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point B in Figure 5-8, where the unchanged relative price of computers is just tangent to
Rybczynski theorem: In the Heckscher‒Ohlin model with two goods and two factors, an
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
the output of the other industry, factor prices remain unchanged. This result is referred to
as
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Factor price insensitivity: In the Heckscher‒Ohlin model with two goods and two
factors, an increase in the amount of a factor found in an economy can be absorbed by
changing the outputs of the industries, without any change in the factor prices.
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
23
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.
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
26
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.
Part A assumes that U.S.– and foreign-born workers are perfect substitutes. Again, we see
This is fascinating research as it may help to explain the Mariel boatlift of low-skilled
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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
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
company builds or buys property including plant and equipment in the host country. FDI
is considered greenfield investment when the foreign company builds a plant in the host
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
31
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
Now let’s examine what occurs as the wage slowly increases at point C, where we hold
the amount of capital constant. This increase in wages will move us up the
′ curve to point B. Notice that as we move along this curve, less labor is used
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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).
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
This outcome is identical to the results of long-term immigration, which also leaves
factor prices unchanged.
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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1.6% per year. More specifically, these estimates are consistent with the short-run
specific–factors model, which predicts that the increase in capital due to FDI would lead
to a fall in the rental on the specific factors (capital) and an increase in the wage paid to
the mobile factor (labor).
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
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
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
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
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W*, at point A* is lower than that at Home. The higher Home wage entices some workers
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.
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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.
After migration all workers are paid the Home wage of W
′
, which equals the marginal
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
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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