week 8 Flashcards
define MNE
a country with production plants in more than 1 country, special case of a multi plant firm
what is FDI
the flows which funds use to estabish a foreign plant
what is horizontal FDI
replication of entire production process in a foreign plant. caused by size of foreign production market plus trade cost
what is vertical FDI
fragmentation of the production process –> components produced in different countries caused by factor price differences across countries
what is greenfield FDI
when a country sets up plant in foreign country from scratch
what are mergers and acquitions
change in ownership of part of the hosts capital stock
what causes FDI flow according to the model?
FDI flows are caused by differences in countries in the return to capital –> it will continue until capital is equal across countries
what are the assumption of the model of FDI flows
2 countries North (K abundant) and south
2 factos of production
1 good produced
perfect comeptition in all market
full employment of both factoes
what is the MPK CURVE
acts as a country demand curve for capital
can be used to determine the distrbution of income between L and K
draw Noth under AUT
north: is K abundant
check
what are the results of the MPK diagram
A+b = total output A = capital income B = labour/wage income
what happens under K mobility?
K flows from K abudant country to the other country
until the return to K is equalised at R1 =R2=R
what is the defintion of GDP?
total output of a country, regardless of who recieves the income it generates
what is GNP?
total income earned by country’s population, regardless of its geographical source
when is GNP=GDP true?
for the world as a whole
but not for an individual country
what are the effects of K mobility on GDP and world income?
K mobility
GDP production will decrease in by traingle
GDP will increase in S by traingle
world output (income) increases by Gn+Gs so world income increase under K mobility
- MPK > MPKm under autarky
what are the effects of K mobility on income distrbution and national income (GNP) in a labour-abundant country
autarky:
GNP=GDP = I (wage income) + (II + III) capital income
fdi gnp FDI: in a labour abundant countries, L increases and K loses by II = (rs -r*)k, national income increases by Gs
what is wage income for L ABUDANT COUNTRIES according to the diagram
wage income I + II + GS
what is income to foreign K owners in L abundant countries in the diagram
IV
what are the effects of K mobility on income distrbution and national income (GNP) in a capital-abundant country
AUT:
gnp=gdp= I + II + III
K-income= rn (kw-k)
FDI: GNP > gdp so fdi will flow out
- GNP = GDP + r* (k*-K)
- GNP = i + II + III + gn
AUT into FDI in n, L loses and K gains
National income will increase by Gn
What is wage income for K abudant countries?
I + II
what is capital income in terms of a capital abundant country
r* (kw-k)
or
II + III + gn
why does L lose when a capital abundant country goes into FDI
due to outward FDI, it shows there deindustralisation
