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EC336 - TRADE > FOP Movements > Flashcards

FOP Movements Flashcards

1
Q

The US distribution of skills among foreign born workers and what type of immigrants are they?

A

BINOMIAL

  • no education - illegal
  • very educated - brain drain
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2
Q

Distribution of skills among US born workers

A

Normal distribution

- majority middle educated

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3
Q

Remittances are higher for what type of immigrants? Why?

A

Illegal - due to higher demand for remittances by family members back home, despite lower skills.

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4
Q

In the labour mobility model, how many goods do we assume?

A

One good = output

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5
Q

In the labour mobility model, how many FOPs? What do we assume about mobility?

A

2 FOPs:
Land = immobile
Labour = mobile

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6
Q

Explain decreasing MPL concept

A

On a fixed area of land, each worker becomes less productive as more workers are added to that fixed area of land.

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7
Q

What shape is the production function when we change labour but keep land constant?

A

Concave
MPL > 0
Change in MPL < 0

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8
Q

Area under MPL =

A

Area under MPL = total value of output

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9
Q

Total value of output =

And why?

A

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.

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10
Q

Perfect competition FOC for inputs

A

W/P = MPL

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11
Q

What does the perfect competition FOC about inputs assume about workers?

A

Assumes workers are homogeneous

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12
Q

How do Home and foreign differ in immigration model? How are they the same?

A

Same technology

Different land-labour ratio endowments

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13
Q

If home is labour abundant, how does this impact MPL and wage?

A

Labour abundant = lower MPL due to diminishing MPL = lower wage by perfect competition FOC

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14
Q

Incentive to migrate driven by…

A

Wage differentials across countries due to different MPLs due to different land-labour ratios.

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15
Q

When is there no longer an incentive to migrate?

A

When MPL=MPL*

W=w*

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16
Q

If workers migrate from home to foreign, how does this impact home and foreign?

A

Home: L falls, MPL rises, w rises
Foreign: L rises, MPL falls, w falls

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17
Q

Empirical example of migration leading to wage convergence

A

1st wave globalisation: 1870-1913
Initially, wages higher in destination that origin countries.
Wages rose more in origin countries than destination as expected.

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18
Q

In the global equilibrium, how do MPL and w of home and foreign compare?

A

MPL=MPL*
w=w*
Movement of labour created arbitrage.

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19
Q

Winners of migration from home to foreign

A
  • Remaining home workers
  • Migrating workers
  • landowners in foreign
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20
Q

Losers of migration from home to foreign

A
  • Existing foreign workers

- Landowners in Home

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21
Q

Does migration create net gains overall? How? Why?

A

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.

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22
Q

When is world output maximised?

A

When MPL=MPL*

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23
Q

What model is an alternative to the MPL model of migration? Why?

A

HO model of trade with 2 goods due to embodiment

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24
Q

3 reasons why we do not see wage equalisation empirically.

A
  1. Countries may not produce the same goods so MPLs not comparable
  2. Countries may have different technology - MPL depends on tech as well as quantity of L
  3. Barriers to immigration / some FOPs immobile
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25
Q

How could our model explain the rising wage gap in the US?

A

Immigration mostly of lowest educated —> less educated relatively more abundant —> rising wage gap

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26
Q

But what do we actually see in terms of US education trends, and hence what could be the cause of wage inequality Instead?

A

Overall in US LF, education risen.
So more educated more abundant.
Instead due to skills biased technological change - cannot blame immigration.

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27
Q

International lending and borrowing refers to the movement of what type of capital?

A

Financial capital - we do not refer to the movement of physical capital, but the money can be used to buy physical K.

28
Q

We interpret international K mobility as what type of trade?

A

Inter-temporal Trade

29
Q

What are the 2 goods in our model of international borrowing and lending?

A

Consumption today
Consumption tomorrow
Assume 2 times periods 2 distinct goods

30
Q

How do we represent the trade off between consumption today and tomorrow?

A

Inter temporal PPF

Slope = opportunity cost of consumption today in terms of consumption tomorrow

31
Q

The concave slope of intertemporal PPF implies…

A

The opportunity cost of consumption today in terms of consumption tomorrow RISES as the amount of consumption today RISES.

32
Q

Comparative advantage in the intertemporal trade model

A

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.

33
Q

If a country has a lower opportunity cost of consumption todsy, how does this influence their PPF?

