Rybczynski theorem
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The Rybczynski theorem was developed by the Polish-born English economist Tadeusz Rybczynski (1923-1998). The Rybczynski theorem proposes that when one of two factors of production is increased there is a relative increase in the production of the good using more of that factor. This leads to a corresponding decline in that good's relative price.
In the context of the Heckscher-Ohlin model of international trade, open trade between regions means changes in relative factor supplies between regions can lead to an adjustment in quantities and types of outputs between regions that would return the system toward equality of production input prices like wages across countries (the state of factor price equalization).
[edit] Relationship between endowments and outputs
The Rybczynski theorem displays how changes in an endowment affects the outputs of the goods when full employment is sustained. The theorem is useful in analyzing the effects of capital investment, immigration and emigration 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 (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.
