Rybczynski theorem

Abstract: No names are more closely associated with modern trade theory than Eli Heckscher and Bertil Ohlin. The basic Heckscher-Ohlin proposition, according to which a country exports factors in abundant supply and imports factors in scarce supply, is a key component of modern trade theory. In this book, Robert Baldwin traces the development of the HO model, describing the historical twists and turns that have led to the basic modern theoretical model in use today. Baldwin not only presents a clear and cohesive view of the model's evolution but also reviews the results of empirical tests its various versions. Baldwin, who published his first theoretical article on the HO model in 1948, first surveys the development of the HO model and then assesses empirical tests of its predictions. Most discussions of empirical work on HO models confine themselves to the basic theorem, but Baldwin devotes a chapter to empirical tests of three related propositions: the Stolper-Samuelson theorem; the Rybczynski theorem; and the factor price equalization theorem. He concludes that the formulation and testing of these later models have improved economists' understanding of the forces shaping international trade, but that many empirical trade economists (himself included) were so enamored of the elegant but highly unrealistic factor price equalization models developed from the insights of Heckscher and Ohlin that they have neglected investigation of other models without this relationship.

Abstract: Despite several recent contributions which have introduced uncertainty into general equilibrium models,3 trade theorists continue to assume that the economic environment is nonstochastic.4 One of the most fundamental theorems in trade theory is the HeckscherOhlin (HO) theorem which asserts that a country exports the commodities which are relatively intensive in the use of its relatively abundant factor. The purpose of this paper is to explore the implications of uncertainty in the production function for the validity of the HO theorem and its offspring, the factor-price equalization theorem. As a byproduct of our analysis, the Rybczynski theorem is also analysed. The HO theorem has been traditionally proved in terms of two alternative definitions of inter-country relative factor abundance, namely the " factor-price " definition and the " physical " definition. We show that the HO theorem cannot be proved in terms of the factor-price definition, but that the theorem is valid in terms of the physical definition even in the presence of uncertainty in the production process. The Rybczynski theorem also continues to hold, but the factor-price equalization theorem does not, even if all the assumptions made customarily for the validity of the theorem are satisfied. The reason for this turns out to be the producers' aversion towards risk.

Abstract: In a world with multiplicative production uncertainty and implicit labor contracts, we show that the Rybczynski theorem retains its validity; therefore the quantity version of the Heckscher-Ohlin theorem survives as well. We also show that the Stolper-Samuelson theorem may not hold. A small increase in the price of the capital-intensive good may benefit labor. We derive a strong version of the factor price equalization theorem that shows free trade tends to equalize sector-specific unemployment rates and sector-specific factor prices across countries. Finally, we relate trade patterns to international differences in the degree of risk aversion.