Question

What happens to the production of both goods in a country when there is an increase in labor? Which theorem will you apply here?

Answer 1

When ther is an increase in the labor in an economy, than the production of labour intensive good will increase and at the same time the production of Capital intensive good will fall.

Consider the diagram below. Labor constraint is represented by orange line and capital constrant is represented by blue line. Suppose that production occurs initially on the production possibility frontier at point S.

Suppose there is an increase in the labor endowment. This will cause an outward shift in the labor constraint. The PPF and thus the production will shift to point M. Production of Clothing, the labour intensive good will rise from C₁ to C₂. Production of cars, the capital intensive good will fall from K₁ to K_2.

# Rybczynski theorom is applied in this concept. This theorom states that at constant relative goods price , a rise in the endowment of one factor will lead to a more than a proportional expansion of the output in the sector which uses that factor intensively and an absolute decline of the output of the other good.

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