Immigration and FDI in Neoclassical Model

Question 1

describe immigration to the ‘new world’

Answer 1

• 1870-1913, 30 million europeans emigrated to US as new world had higher real wages
• US population increased by 17%
• real wages in US in 1870 3 times higher than europe as labour scarce relative to land and capital
• over time capital accumulated to real wages in both locations grew but at a slower rate in the new world
• this migration contributed toward convergence of real wages

Question 2

how to determine wages and rental wages

Answer 2

• wages and rentals determined by marginal products of labour and capital
• MPs determined by capital-labour ratio in each industry

Question 3

what does a higher capital-labour ratio mean?

Answer 3

MP of capital and real rental must be lower than MP of labour and real wage

Question 4

what is the Rybczynski theorem?

Answer 4

‘in HO model with two goods and factors, increase in amount of a factor found in economy will increase output of industry using that factor intensively and decrease output of the other industry’

Question 5

effect of immigration on factor prices

Answer 5

change in outputs in rybczynski theorem goes hand in hand with finding wages and rentals won’t change due to increase in labour/capital

Question 6

what is ‘factor price insensitivity’?

Answer 6

in HO model with 2 goods and factors, exogenous increase in endowment of factor will be absorbed by changing outputs of industries with no change in factor prices

Question 7

define ‘real value added’

Answer 7

measures payments to labour and capital in industry correlated for inflation

Question 8

two types of FDI

Answer 8

1) greenfield FDI
2) acquisition/brownfield FDI

Question 9

what is greenfield FDI?

Answer 9

firm builds a new plant in foreign country

Question 10

what is acquisition/brownfield FDI?

Answer 10

firm buys already existing foreign plant

Question 11

example of acquisition/brownfield FDI

Answer 11

flow of investment into eastern europe due to privatisation

Question 12

why is immigration controversial?

Answer 12

• some groups oppose spending of public funds of immigrants
• other groups fear competition for jobs created by inflow of foreign workers

Question 13

immigration - aggregate welfare effects at home

Answer 13

• gain for home economy is difference between MPs of additional workers and actual wage paid
• total value of additional output of goods in home economy exceeds increase in total wages to be paid