EMPLOYEES' WELFARE

SCHEMES IN THE
INDUSTRY
BACKGROUND

In both Heckscher-Ohlin theory and the factor-

price equalisation theory, the assumption was taken
that the factor endowments were fixed. T.M.
Rybczynski, published a paper in 1955 to
investigate the effect of an increase in the
quantity of a factor of production upon production,
consumption and the terms of trade.
INTRODUCTION

This theorem states that the increase in the supply

of one of the factor of production, other factors
remaining the same, causes the output of the good
using the accumulating factor intensively to
increase and the output of the other good to
decrease in absolute amount, provided that
commodity and factor prices remain unchanged.
 MEANING
At constant world prices, if a country experiences an increase in the supply of one
factor, it will produce more of the product intensive in that factor and less of the
other.

• In the context of the Heckscher–Ohlin model of international trade, open trade

between two regions often leads to changes in relative factor supplies between the
regions. This can lead to an adjustment in the quantities and types of outputs
between the two regions

• The Rybczynski theorem explains the outcome from an increase in one of these
factor's supply as well as the effect on the output of a good which depends on an
opposing factor
 EXAMPLE

● 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 analysing the effects of capital
investment, immigration and emigration within the context
of a Heckscher-Ohlin Model.
● Suppose in a labour-surplus country, the supply of labour
gets increased. It will lead to an increased output of the
labour-intensive commodity, say cloth, and reduced output
of the capital-intensive commodity, say steel.
DIAGRAM
EXPLANATION OF DIAGRAM
• 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 the labour-intensive good, will rise from C1 to

C2.
● Production of the capital-intensive good, will fall from S1 to
S2

• 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
Assumptions of Rybczynki Theorem
(i) The trade takes place between two countries. The case of only one of
the two countries will be discussed here.

(ii) The given country is labour-abundant and capital-scarce.

(ii) This country produces two commodities— cloth and steel.

(iv) The production of these commodities requires two factors—labour

and capital.

(v) Capital and labour are perfectly mobile, perfectly divisible and
substitutable in some degree.
(vi) Cloth is labour-intensive good and steel is a capital-intensive good.

(vii) There are the conditions of perfect competition in the product and
factor markets.

(viii) The production functions related to both the commodities are

homogenous of the first degree. That implies constant returns to scale
in production.

(ix) The factor and commodity prices are constant.

(x) The supply of the factor labour expands while that of capital
remains the same.
Criticisms of the Rybczynski Theorem
E.J. Mishan has raised two major objections
against the theorem given by Rybczynski.
Firstly, if the increase in the supply of one
factor (labour) is accompanied by the
increased supply of the other factor (capital),
the results suggested by Rybczynski are not
likely to follow. Secondly, there is technical
difficulty in extending Rybczynski’s two-
factor model to a multi-factor system.
Thank
You. Prakash Shaw