Constant Factor Supply

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

Rybezynski’s theorem seeks to examine the effect of cage 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 labour and capital.

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 Instead of B. The increase in capital stock is measured as AD.

In the beginning, the country reaches curve OQB. Which means factor intensity in producing cloth is OQ and that of wine is BQ with the increase in capital stock upto AD further, labour supply beige constant, the country tends to set new equalilibrium point I 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 large than OQ, obviously, implies that more amount of cloth is produced now.

There 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 scantly 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 labour- intensive product will be decreased, and vice velars. It suggests that if capital stock expands indefinitely in our illustration of capital abundant country, the country will tend to have complete specialization in production cloth.

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