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By

 

Roll No. ± 0821002774
Program-- PGP 3
Program 3--Years
Batch-- July 2008
Batch
 | ter atio al Vs. Domestic
Trade
( Resources are free to move withi a domestic
eco omy
( Resources are ot free to move across cou tries.
( | ter atio al trade causes resource prices to
co verge toward o e a other.
( So i ter atio al trade ca substitute for
i ter atio al resource mobility.
±ssume that labor is mobile
across cou tries.
( The U.S. is capital abu da t a d | dia
is labor abu da t.
( Theory predicts that wages will be
higher i the U.S. tha i | dia.
( Higher US wages cause workers from
| dia to migrate to the U.S.
( Wages fall i the U.S. as supply (labor)
i creases.
( Wages rise i | dia as supply (labor)
decreases.
( Migratio of | dia labor stops whe
wages are equal betwee cou tries ±
o more gai s from migratio .
 Now ±ssume Capital is
Mobile ±cross Cou tries
( US is capital abu da t a d | dia is labor abu da t.
( Retur s to capital are lower i the US tha i | dia
( US capital will migrate to | dia to ear a higher rate of retur .

( The supply of capital falls i the US, causi g US retur s to

capital to rise.
( The supply of capital rises i | dia, causi g | dia retur s to
capital to fall
( US capital will migrate u til the rate of retur is the same i the
two cou tries.
 Òactor Price Equalizatio

( Òactor prices across cou tries will move to

equality through trade or through factor
moveme ts.
( | ter atio al trade is a substitute for factor
moveme ts amo g cou tries.
( | ge eral, immigratio issues make labor
less mobile tha capital amo g cou tries.
 | ter atio al
Moveme ts of Capital
( Òoreig Direct | vestme t = a domestic
corporatio ope i g a foreig subsidiary or
buyi g co trol of existi g foreig firm
( ±bout 90% of ÒD| origi ates i developed
cou tries.
( ± d about 75% of ÒD| is made i developed
cou tries.
| ter atio al Moveme ts of
Capital
_

Reaso s for the | ter atio al
Moveme t of Capital
¬ Higher retur o capital i capital scarce
cou tries from a lower supply of capital i
labor-i te sive cou tries.
¬ Obstacles to buildi g i foreig cou tries
must be less tha the be efits.
¬ Extractio of atural resources
¬ Severe trade restrictio s -- Set up pla t to
ma ufacture good ot allowed or severely
restricted by trade barriers
¬ High tra sportatio costs -- Exporti g the
good is so expe sive that locati g a pla t i
the foreig cou try is less expe sive.
Reaso s for the | ter atio al
Moveme t of Capital
¬ Differe tiated products - Modificatio of
products may be ecessary for export.
¬ Horizo tal differe tiatio i the productio
process
¬ Lower operati g costs
( Vertical i tegratio i productio
process
( Productio process separated a d
located i differe t cou tries where
productio costs are lower
 Gai s a d Losses from the
| ter atio al
Moveme t of Capital

( Source cou try = The cou try that se ds the

factor of productio to a other cou try (US).
( Whe capital moves out of the source
cou try, the supply of capital decreases
which causes a i crease i the rate of
retur to capital.
¬ Ow ers of capital i source cou try be efit
¬ Ow ers of tra sferred capital be efit from
higher rate of retur i foreig cou try.
 | ter atio al
Moveme ts of Capital
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 | ter atio al
Moveme ts of Capital
( Reductio i supply of capital mea s less
capital for labor to use.
¬ Capital-to-labor ratio decli es
¬ Productivity of labor decli es
¬ Slower rate of growth of labor productivity
a d wages i source cou try
 | ter atio al
Moveme ts of Capital
( Host cou try = The cou try that receives the
factor of productio from a other cou try
(| dia).
( Supply of capital i creases which decreases
the rate of retur .
( Labor be efits from i creased capital per
worker.
( Retur to labor i creases.
( Ope i g of trade i creases wages a d
decreases retur s to capital i the labor-
abu da t cou try.
Capital Moveme ts a d Public Policy

