Testing Rybczynski Theorem: Case for India

Objectives: To check whether the Rybczynski theorem holds for the case of India. The theorem explores the impacts of dynamics in factor endowments on final output produced by a nation.

Statistical Analysis: We use the KLEMS [Capital (K), Labor (L), Energy (E), and Materials (M)] database which was prepared as a project under RBI to determine the factor endowments of the country and factor intensities of commodities in India. The theorem is tested by running multiple regressions under Ordinary Least Squares (OLS) Method to test the theorem. Furthermore, we use the K/L ratio and exports/import data from WITS (World Integrated Trade Systems Database, WTO) to check the underlying support of the theorem.

Findings: We observe a pattern of movement in output very similar to the predictions of the Rybczynski theorem but we don’t find enough evidence for the theoretical underpinnings of the same. Mainly, the data on K/L ratio and Terms of trade do not seem to be in agreement with the assumptions of the theorem. We also observe some possible explanation for regional divergence in India.

Improvements: Questions like why the pattern similar to Rybczynski Theorem is observed despite proven support of the other assumptions of the same can be addressed in further research using more rigorous and sound econometric techniques.