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Rybczynski theorem: In the Heckscher‒Ohlin model with two goods and two factors, an
increase in the amount of a factor found in an economy will increase the output of the
industry using that factor intensively, and decrease the output of the other industry.
Effect of Immigration on Factor Prices By absorbing additional units of the increased
factor via output expansion in the industry that uses the factor intensively and contracting
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Factor price insensitivity: In the Heckscher‒Ohlin model with two goods and two
It is important to note that the factor price insensitivity theorem assumes the following:
• Perfect competition and full employment exist.
• Factors are mobile in each country but immobile across national borders.
APPLICATION
The Effects of the Mariel Boatlift on Industry Output in Miami
Recall that the Cuban refugees arriving in Miami in 1980 were predominately less skilled
relative to those in the host city. With the large inflow in unskilled workers, according to
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Figure 5-9 shows the real value-added per capita for Miami and the average for
comparison cities in the apparel industry and high-skilled industries in panels (a) and (b),
respectively.
Panel (a) provides some evidence of the results predicted by the Rybczynski theorem.
Namely, although the real value-added per capita in the apparel industry fell between
1972 and 1996, the rate of decline was slower for Miami relative to the comparison cities
However, another reason why wages did not change in Miami could be that the city
adopted the use of computers more slowly relative to the rest of the country during the
period of “skill-biased technological change.” Although the national trend led to an
increase in the demand for high-skilled workers and a reduction in the employment of
APPLICATION
Immigration to the United States
From 1980 to 2005, the United States experienced more than a doubling of foreign-born
people. They amounted to some 6.7% of the population in 1980 and 13% in 2005. By
2013, that percentage had grown to 14.3%.
How has immigration to the United States affected U.S. wages?
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On the horizontal axis of Figure 5-10, the percent of U.S.-born workers in various
educational categories is provided. These numbers inform us that some 7% of the U.S.-
born workforce did not have a high school diploma. These data suggest the potential for
competition between U.S.- and foreign-born workers. The 7% of U.S.-born workers
likely compete for jobs with the 45% of foreign-born immigrants. But, this represents a
relatively small percent of U.S.-born citizens that compete with foreigners for jobs.
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What we have learned from this analysis is that competition with foreigners does occurs.
It occurs at the bottom and top educational levels, but not where the majority of the U.S.-
born workforce resides. That 82% experience very little competition from foreign-born
workers.
One is that the fraction of immigrants is largest for the lowest and highest educational
levels, as shown in Figure 5.10. So, it may not be too surprising that these two groups
experience the greatest loss in wages. Second, even though it is assumed that the overall
capital–labor ratio in the country is fixed, and the real rental on capital is fixed, it may
still be possible for specific wages of workers with certain education levels to change.
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Part A assumes that U.S.- and foreign-born workers are perfect substitutes. Again, we see
that immigration has the greatest effect on worker’s wages with very low or very high
levels of education and only a small impact on worker’s wages at the middle educational
levels.
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may not have competed with the Israeli workers and instead competed with each other,
lowering the wages for the Russians, while at the same time complementing the activities
of the Israeli workers and offering more opportunities for greater specialization, greater
productivity, growth in capital, and increasing wages.
2 The Movement of Capital Between Countries: Foreign Direct Investment
In this section, we study the movement of capital across countries, also known as foreign
direct investment (FDI). A country experiences an inflow of FDI when a foreign
Greenfield Investment
In the following sections, we focus on greenfield investments rather than acquisitions.
We treat the purchase of a new foreign building in the same way as the movement of
labor between countries. Doing so allows us to determine the impact of cross-country
FDI in the Short Run: Specific-Factors Model
Effect of FDI on the Wage We begin with the short-run specific-factors model in which
labor is mobile and capital and land are used exclusively in manufacturing and
agriculture, respectively. Under these assumptions, the additional capital is only
employed in the manufacturing industry. The rise in the amount of capital available per
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Effect of FDI on the Industry Outputs Again, in the short-run specific-factors model,
the combination of increased capital and additional labor employed in the manufacturing
sector means that output of that sector increases after the inflow of FDI. In contrast,
Effect of FDI on the Rentals To determine the short-run impact of FDI on the rental on
land, note that the decrease in workers employed in agriculture implies that the marginal
product of land falls. Consequently, the rental on land, RT = PA · MPTA, drops because the
price of agricultural goods is unchanged.
