Rybczynski Theorem 50th Anniversary - November 2005

Model of a two-factor economy

To begin developing the Rybczynski model, we start with the Production Possibilities Frontier (PPF). We assume that this economy uses two factors of production, land (T) and labor (L), and uses these factors to produce two goods, food (f) and cloth (c).

In this scenario, food is a land-intensive good, which means to produce food, land is used more intensively than labor. This also means that to produce cloth, labor is used more intensively than land.

This is demonstrated by the inequality:
    » (T/L)^c < (T/L)^f

For this model we also assume there are two countries, Home (H) and Foreign (F). Home is land-abundant, and Foreign is labor-abundant. Since Home is land-abundant, this means that Home will produce food, the land-intensive good. And since Foreign is labor-abundant, it will produce cloth, the labor-intensive good.

This is demonstrated by the inequality:
    » (T/L)^H > (T/L)^F

(Assuming that T and L represent the total land and labor endowments for each country)

The PPF without factor substitution

"The economy can't use more than the available supply of labor or land. So the production possibility frontier is defined by the red line in this figure. The important feature of this frontier is that the opportunity cost of cloth in terms of food isn't constant: It rises as the economy's mix of production shifts toward cloth." ¹

The PPF with factor substitution

"If land can be substituted for labor and vice versa, the production possibility frontier no longer has a kink. But it remains true that the opportunity cost of cloth in terms of food rises as the economy's production mix shifts toward cloth and away from food." ²

In the case where a country is labor-abundant, the PPF will be stretched toward the labor-intensive good, cloth. Respectively, when a country is land-abundant, the PPF will be stretched toward the land-intensive good, food.