Economics Chapter 5 Homework All The Countries The List With The

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World Gains from Migration The sum of triangles ABC and A*BC representing Home

and Foreign gains, respectively, gives the larger triangle A*AB, which denotes the

increase in the world gross domestic product (GDP) due to immigration. For example,

when the first migrant leaves Foreign for Home, the GDP in the former country falls by

W*, whereas that in the latter increases by W. The gain in world welfare due to the

movement of the first migrant is equal to the difference between the Home and Foreign

wages.

APPLICATION

Gains from Migration

It is estimated that the net gain due to immigration is about 0.1% of GDP, where the

migrants are assumed to make up approximately 10% of the U.S. workforce and compete

for domestic jobs. The 0.1% net GDP gain translates into an estimate of 2% gains for

capital and 1.9% loss for domestic labor. The relatively small size in GDP gain compared

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with the transfer of income from labor to capital helps to explain the focus on potential

harm to labor instead of overall increases in welfare in debates over immigration policies.

The estimated worldwide gains due to immigration are shown in Part B. The result in the

first row indicates that a 3% flow of workers from developing to developed countries

increase world GDP by 0.6%. The remaining findings in Part B consider the enlargement

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Gains from Foreign Direct Investment

To determine the overall short-term gains from FDI, we present in Figure 5-15 the total

world capital on the horizontal axis and the rental earned in each country on the vertical

axis. The amount of capital used at Home, measured from left to right, is denoted by 0K.

Prior to FDI, the Home rental is R at point A. The units of capital employed in Foreign,

5 Conclusion

This chapter examines the impact of labor and capital mobility on the Home and Foreign

country in the short and long run using the specific-factors and Heckscher‒Ohlin models,

respectively.

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In the long run, when labor as well as capital is mobile between the industries, the wage

does not necessarily fall, in contrast to the short-run case. The reason is that there is an

expansion in the output of the industry that uses the labor intensively and a contraction in

the other industry, leading to full employment without a change in the labor‒capital ratio.

The change in the industry output is the main finding of the Rybczynski theorem.

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TEACHING TIPS

Tip 1: Differences in the Short– and Long–Run Model

This chapter deals with the effects of factor movements on factor returns in both the

short- and long-run models. This is important because it demonstrates the differences

between these two models. In teaching this chapter, it is important to stress the

differences in factor returns and their link to factor mobility. Problems 9 and 10

demonstrate this difference. Ask students to complete them and comment on the

difference in output and factor prices in these two problems.

Tip 2: Discussion and Debate on Migration

Ask students to use information from this chapter (we suggest students read SIDE BAR:

Immigrants and Their Remittances and APPLICATION: Gains from Migration), as well

as independent research, to prepare to discuss the consequences of migration for both

Data on world migration

UN International Migrant Stock: http://esa.un.org/migration/

Data source for remittance flows

Time series data: Go to http://data.un.org/Default.aspx and search for “remittances”.

Most recent data and projections: Search for “World Bank migration and remittances” to

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Tip 3: FDI Data Exercise

To familiarize students with data sources, ask students to look up the most recent U.S.

direct investment data, as seen in Problems 1–3. Instruct students to go to

http://www.bea.gov and then proceed to the section entitled “International Economic

Accounts”. Scroll down to “Operations of Multinational Companies” and click on the

“Selected Tables” link for U.S. direct investment abroad and FDI in the United States.

Here, students will find country-by-industry tables on the historical–cost basis for FDI in

the United States and the U.S. direct investment position abroad (as is reported in the In-

Class Problems).

Ask students to investigate the latest available industry–level data and discuss whether

they remain consistent with previous data or if any major changes have occurred.

Additionally, you may want to ask students to investigate the data by source and

destination country (as in Problems 1 and 2). Which countries does the United States

invest in most heavily, and in which industries? Which countries invest most heavily in

the United States, and in what U.S. industries? Ask students to compile this information

and discuss it.

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IN–CLASS PROBLEMS

1. Obtain information pertaining to the U.S. direct investment position abroad on a

historical-cost basis from the Bureau of Economic Analysis

(http://bea.gov/international/di1usdbal.htm.

Name the top 20 countries receiving FDI from the United States. Comment on your list.

Have the countries remained the same over the years?

