-competing good in the domestic market.

Now, let us assume an increase in the stock of capital. This is shown by extending the size of the box to AD. So new box representing factor-endowments in this country is ODEC. Now, the point of origin for wine is E instead of B. The increase in capital stock is measured as AD.

In the beginning, the country reaches an equilibrium point Q on the contract curve OQB. Which means factor-intensity in producing cloth is OQ, and that of wine is BQ. With the increase in capital stock up to AD further, labour supply being constant, the country tends to set new equilibrium point T on the new contract curve OTE.

Following points may be observed in this regard:

1. There is no change in the factor intensities in the production of cloth and wine in this case, as TE is parallel to QB. This implies that factor price ratio has not changed.

2. It follows that when capital abundant country gets an increase in its capital stock or labour abundant country has an increase in its labour force, such a change in factor supply obstructs the tendency of factor price equalization.

3. When factor prices do not change, the product prices also will not change. Thus, with the shift of equilibrium position from Q to T, there is only a change in the quantity of goods (cloth and wine) produced by the country, but there is no change in the factor prices or commodity prices. Here, we may observe that only lesser quantity of wine is produced than before, as TE is shorter than QB. Similarly, OT being larger than OQ, obviously, implies that more amount of cloth is produced now.

This means, when the supply of abundant factor in the country increases, while the other factor remaining constant, the output of the good using this factor intensively will be produced more and that of the other good requiring intensive application of scanty factor will be reduced.

That is to say when capital stock increases in a capital abundant country, the output of capital-intensive product will be increased while that of labor-intensive product will be decreased, and vice versa. It suggests that if capital stock expands indefinitely in our illustration of capital abundant country, the country will tend to have complete specialization in producing cloth.

Rybezynski's theorem, thus, shows that change in factor supply in the country comes in the way of factor-price equalization. Further, when the country tends to increase its exportable goods in supply due to increase in the abundant factor supply, its terms of trade will deteriorate. For instance, as in our illustration, when the country produces more of cloth and less of wine, its export supply of cloth will increase, and import demand for wine will also increase, this would adversely affect its terms of trade, assuming no change in the conditions of its trading partner.

In short, Rybezynski's theorem contends that change in factor supplies prevent factor price equalisation among the trading countries.

Peter Kenen, for instance, has tried to resolve the Leontief Paradox by showing that, the US exports are not labour-intensive but skill-intensive or human capital-intensive, as the American economy is basically characterised by the plenty of skilled labour supply. The American exportables are containing large amounts of highly skilled and efficient labour as against the exports of countries like India which contain low proportion of skilled labour and greater proportion of unskilled labour. Thus, by adding human capital along with, physical capital in analysing America's exportables, Prof. Kenen could resolve the Leontief Paradox.

Keesing also provides an explanation for trade by showing that different commodities need different quantities of skilled labour and technical efficiencies and there are wide variations among different countries in this regard.

On the other hand, Gruber, Mehta and Vernon have successfully demonstrated a positive correlation or significant link between the R and D factor (research efforts) and structure of exports of the American economy in recent years.

Linder, on the other hand, points out that in manufactured goods, there must be a domestic demand first before it is being produced for further exports. Further, countries in similar income groups tend to have identical demand patterns and greater propensity to trade.

According to William Travis, the Leontief Paradox in LDCs may be due to tariffs and other forms of protection.

S.B. Linder assigns a central role to demand factor as the determinant of pattern of trade. Linder's hypothesis is that: the volume of trade will be the largest between countries with similar capital-labour ratios and similar per capita incomes. This is contrary to the Heckscher-Ohlin's theorem implying that countries with similar capital-labour ratios will have similar comparative costs and therefore, there is no ground for mutual trade.

Linder's hypothesis suggests which commodities are potentially tradable but fails to explain " the pattern of trade in any clear manner. It is only in some accord with fact that developed economies with similar per capita income have claimed a large part of world's trade.

In sum, most of these new ideas and empirical findings, in essence, do not supplant, rather supplement to the Heckscher-Ohlin's theorem.