Topic 4 & 5: Wage Skill Premium and Wealth

Question 1

Wage Skilled Premium

Answer 1

Wage skilled premium explains:

• increased inequality in labor income causing
• Observed increases in inequality in developing and developing countries

Express WSP:

• As the ratio of the wage for skilled workers (ws) to the wage of unskilled workers (wl)
• ws/wl

Question 2

Migration and Wage Skilled Premium

Answer 2

Input/labor movement

DEVELOPED (N) - Migration of unskilled workers from the South to the North can explain the observed increase in the wage skill premium in developed countries

DEVELOPING (S) - BUT it cannot explain the observed wage inequality in developing countries

Question 3

Trade Liberalization and Wage Skilled Premium

Answer 3

Output movements

DEVELOPED COUNTRIES (N) - Trade liberalization for goods can explain the observed increase in the wage skill premium in developed
countries (specializing in high-skill intensive production)

DEVELOPING COUNTRIES (S) - it cannot explain the observed wage inequality in developing countries (specializing in low-skill intensive production)

Question 4

Skilled-biased technological change and WSP

Answer 4

Production movements

Skill-biased technological change can explain the increase in the wage skill premium in developing and developed countries and predicts a race between technology and education

Question 5

International Outsourcing and WSP

Answer 5

Production movements

International outsourcing can explain the increase in wage inequality in both regions

Question 6

Brain Waste

Answer 6

Skilled workers from country of origin (S) enter the labor market for unskilled workers abroad (N)

Question 7

Brain Drain

Answer 7

XXX

Question 8

Wealth

Answer 8

• Wealth is the difference between assets and liabilities
• Wealth changes as a response to exogenous shocks (luck) or endogenous changes (saving, interest)
• We will only look at real assets for now (vs. financial assets)

Question 9

Saving

Answer 9

Saving is the change in wealth due to the accumulation of assets or the reduction of liabilities

Saving = current income - current spending = change in wealth

Saving = current income > current expenditures

• increase in wealth
• increase in assets and/or liabilities decrease

Question 10

Dissaving

Answer 10

Current income < current expenditures

• decrease in wealth
• decrease in assets and/or increase in liabilities

Question 11

Interest

Answer 11

Interest is the difference between initial value and future value of asset

Interest = Future Value−Initial Value = ∆Wealth

POS Interest
- Future value > initial value = wealth increase

Neg Interest
- Future value < initial value = wealth decrease

Interest is the return on investments and is described by nominal and real interest rates

Question 12

Nominal Interest Rates (i)
vs
Real Interest Rates (r)

Answer 12

Nominal interest rates are the relative (percentage) returns from holding assets

Real interest rates remove inflation from nominal interest rates - Adjusts for inflation

Question 13

National Saving

S

Answer 13

Means the change in National wealth

S = National income - national spending 
S =         GNDI -            current spending 

⇒Closed economy: Changes in domestic real assets only S = I
⇒Open economy: Changes in domestic real assets, foreign assets, foreign liabilities S < or > I

Government saving is the surplus/deficit of the government budget

Question 14

GNDI
NI
NUT

Answer 14

S = National income - national spending 
S =         GNDI -            current spending 

GNDI = GDP + NI + NUT

NI: net income from factors of production and interest
NUT: net unilateral transfers (foreign aid, remittances)

Question 15

Net Lender

Answer 15

S > I

• Excess domestic saving over domestic investment
• Excess funds are used for purchasing foreign assets and/or reducing foreign liabilities

Question 16

Net Borrower

Answer 16

S < I
→Excess domestic investment over domestic saving
→Excess domestic investment is financed by selling foreign assets and/or increasing foreign liabilities

These countries accumulate assets (liabilities) from the rest of the world by running CA surpluses (deficits)

Question 17

Current Account (CA)

Answer 17

• The current account records all transactions in trading goods and services, realizing income, and
  receiving transfers in the interactions with other countries
• excludes acquisitions of assets and liabilities