¬ Gover me ts restrict the free flow of

foreig direct i vestme t i several ways.
¬ | dustrial Policy
( ± gover me t policy desig ed to
stimulate the developme t a d growth
of a i dustry.
¬ |t te ds to favor local firms at the
expe se of foreig firms.
 | ter atio al
Moveme ts of Labor
( | 

¬ | dividuals that perma e tly cha ge their
cou try of reside ce to a foreig cou try.
( | 1965, 75 millio people lived i a cou try
outside their cou try of birth.
( | 2000, the umber of immigra ts residi g i
a ew cou try was greater tha 150 millio .
( Till 2008, its more the 200 Millio .
 | ter atio al
Moveme ts of Labor
 | ter atio al
Moveme ts of Labor
( j 
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¬ Most immigratio comes from developi g

cou tries.
¬ Low sta dard of livi g i developi g
cou tries ± close to poverty
¬ Skilled labor may leave due to high rates of
u employme t.
¬ Poverty a d u employme t are ³push´
factors.
 | ter atio al
Moveme ts of Labor
¬ High i comes i other cou tries creates a
³pull´ factor.
¬ Sta dard of livi g ca be improved by
movi g to higher-i come cou try.
¬ Workers i low i come cou tries may
move to middle-i come cou tries.
¬ Both ³push´ a d ³pull´ factors make a
co ducive e viro me t for migratio of
labor.
 Gai ers a d Losers from
Migratio of Labor
( 
 

¬ Labor migrates to take adva tage of higher
wages elsewhere.
¬ Labor supply falls, capital to labor ratio
rises, wages rise.
¬ Total output falls.
¬ Retur s to ow ers of capital fall.
( Higher wages paid
( Reduced productio
 | ter atio al
Moveme ts of Labor
( ß

¬ | crease i labor force lowers the amou t
of capital each worker has available to
work with.
¬ Capital to labor ratio falls, labor productivity
falls, wages fall.
¬ Total output rises.
¬ Ow ers of capital gai from
( Lower wages paid
( More output
 | ter atio al
Moveme ts of Labor
( Host cou try labor orga izatio s will oppose
ope immigratio .
( Host cou try ow ers of capital favor ope
immigratio .
( |mmigratio policy should bala ce lower
wages a d higher total output.
( The output of the world eco omy rises si ce
workers ca move to cou tries where they
are more productive.
 | ter atio al
Moveme ts of Labor
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|mmigratio a d Public Policy

( To maximize a cou try¶s total output,

policy should be completely ope
immigratio .
( Output would be maximized but wages
may be harmed.
( Òew cou tries have ope immigratio
but few completely ba immigratio .
 |mmigratio a d Public Policy

( Some cou tries use policies that allow

market forces to allocate labor efficie tly o a
global basis compatible with public
prefere ces o immigratio .
¬ Òor example, the guest worker programs of
Europe allow workers from developi g
cou tries to work there temporarily rather
tha to immigrate perma e tly.
¬ These programs ca i crease social costs:
U employme t i sura ce, Educatio ,
Housi g, Healthcare
Offshore assembly provisio s as a
substitute for labor migratio
( ±llow firms to export materials a d parts of a
good to foreig cou tries for fi al assembly;
( Whe the assembled goods are retur ed,
duties are assessed o ly o the value added
i the foreig cou try.
( ±llows firms to take adva tage of lower
foreig labor costs without importi g labor.
¬ U.S. Y
   i Norther Mexico.
¬ US subco tracti g for paperwork
processi g a d desig a d e gi eeri g
work.
 Summary
( Resource moveme ts betwee cou tries is a
substitute for i ter atio al trade i goods.
( Labor migratio is o e of the most co troversial
areas i public policy.
( The i ter atio al moveme t of capital ca
occur for a variety of reaso s.
 Tha k You

Prakash Kumar Jaiswal