A

Intertemporal PPF biased towards current consumption.

34
Q

Example of a country that had a comparative advantage in current consumption and why

A

Oil producing countries during 1970s oil price boom.

Meant could consume a lot today, but didn’t have matching investment opportunities cf other countries.

35
Q

Autarky condition in intertemporal trade model.

A

Opportunity cost of current current in terms of future consumption = relative price of current consumption in terms of futur consumption.

36
Q

What is the relative price of current consumption?

A

(1 + r)

R = real IR

37
Q

What’s the relative price of future consumption?

A

1/(1+r)

38
Q

Which good does each country export in the intertemporal trade model? What does this actually mean?

A

Each country exports the good they have a comparative advantage in.
Export current consumption = lender
Export future consumption = borrower

39
Q

In the intertemporal trade model, funds flow between home and foreign until….

A

r home = r foreign —> ONE WORLD IR

Arbitrage

40
Q

FDI definition

A

FDI = an investment in which a firm in one country directly controls or owns a subsidiary in another country.

41
Q

How does FDI differ to just looking at international borrowing and lending

A

FDI = about transfers of money AND acquisition of ownership.

42
Q

Foreign controls definition and why?

A

At least 10% of stock is owned by a foreign company.

10% sufficient for direct control of business operations.

43
Q

Across companies FDI

A

Invest in stock of another company = acquire ownership

44
Q

Within company FDI

A

Money flows across borders from a parent company to one of its subsidiaries - do not acquire ownership as already owned.

45
Q

Greenfield FDI =

A

Build a new production factory abroad

46
Q

Brownfield FDI =

A

Buy a controlling stake in a foreign firm - buy something that already exists.

47
Q

Another name for brownfield FDI

A

Cross border M&A

48
Q

How do greenfield and brownfield FDI differ by stability?

A 
Greenfield = more stable 
Brownfield = varies with business cycle.
49
Q

How have the growth rates of FDI compared to growth rates of trade ??

A

Growth rates FDI > growth rates trade.

50
Q

Peaks in world FDI flows during X and Y due to Z

A

Dot com bubble
Financial crisis
Due to M&A activity - tends to peak during booms as easier to secure loans.

51
Q

Most FDI goes from what type f countries to what time?

A

From rich to rich

52
Q

Authors of paper on are multinational a threat and what did they find?

A

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.

53
Q

Why is it hard to compare size of companies and countries?

A

Countries: GDP = value added, flow
Companies: revenue = flow, but not value added.

54
Q

A firm’s decision regarding FDI involves a trade off between…

A 
Proximity = want to locate near customers to avoid high trade costs 
Concentration = want to locate in one place for IRS &amp; only one FOC
55
Q

Horizontal FDI =

A

Replicating production process abroad

56
Q

Vertical FDI =

A

Buy something @ a different stage of the supply chain.

57
Q

Vertical FDI is driven by…

A

Driven by lower production costs

58
Q

Horizontal FDI driven by…

A

Proximity incentive - locate near large customer bases to reduce trade costs.

59
Q

Vertical FDI between what type of countries

A

Developed —> developing

Reason for higher FDI to developing countries.

60
Q

Horizontal FDI between what type of countries

A

Between developed countries.

61
Q

2 questions for theory of MNCs

A
  1. Location - why locate where?

2. Internalisation - why produce in different locations by same firm, rather than separate firms?

62
Q

3 reasons for producing in separate locations I.e. choosing proximity over concentration

A
  1. Locate near necessary FOPs
  2. Transport costs
  3. Other barriers to trade
63
Q

3 reasons for internalisation

A
  1. More profitable
  2. Technology transfers: patents or property rights may be weak
  3. Vertical integration: rather than outsourcing, control supply chain yourself - combine upstream and downstream firms into one company I increase efficiency.
64
Q

Example of company that did vertical integration

A

Boeing - bough many upstream companies to fulfil its contracts with airline companies on time and avoid delays.

65
Q

Define outsourcing

A

Giving up ownership to another firm of a production process previously done in house.
Can outsource to a domestic or foreign firm.

66
Q

Define offshoring

A

Shifting production abroad

Doesn’t matter if your own company or a foreign company.

67
Q

2 forms of offshoring =

A
  1. Foreign outsourcing

2. Vertical FDI

EC336 - TRADE (9 decks)

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