Rybczynski Theorem discusses the effect of economic growth on a nation’s trade. It states that at constant prices, an increase in one factor endowment will increase by a greater proportion the output of the good intensive in that factor and will reduce the output of the other good. An increase in the supply of labour expands production possibilities disproportionately in the direction of the production of labour-intensive good (wheat), while an increase in the supply of capital expands them disproportionately in the direction of the production of capital- intensive good (cloth).
Suppose the supply of capital increases by 10% and that of labour is unchanged. If both goods continue to be produced, then factor prices will not change (because of factor-price equalisation theorem) and so the techniques of production will also not change.
As a result of increase in capital,
(a) the output of both goods cannot rise by 10% because this would require 10% more labour, and the supply of labour has not changed;
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(b) output of both goods cannot rise by more than 10%,
(c) output of both goods cannot fail to rise by 10% because otherwise the increased capital could not all be utilised;
(d) thus the output of one rises by more than 10% and that of the other does not. Because cloth is capital intensive, it must be cloth output that rises more than 10%. The labour supply has not changed, but the cloth industry has expanded and so has increased Us use of labour. Therefore, the output of wheat must actually fall.
By combining this result with the Heckscher-Ohlin theorem, we can see how economic growth affects a nation’s trade. If a country’s capital increases by 10%, national income will rise by some smaller proportion, because only part of national income comes from the earnings of capital. This increased income will normally be spent on both goods, so that at constant prices, national demand for both goods will rise by less than 10%.
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According to Rybczynski Theorem, the supply of capital-intensive good (cloth) rises more than 10%, while the supply of labour-intensive good (wheat) falls.
Thus, cloth supply rises relative to demand, and wheat demand rises relative to supply. Now, if the country is capital intensive, then according to the Heckscher-Ohlin theory, it exports cloth and imports wheat, so that the growth of capital causes the country to trade more at each price.
Thus, its offer curve shifts outward. If the country is labour abundant, its offer curve shifts inward. The general conclusion is economic growth that accentuates country’s relative factor abundance shifts its offer curve it; economic growth that moderates the country’s relative factor abundance shifts its offer curve in.