International Trade - Theory and Policy, 2010a

Ricardian model, then factor prices would not equalize once goods’ prices equalize. As such, a better
interpretation of the factor-price equalization theorem applied to real-world settings is that free trade
should cause a tendency for factor prices to move together if some of the trade between countries is based
on differences in factor endowments.
The Rybczynski Theorem
The Rybczynski theorem demonstrates the relationship between changes in national factor endowments
and changes in the outputs of the final goods within the context of the H-O model. Briefly stated, it says
that an increase in a country’s endowment of a factor will cause an increase in output of the good that uses
that factor intensively and a decrease in the output of the other good. In other words, if the United States
experiences an increase in capital equipment, then that would cause an increase in output of the capitalintensive
good (steel) and a decrease in the output of the labor-intensive good (clothing). The theorem is
useful in addressing issues such as investment, population growth and hence labor force growth,
immigration, and emigration, all within the context of the H-O model.
The theorem was also generalized by Ronald Jones, who constructed a magnification effect for quantities
in the context of the H-O model. The magnification effect allows for analysis of any change in both
endowments and provides information about the magnitude of the effects on the outputs of the two goods.
Aggregate Economic Efficiency
The H-O model demonstrates that when countries move to free trade, they will experience an increase in
aggregate efficiency. The change in prices will cause a shift in production of both goods in both countries.
Each country will produce more of its export good and less of its import good. Unlike the Ricardian
model, however, neither country will necessarily specialize in production of its export good. Nevertheless,
the production shifts will improve productive efficiency in each country. Also, due to the changes in
prices, consumers, in the aggregate, will experience an improvement in consumption efficiency. In other
words, national welfare will rise for both countries when they move to free trade.
However, this does not imply that everyone benefits. As the Stolper-Samuelson theorem shows, the model
clearly demonstrates that some factor owners will experience an increase in their real incomes, while
others will experience a decrease in their factor incomes. Trade will generate winners and losers. The
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