The Rybczynski Theorem: Short-Run Adjustment

Abstract

The modern, open economy must constantly re-allocate factors of production during the process of adjusting to external shocks. Few issues present us with greater economic and political problems due to the ensuing re-distribution of the national income and power. Terms of trade variations constitute a very important source of change, and the literature provides us with a number of recent contributions dealing with the issue of mobility after an exogenous shift in relative prices.' Less attention has been devoted to changes in the factor endowments.2 This is understandable since significant, one-time shifts in factor supplies are not as common as price shocks. Yet they do occur. Regime changes which lead to alterations in immigration policy or foreign investment policy may provoke sudden increases in labor or capital endowments. Foreign assistance may increase discontinuously, or technical change may occur rapidly, increasing the stock of effective capital in a onetime manner. Moreover, these endowment shocks may immediately affect one industry more heavily than the other. We know how the open economy must eventually adjust to such changes. The answer is given by the Rybczynski Theorem [15] in the event that both factors of production are completely mobile in the long run. One industry will expand and the other will contract. The industry which experiences growth will be the one that uses intensively the factor which has become more plentiful. In the new equilibrium, factor prices and factor ratios are unchanged from their original values, and the growing industry has received some of both factors from the other sector in addition to all of the initial inflow.