Answer: The top 20 countries that received FDI from the United States in 2009

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U.S. Direct Investment Abroad on a Historical–Cost Basis

2. Name the top nine countries investing in the United States using data on the

historical-cost basis as compiled by the Bureau of Economic Analysis

((http://bea.gov/international/di1fdibal.htm). Is your list of countries the same as that in

Problem 1? What may account for the differences?

Answer: The top 20 countries investing in the United States in 2009 are given in

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FDI into the United States by Country on a Historical-Cost Basis

3. In which industries is the U.S. investment abroad the largest? In what industries

are foreign investments in the United States most concentrated?

U.S. Direct Investment Abroad by Industry on a Historical-Cost Basis, 2009‒14

(millions of U.S. dollars)

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Data from: Bureau of Economic Analysis.

FDI in the United States by Industry on a Historical-Cost Basis, 2008‒14 (millions of

U.S. dollars)

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4. Why might labor unions support limitations on the outflow of FDI?

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5. According to Table 5-3, for some countries remittances account for a larger

source of income than foreign aid. Should these countries have policies to encourage

emigration? Explain.

6. Assume that Mexico receives an inflow of FDI. Suppose two factors (labor and

capital) are used in the production in two industries (food and televisions). Further

assume that televisions are capital-intensive, as compared with food. Use the long-run

specific-factors model to answer the following questions.

a. Show the impact of the inflow of FDI on Mexico in an illustration similar

to Figure 5.13, with the output of food (televisions) on the vertical (horizontal) axis.

What happens to the output of each good?

b. How has wage changed in terms of food and televisions?

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Answer: Because the capital-intensive industry (televisions) absorbed the

7. Only developing countries compete for FDI. Comment.

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8. The following table shows the flow of FDI for select countries between 1985 and

2008. Over this period, the inflow of FDI to China increased substantially. What is the

impact of this flow of capital on wages in China according to the short-run specific–

factors model?

FDI Flow by Country, 1985‒2008 (millions of U.S. dollars)

Flow

1985–

2004

(Annual

Average)

2005

2006

2007

2008

Outflows

395,122

741,972

1,157,910

1,809,531

1,506,528

United

Kingdom

Inflows

33,530

176,006

156,186

183,386

96,939

Outflows

60,078

80,833

86,271

275,482

111,411

Inflows

3,238

2,775

–6,506

22,549

24,426

Outflows

226,874

45,781

50,266

73,549

128,020

Inflows

439,007

973,329

1,461,074

1,978,838

1,697,353

Developed

Inflows

312,072

613,089

972,762

1,358,628

962,259

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United

States

Inflows

93,586

104,809

237,136

271,176

316,112

Outflows

46,412

122,707

215,282

285,486

292,710

India

Inflows

2,036

7,606

20,336

25,127

41,554

Outflows

419

2,978

14,344

17,281

17,685

China

Inflows

27,900

72,406

72,715

83,521

108,312

Outflows

2,263

12,261

21,160

22,469

52,150

Inflows

10,492

21,922

19,316

27,278

21,950

Outflows

908

6474

5758

8256

686

Data from: UNCTAD, Interactive Database.

9. Consider a long-run model for a country producing two products (digital cameras

and baskets) using two factors (capital and labor).

Outflows

90,779

15,369

224,220

378,362

311,796

Developing

Inflows

120,841

329,292

433,764

529,344

620,733

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a. Which good would you expect to be capital-intensive? Which good would

you expect to be labor-intensive? Why?

Answer: We define a capital-intensive good (in contrast to a labor–

b. Suppose that foreign owners of domestic capital decide to decrease their

investment. Illustrate the effects of this change in a box diagram. Does output in each

industry increase, decrease, or stay the same? Do wages increase, decrease, or stay the

same in each industry?

Answer: The effect of decreasing FDI is equivalent to a decrease in

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10. Suppose a country has two specific factors, land and capital. Land is an input in

the production of corn. Capital is used only in the production of rockets. A third factor,

labor, is mobile between the two sectors. Holding all else constant, what is the effect of

an increase in the amount of available capital in the short run?

a. on the real return on capital?

Answer: The increase in capital leads to a decrease in its real return in the

b. on the real return of the mobile factor of production?

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c. on the output of corn and rockets?

Answer: According to the Rybczynski theorem, an increase in the amount

11. Have your class watch the TED Talk located at

https://www.ted.com/talks/dilip_ratha_the_hidden_force_in_global_economics_sending_