In a two-good world consider a small country whose trade follows the Heckscher-Ohlin theory. Discuss the implications of the Rybczynski theorem when the country's endowment of only one of two factors of production increases.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: 

The Rybczynski theorem explains the effects of an increase in the endowment of one factor on the outputs of the two goods, assuming product prices are constant. The Rybczynski theorem asserts that when only one of two factors of production is increased there is an increase in the production of the good using that factor intensively, and a decrease in the production of the other product. The effect on the country's willingness to trade depends on changes in both domestic production quantities and domestic consumption quantities. Growth in a small country does not affect international prices, so with growth higher income in the country leads to increases in the quantities consumed of both goods. Whether the country increases or decreases its willingness to trade depends on which factor is growing.
If the country's abundant factor is growing, the country increases the quantity consumed of its importable product but decreases its production of this product, so the country's willingness to trade increases. 
If the country's scarce factor is growing, the country increases the quantity consumed of its exportable product but decreases its production of this product, so the country's willingness to trade decreases.