FOP Movements Flashcards
The US distribution of skills among foreign born workers and what type of immigrants are they?
BINOMIAL
- no education - illegal
- very educated - brain drain
Distribution of skills among US born workers
Normal distribution
- majority middle educated
Remittances are higher for what type of immigrants? Why?
Illegal - due to higher demand for remittances by family members back home, despite lower skills.
In the labour mobility model, how many goods do we assume?
One good = output
In the labour mobility model, how many FOPs? What do we assume about mobility?
2 FOPs:
Land = immobile
Labour = mobile
Explain decreasing MPL concept
On a fixed area of land, each worker becomes less productive as more workers are added to that fixed area of land.
What shape is the production function when we change labour but keep land constant?
Concave
MPL > 0
Change in MPL < 0
Area under MPL =
Area under MPL = total value of output
Total value of output =
And why?
Total value of output = value of wages + value of rents
Due to perfect competition: zero profits
Wages = rectangle below real wage, area above is rents.
Perfect competition FOC for inputs
W/P = MPL
What does the perfect competition FOC about inputs assume about workers?
Assumes workers are homogeneous
How do Home and foreign differ in immigration model? How are they the same?
Same technology
Different land-labour ratio endowments
If home is labour abundant, how does this impact MPL and wage?
Labour abundant = lower MPL due to diminishing MPL = lower wage by perfect competition FOC
Incentive to migrate driven by…
Wage differentials across countries due to different MPLs due to different land-labour ratios.
When is there no longer an incentive to migrate?
When MPL=MPL*
W=w*
If workers migrate from home to foreign, how does this impact home and foreign?
Home: L falls, MPL rises, w rises
Foreign: L rises, MPL falls, w falls
Empirical example of migration leading to wage convergence
1st wave globalisation: 1870-1913
Initially, wages higher in destination that origin countries.
Wages rose more in origin countries than destination as expected.
In the global equilibrium, how do MPL and w of home and foreign compare?
MPL=MPL*
w=w*
Movement of labour created arbitrage.
Winners of migration from home to foreign
- Remaining home workers
- Migrating workers
- landowners in foreign
Losers of migration from home to foreign
- Existing foreign workers
- Landowners in Home
Does migration create net gains overall? How? Why?
Migration —> increase in world output
Because workers move to where they’re most productive = able to produce more world output with same world labour force.
When is world output maximised?
When MPL=MPL*
What model is an alternative to the MPL model of migration? Why?
HO model of trade with 2 goods due to embodiment
3 reasons why we do not see wage equalisation empirically.
- Countries may not produce the same goods so MPLs not comparable
- Countries may have different technology - MPL depends on tech as well as quantity of L
- Barriers to immigration / some FOPs immobile
How could our model explain the rising wage gap in the US?
Immigration mostly of lowest educated —> less educated relatively more abundant —> rising wage gap
But what do we actually see in terms of US education trends, and hence what could be the cause of wage inequality Instead?
Overall in US LF, education risen.
So more educated more abundant.
Instead due to skills biased technological change - cannot blame immigration.
International lending and borrowing refers to the movement of what type of capital?
Financial capital - we do not refer to the movement of physical capital, but the money can be used to buy physical K.
We interpret international K mobility as what type of trade?
Inter-temporal Trade
What are the 2 goods in our model of international borrowing and lending?
Consumption today
Consumption tomorrow
Assume 2 times periods 2 distinct goods
How do we represent the trade off between consumption today and tomorrow?
Inter temporal PPF
Slope = opportunity cost of consumption today in terms of consumption tomorrow
The concave slope of intertemporal PPF implies…
The opportunity cost of consumption today in terms of consumption tomorrow RISES as the amount of consumption today RISES.
Comparative advantage in the intertemporal trade model
A country has a comparative advantage in current consumption if it has a lower opportunity cost of consumption today in terms of consumption tomorrow compared to another country.
If a country has a lower opportunity cost of consumption todsy, how does this influence their PPF?
Intertemporal PPF biased towards current consumption.
Example of a country that had a comparative advantage in current consumption and why
Oil producing countries during 1970s oil price boom.
Meant could consume a lot today, but didn’t have matching investment opportunities cf other countries.
Autarky condition in intertemporal trade model.
Opportunity cost of current current in terms of future consumption = relative price of current consumption in terms of futur consumption.
What is the relative price of current consumption?
(1 + r)
R = real IR
What’s the relative price of future consumption?
1/(1+r)
Which good does each country export in the intertemporal trade model? What does this actually mean?
Each country exports the good they have a comparative advantage in.
Export current consumption = lender
Export future consumption = borrower
In the intertemporal trade model, funds flow between home and foreign until….
r home = r foreign —> ONE WORLD IR
Arbitrage
FDI definition
FDI = an investment in which a firm in one country directly controls or owns a subsidiary in another country.
How does FDI differ to just looking at international borrowing and lending
FDI = about transfers of money AND acquisition of ownership.
Foreign controls definition and why?
At least 10% of stock is owned by a foreign company.
10% sufficient for direct control of business operations.
Across companies FDI
Invest in stock of another company = acquire ownership
Within company FDI
Money flows across borders from a parent company to one of its subsidiaries - do not acquire ownership as already owned.
Greenfield FDI =
Build a new production factory abroad
Brownfield FDI =
Buy a controlling stake in a foreign firm - buy something that already exists.
Another name for brownfield FDI
Cross border M&A
How do greenfield and brownfield FDI differ by stability?
Greenfield = more stable Brownfield = varies with business cycle.
How have the growth rates of FDI compared to growth rates of trade ??
Growth rates FDI > growth rates trade.
Peaks in world FDI flows during X and Y due to Z
Dot com bubble
Financial crisis
Due to M&A activity - tends to peak during booms as easier to secure loans.
Most FDI goes from what type f countries to what time?
From rich to rich
Authors of paper on are multinational a threat and what did they find?
De Graume and Camerman (2003)
Not a threat: MNCs small cf nation states, and no evidence of size/power rising relatively.
What has changed = perception.
Why is it hard to compare size of companies and countries?
Countries: GDP = value added, flow
Companies: revenue = flow, but not value added.
A firm’s decision regarding FDI involves a trade off between…
Proximity = want to locate near customers to avoid high trade costs Concentration = want to locate in one place for IRS & only one FOC
Horizontal FDI =
Replicating production process abroad
Vertical FDI =
Buy something @ a different stage of the supply chain.
Vertical FDI is driven by…
Driven by lower production costs
Horizontal FDI driven by…
Proximity incentive - locate near large customer bases to reduce trade costs.
Vertical FDI between what type of countries
Developed —> developing
Reason for higher FDI to developing countries.
Horizontal FDI between what type of countries
Between developed countries.
2 questions for theory of MNCs
- Location - why locate where?
2. Internalisation - why produce in different locations by same firm, rather than separate firms?
3 reasons for producing in separate locations I.e. choosing proximity over concentration
- Locate near necessary FOPs
- Transport costs
- Other barriers to trade
3 reasons for internalisation
- More profitable
- Technology transfers: patents or property rights may be weak
- Vertical integration: rather than outsourcing, control supply chain yourself - combine upstream and downstream firms into one company I increase efficiency.
Example of company that did vertical integration
Boeing - bough many upstream companies to fulfil its contracts with airline companies on time and avoid delays.
Define outsourcing
Giving up ownership to another firm of a production process previously done in house.
Can outsource to a domestic or foreign firm.
Define offshoring
Shifting production abroad
Doesn’t matter if your own company or a foreign company.
2 forms of offshoring =
- Foreign outsourcing
2. Vertical FDI
