neo classical

Question 1

Can you think of reasons for why the assumption of perfect mobility of capital and labor might not hold up in reality? (4)

Answer 1

• Legal and regulatory barriers: Different countries have their own laws and regulations regarding the movement of capital and labor. These barriers can make it difficult for capital and labor to move freely between countries.
• Cultural and language differences: Language barriers and cultural differences can make it challenging for workers to move to other countries for work.
• Job-specific skills: Workers might have skills that are specific to their home country’s industries, making it harder for them to find suitable jobs in other countries.
• Capital restrictions: Some countries may impose restrictions on the movement of capital in and out of the country, limiting its mobility.

Question 2

Do you think capital and labour are equally mobile? Why or why not?

Answer 2

No, capital and labour are not equally mobile. Capital, especially financial capital, tends to be more mobile than labor.
This is because financial investments can be moved quickly between countries, and multinational corporations can easily shift their operations to places with better business conditions.
On the other hand, labor mobility is often hindered by various factors like visa requirements, language barriers, and cultural differences, making it less mobile compared to capital.

Question 3

Can you think of examples of where it does not (hold up)? Where it does (hint: you might have to go back in time)? (2)

Answer 3

• Today, many migrant workers face challenges in moving to other countries for work due to strict immigration policies and societal prejudices, demonstrating limited labor mobility.
• As for capital, certain countries restrict the outflow of capital to protect their economies, such as China’s capital controls to manage its financial stability.

Question 4

What does violating the assumption of perfect mobility of capital (‘Lucas paradox’) or labour mean for convergence/disparities?

Answer 4

Can have significant implications for convergence and disparities between regions or countries.
If capital and labor cannot move freely to areas with higher returns or better opportunities, it can lead to imbalances in economic development.
Regions or countries with limited mobility may struggle to attract investment and skilled labor, causing disparities in economic growth and development.

Question 5

What kind of policies are consistent with the neoclassical framework?

Answer 5

Policies that promote free markets, limited government intervention, and open trade are consistent.
These policies aim to enhance competition, encourage private investment, and facilitate the efficient allocation of resources.
Examples include free trade agreements, deregulation of industries, and measures to attract foreign direct investment. The neoclassical approach advocates for policies that foster market-driven economic growth and development.

Question 6

Capital controls in China are designed to achieve several objectives (4)

Answer 6

Currency stability: By restricting the outflow of capital, China aims to stabilize its currency, the Renminbi (RMB), and prevent excessive fluctuations in its exchange rate. This helps to maintain a competitive and predictable environment for trade and investment.

Financial stability: Capital controls help China manage financial risks and reduce the possibility of sudden capital flight or large-scale withdrawals of investments, which could destabilize the domestic financial system.

Preventing speculative activities: By limiting capital outflows, China seeks to curb speculative investments and prevent investors from moving money in and out of the country quickly, which could lead to speculative bubbles or market volatility.

Controlling inflation and asset bubbles: Capital controls can be used to prevent excessive inflows of foreign capital, which could lead to inflationary pressures or asset bubbles in certain sectors of the economy.

Question 7

However, these capital controls also come with some drawbacks and challenges (3)

Answer 7

Impact on foreign investors: Capital controls may discourage foreign investors from investing in China, as it can make it more difficult for them to repatriate profits or move their investments freely.

Limited access to global markets: Capital controls can restrict Chinese businesses and investors from accessing global markets and diversifying their investment portfolios abroad.

Potential for evasion: Capital controls may lead to increased attempts to evade the regulations, such as using informal channels to move money in and out of the country, which can create challenges for regulators in enforcing the controls effectively.