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MPLM. If the MPLM in manufacturing has not changed (it is assumed that PM is constant),
this implies that labor must have the same amount of capital per worker following the
inflow of FDI represented by point C. Thus, the capital‒labor ratio must not have
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FDI in the Long Run
To examine the effect of FDI in the long run, we return to the simplified model with two
industries (computers and shoes) using two factors of production (labor and capital),
where computers are capital-intensive and shoes are labor-intensive (i.e., KC/LC > KS/LS).
Point A of the “box diagram” illustrated by panel (a) of Figure 5-13 gives the initial
Effect of FDI on Outputs and Factor Prices
Suppose that the amount of capital in the economy increases due to an inflow of FDI. The
increase expands the capital axis on the top right of the box in panel (a) of Figure 5-13
and shifts the origin up to 0C
′
. The new allocation of factors between the industries is
shown at point B. Now the labor and capital used in the shoe industry are measured by
0SB, which is shorter than the line 0SA. Therefore, less labor and less capital are used in
the production of footwear, and shoe output falls. The labor and capital used in computers
APPLICATION
The Effect of FDI on Rentals and Wages in Singapore
Many countries have policies to attract foreign investments. One such country is
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Table 5-2 presents the estimated effect of the inflow of FDI on the real rental and wages
in Singapore for 1970 to 1990. Over this period, the overall capital‒labor ratio grew
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Alternatively, the rental on capital can be measured as the price, PK, of the capital
equipment multiplied by the interest rate, i, earned had the capital been invested in other
forms of asset plus its rate of depreciation, d. Namely, the rental on the capital equipment
where P is the overall price index. Using the bank lending rate for i, the real rental is
estimated to grow by 1.6% per year, as shown in the first row. With the return on equity
as the interest rate, the second row shows that the real rental falls by 0.2% each year
Altogether, the alternative calculations for the rental on capital contradict the results of
Part A, suggesting a lack of evidence that the rental on capital fell as predicted by the
short-run specific-factors model.
Again, these results do not clearly verify the long-run model as well. In particular, part B
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H E A D L I N E S
“The Myth of Asia” Miracle
The article gives the reader the impression that the United States and Europe are
concerned about rising competition from Asia due to the amount of capital accumulation
in the region. In addition, it alludes to a pledge made—possibly by former President Bill
Clinton—to meet the new challenge. However, it turns out that the Eastern economy
3 Gains from Labor and Capital Flows
Most countries have restrictions on foreign investment and immigration, particularly the
latter. These limitations include a quota on the number of individuals allowed from each
country, such as the Quota Law of 1921 in the United States. The restrictions are
supported by groups opposed to public spending on services available to immigrants
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Gains from Immigration
Wages at Home and Abroad To measure the gains from immigration, we will use the
short-term specific-factors model for the world. As illustrated in Figure 5-14, the
horizontal axis measures the number of workers at Home, , from left to right, and the
number of workers in Foreign, , is measured from right to left, giving the total amount
of workers in the world as + .
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Gains for the Home Country We are now ready to determine whether there are overall
short-term gains to Home and Foreign from immigration and how those gains are
distributed.
Recall that the wage is equal to the marginal product of labor in the respective industry
multiplied by the price of its good. Therefore, the marginal product of the first Foreign
worker to migrate equals the Home wage, W. As each additional Foreign worker enters
the Home workforce, the marginal product of labor at Home falls given the law of
diminishing returns and our assumption of fixed land and capital in the short run. The
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decrease in marginal product due to the inflow of immigrants causes the Home wage to
decrease from W to W
′
along the Home wage curve from points A to B.
Gains for the Foreign Country In the Foreign country, the wage absence of emigration
is W* at point A*. As each worker leaves, the Foreign marginal product of labor improves,
causing the wage to rise from W* to W
′
. In addition to workers in the Foreign country
receiving the higher wage, emigrated Foreign workers are also paid W
′
in the Home
country under full migration. However, because the wage earned, W
′
, at Home is higher
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S I D E B A R
Immigrants and Their Remittances
For some countries, remittances or earnings sent back to Home by immigrants are an
important source of income. The estimated remittances in 2013 from the World Bank
were $480 billion, up from $406 billion in 2012. Table 5-3 shows the remittances versus
See Problem 11 below for a TED Talk video explaining the importance of, and issues
surrounding, global income flows from inward remittances.
