Relative Commodity Prices , and Anything Goes

Fifty years ago T. M. Rybczynski [3] published a frequently referenced note in which he inaugurated a systematic investigation of the comparative statics associated with a change in the endowment of a factor. The questions that he posed are broad and fundamental: How do the prices and consumptions of final goods depend on factor endowments? How do factor prices and consumer wealth vary with changes in factors endowments? What are the welfare implications of these changes? Rybczynski considered a closed economy with two factors of production A and B and two consumption goods X and Y , each produced according to constant returns to scale and perfect competition. He argued that if X is A intensive and Y is B intensive, then an increase in A leads to an increase in the equilibrium output of X and a decrease in the equilibrium output of Y , provided that the marginal rate of transformation in production betweenX and Y (MRT (X,Y )) does not change when one moves from the original to the new equilibrium. In other words, under Rybczynski’s assumptions, the expanded production possibilities associated with a factor increase, which allows for an increased production of both outputs, leads in equilibrium to an increase in just one of the two outputs (the one that is intensive in the factor that has increased) and a decrease in the other. This unambiguous comparative statics result has been applied to the case of international trade in which an economy is small (more properly infinitesimal), so that the MRT at every interior equilibrium is determined by international prices and does not change.