Economics Chapter 5 Homework Figure 512 Both These Points The Wage

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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

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

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?

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.

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.

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.

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

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.

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

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

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

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

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

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 + .

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

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

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.