Answer to Question #133318 in Economics of Enterprise for Abraham

Question

Assume a world of two goods, beef and cars; and two countries South Africa and Botswana. Cars are capital intensive and Botswana is labour abundant. Assume the standard H-O assumptions hold. According to the Rybczynski theory, if labour doubles in Botswana how does production and consumption compare to pre- growth conditions in Botswana? Explain with the relevant diagram.

Answer 1

If the supply of labour in Botswana doubles, other factors remaining the same, causes the output of the beef using the accumulating factor intensively to increase and the output of the other good to decrease in absolute amount, provided that prices of beef remain the same.

The double labour will cause an outward shift in the labour constraint. The PPF and thus production will shift to point B. Production of beef in Botswana, the labour-intensive good, will rise from C1 to C2. Production of cars, the capital-intensive good, will fall from S1 to S2.