Chapter 7 International Factor Movements
Chapter 7 ▪ International Factor Movements
Chapter organization Introduction International labor mobility a International Borrowing and Lending Direct Foreign Investment and Multinational Firms Summary Appendix: More on Intertemporal Trade Copyright C 2003 Pearson Education, Inc Slide 7-2
Copyright © 2003 Pearson Education, Inc. Slide 7-2 ▪ Introduction ▪ International Labor Mobility ▪ International Borrowing and Lending ▪ Direct Foreign Investment and Multinational Firms ▪ Summary ▪ Appendix: More on Intertemporal Trade Chapter Organization
Introduction Movement of goods and services is one form of international integration Another form of integration is international movements of factors of production(factor movements) Factor movements include ° Labor migration Transfer of capital via international borrowing and lending International linkages involved in the formation of multinational corporations Copyright C 2003 Pearson Education, Inc Slide 7-3
Copyright © 2003 Pearson Education, Inc. Slide 7-3 Introduction ▪ Movement of goods and services is one form of international integration. ▪ Another form of integration is international movements of factors of production (factor movements). ▪ Factor movements include: • Labor migration • Transfer of capital via international borrowing and lending • International linkages involved in the formation of multinational corporations
International Labor Mobility A One-Good Model without Factor Mobility Assumptions of the model There are two countries(Home and Foreign) There are two factors of production: Land(T)and Labor (L). Both countries produce only one good (refer to it as output Both countries have the same technology but different overall land-labor ratios Home is the labor-abundant country and Foreign is the land-abundant country Perfect competition prevails in all markets Copyright C 2003 Pearson Education, Inc Slide 7-4
Copyright © 2003 Pearson Education, Inc. Slide 7-4 ▪ A One-Good Model Without Factor Mobility • Assumptions of the model: – There are two countries (Home and Foreign). – There are two factors of production: Land (T) and Labor (L). – Both countries produce only one good (refer to it as “output”). – Both countries have the same technology but different overall land-labor ratios. – Home is the labor-abundant country and Foreign is the land-abundant country. – Perfect competition prevails in all markets. International Labor Mobility
International Labor Mobility Figure 7-1: An Economy's Production Function Output, Q Q(T, L Labor, L Copyright C 2003 Pearson Education, Inc Slide 7-5
Copyright © 2003 Pearson Education, Inc. Slide 7-5 International Labor Mobility Labor, L Output, Q Q (T, L) Figure 7-1: An Economy’s Production Function
International Labor Mobility Figure 7-2: The Marginal Product of Labor Marginal product of labor. MPL Real Rents wage Wages MPL abor. Copyright C 2003 Pearson Education, Inc Slide 7-6
Copyright © 2003 Pearson Education, Inc. Slide 7-6 Rents Wages Real wage MPL Labor, L Marginal Product of labor, MPL International Labor Mobility Figure 7-2: The Marginal Product of Labor
International Labor Mobility International Labor movement Suppose that workers are able to move between the two countries Home workers would like to move to Foreign until the marginal product of labor is the same in the two countries This movement will reduce the home labor force and thus raise the real wage in Home This movement will increase the Foreign labor force and reduce the real wage in Foreign Copyright C 2003 Pearson Education, Inc Slide 7-7
Copyright © 2003 Pearson Education, Inc. Slide 7-7 ▪ International Labor Movement • Suppose that workers are able to move between the two countries. – Home workers would like to move to Foreign until the marginal product of labor is the same in the two countries. – This movement will reduce the Home labor force and thus raise the real wage in Home. – This movement will increase the Foreign labor force and reduce the real wage in Foreign. International Labor Mobility
International Labor Mobility Figure 7-3: Causes and Effects of International Labor Mobility MPL Marginal product MPL of labor Bc MPL MPL o Home employment/2 Foreign O employment Migration of labor from Home to Foreign Total world labor force Copyright C 2003 Pearson Education, Inc Slide 7-8
Copyright © 2003 Pearson Education, Inc. Slide 7-8 L2 International Labor Mobility Figure 7-3: Causes and Effects of International Labor Mobility MPL MPL MPL* MPL* Home employment O Foreign employment O* A B C L1 Migration of labor from Home to Foreign Total world labor force Marginal product of labor
International Labor Mobility The redistribution of the world 's labor force Leads to a convergence of real wage rates Increases the world s output as a whole eaves some groups worse off Extending the analysis Modifying the model by adding some complications Suppose the countries produce two goods, one labor intensive and one land-intensive Trade offers an alternative to factor mobility: Home can export labor and import land by exporting the labor-intensive good and importing the land-intensive good Copyright C 2003 Pearson Education, Inc Slide 7-9
Copyright © 2003 Pearson Education, Inc. Slide 7-9 ▪ The redistribution of the world’s labor force: • Leads to a convergence of real wage rates • Increases the world’s output as a whole • Leaves some groups worse off ▪ Extending the Analysis • Modifying the model by adding some complications: – Suppose the countries produce two goods, one laborintensive and one land-intensive. – Trade offers an alternative to factor mobility: Home can export labor and import land by exporting the labor-intensive good and importing the land-intensive good. International Labor Mobility
International Borrowing and Lending International movements of capital Refer to borrowing and lending between countries -Example: AU.S. bank lends to a mexican firm Can be interpreted as intertemporal trade Refers to trade of goods today for goods in the future Copyright C 2003 Pearson Education, Inc Slide 7-10
Copyright © 2003 Pearson Education, Inc. Slide 7-10 ▪ International movements of capital • Refer to borrowing and lending between countries –Example: A U.S. bank lends to a Mexican firm. • Can be interpreted as intertemporal trade –Refers to trade of goods today for goods in the future International Borrowing and Lending
