Rybczynski Theory of Trade.

Rybczynski theory of trade states that if the supply of a factor rises and the terms of trade remain constant, the output of the product intensively using that factor will rise and the output of the product intensively using the other factor whose supply has not changed will fall. An increase in the endowment of one of the factors will reduce the production of goods that intensively use the other factor. For example, if the USA is capital rich and innovation increases the productivity of capital, labor-intensive industries in USA will get hurt.

With an increase in its capital endowment the, USA can now produce and export more capital-intensive goods this would lower the demand for labor since resources will move away from the labor-intensive sectors of the economy. However, in India that specializes in labor-intensive goods, an increase in the productivity of labor through better education and training or better provision of health care will hurt capital-intensive sectors.

Thus, demand for protection is likely to come from labor-intensive industries in capital-intensive economies and capital-intensive industries in labor-intensive economies.

Rybczynski theory of trade recognizes that differences in relative factor endowment from the major basis for comparative advantage there are two concepts of factor endowments, absolute factor-endowment and relative factor endowment. Let L_N and K_N denote the endowments of labor and capital in India. Likewise, let L_A and K_A denote the endowments of labor of capital in America. These are absolute factor endowments.

The ratio of absolute endowments is called the relative factor endowment. For example, L_N/K_N is the relative endowment of labor in India. Rybczynski theorem emphasis relative factor endowment difference as the basis of comparative advantage and predicts that a country will export those products which uses its relatively abundant factor more intensively.

Rybczynski theorem states that if the supply of a factor rises and the terms of trade remain constant, the output of the good intensively using that factor will rise and the output of the good intensively using the other factor whose supply has not changed will fall.  Rybczynski theorem supports the Heckscher-Ohlin-Samuelson (HOS), theorem.

As the home country which is labor abundant has comparative advantage in labor intensive good and the capital abundant foreign country has comparative advantage in capital intensive good.