ECON 2181, PROF. BUTT, MIDTERM STUDY GUIDE
ECON 2181, PROF. BUTT, MIDTERM STUDY GUIDE STAT 1051
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ECON 2181 MIDTERM 1 STUDY GUIDE KEY TERMS IMPORTANT PEOPLE IMPORTANT CONCEPT IMPORTANT FORMULAS CHAPTER 1: TRADE IN THE GLOBAL ECONOMY International Trade: the movement of goods and services across boarders. Export: a product sold from one country to another. Import: a product bought by one country from another. Trade: the selling and buying of goods and services between countries. Trade Balance: the Δ of a country’s total value of exports and its total value of imports. It is determined by macroeconomics conditions in the country. Trade Surplus: when a country exports more than it imports. (China) Trade Deficit: when a country imports more than it imports. (USA) Import Tariffs: taxes on international trade. ▯ Trade between European countries is high b/c of low tariffs. ▯ A large amount of world trade occurs between countries that are similar in their levels of industrialization and great wealth. Gross Domestic Product (GDP): the value of all final goods produced in a year. Trade can also be reported as the ratio of trade to a country’s GDP. Countries with the highest ratios of trade to GDP tend to be small in economic size and are often important centers for shipping goods, like Hong Kong (China) and Malaysia. Countries with the lowest ratios of trade to GDP tend to be very large in economic size or are not very open to trade b/c of trade barriers or distance from other countries. Trade Barrier: all factors that influence the amount of goods and services shipped across international boarders. Foreign Direct Investment (FDI): occurs when a firm in one country owns (in part or in whole) a company or property in another country. ▯ The majority of world flows of FDI occur between industrial countries. ▯ Horizontal FDI: when a firm from one industrial country owns a company in another industrial country. ▯ Vertical FDI: when a firm from one industrial country owns a plant in a developing country. Low wages are the principal reasons that firms shift production abroad to developing countries. Migration: ▯ Free trade doesn’t promote free migration; all countries have restrictions on immigration. The majority of world migration occurs in developing countries as a result of restrictions on immigration into wealthier, industrial countries. International trade in goods and services acts as a substitute for migration and allows workers to improve their standard of living through working in export industries, even when they cannot migrate to earn higher incomes. CHAPTER 2: THE RICARDIAN MODEL Reasons countries trade with each other: • Technology: ∆ in tech used (differences a country’s ability to manufacture) • Resources: ∆ in the total amount of resources found in each country (including land, labor, and capital) o Geography: Natural resources, labor resources, and capital o Factors of Production: land, labor, capital • Offshoring: ∆ in the costs of offshoring (producing the various parts of a good in different countries and then assembling it in a final location) • Proximity: the proximity of countries to each other. The closer countries are lower the costs of transportation. Ex; European countries. Absolute Advantage: the ability to produce more of a good than competitors, using the same resources/time. Comparative Advantage: the ability to produce a good/service at a lower opportunity cost. • Primary explanation for trade among countries. David Ricardo and Mercantilism: Mercantilists believed that exporting was good b/c it generated gold, importing was bad b/c it drained gold from the national treasury. In favor of high tariffs to ensure high exports and low imports. Ricardo showed that countries could benefit from international trade w/out having to use tariffs. Today, it is accepted that international trade brings gains to all trading partners. Ricardian Model: start up point of the new classical international trade theory. It explains how the level of a country’s tech. affects its trade pattern. ????????????????∗???????????????? Trade= ???????????????????????????????? (????,????) Developing a Ricardian Model of Trade: a. 2 goods; wheat and cloth b. Labor is the only resource used to produce goods. Marginal Product of Labor (MPL) is the extra output obtained by using one more unit of labor. c. We can graph Home’s PPF using MPL. Production Possibilities Frontier (PPF) is a curve showing the maximum attainable combinations of two products that may b produced with available resources and current technology. The slope of the PPF is the opportunity cost of Good A, (the amount of Good B must be given.) Home Country: If all were employed in cloth they could 25 workers available: if employed in produce 50 yards. wheat, Home could produce 100 bushels. Foreign Country: 100 workers available: if all employed in all were employed in cloth, they could wheat, they could produce 100 bushels. If produce 100 yards. • MPL C 2, MPL =W4 • MPL *W = 1, MPL*C= 1 Labor = 25 Labor = 100 MPL W 4, MPL =C2 MPL W 1, MPL =C1 Q W MPL (W* = 25*4 = 100 QW= MPL (W* = 100*1 = 100 Q C MPL (C* = 25*2 = 50 QC= MPL (C* = 100*1 = 100 The linear shape of the PPF is a unique The magnitude of the slope can be feature of the Ricardian model. Without expressed as the ratio of the marginal trade, the PPF acts as a budget constraint products of labor for the two goods for the country. M PPF - opportunity cost of wheat, that is, Pm MPLa the amount of cloth that must be given up = (1/2 yard) to obtain 1 more bushel of Pa MPLm wheat. Indifference Curves: All points on an indifference curve have the same level of utility. Points on higher indifference curves have higher utility. • U A U B The highest level of Home utility on the PPF is obtained at point A, which is the no-trade equilibrium. • U C U ,Abut point B is unattainable. With perfectly competitive markets, the country will produce at its highest level of utility within the limits of the PPF. M PPF = Opp. cost of wheat (comparative advantage) = Relative Price In competitive markets firms hire workers up to the point at which the hourly wage equals the value of one more hour of production. The value of one more hour of labor equals the amount of goods produced in that hour (MPL) times the price of the good. Labor will be hired up to the point where wage equals P • MPL for each industry. P • MPL = relative price of wheat P W MPL = PW• MPL C C W W P WP =CMPL /MPL C W PC• MPL =CM PPF(the opp. cost of wheat) Relative price of wheat and opp. cost of wheat must be equal in the no-trade equilibrium at Wage= P*MPL point A. WITH TRADE: • A country’s no-trade relative price determines which product it will export and which it will import. • No-trade relative price = opp. cost of production = comparative advantage values of goods • The pattern of exports and imports will be determined by the opportunity costs of production in each country—their comparative advantage. How to determine which good a country will export? By looking at relative prices. Both countries export the good for which they have the comparative advantage. • The relative price of cloth in ForeiCn Ws P /P = 1. • The relative price of cloth in HomeCisWP /P = 2. Production Opportunity Cost Cloth Wheat Cloth (W/C) Wheat (C/W) Home 2 bushels of w. 4 yard of c. 2 bushel of w. ½ yards of c. Foreign 1 bushel of w. 1 yard of c. 1 bushel of w. 1 yard of c. • Therefore, Foreign would want to export cloth to Home—they can make it for $1 and export it for more than $1. Home will export wheat. • The two countries are in international trade equilibrium when the relative price of wheat is the same in the two countries. World price line shows the range of consumption possibilities that a country can achieve by specializing in one good and engaging in international trade. Home profit from trade > opp. cost of production of wheat. Home will therefore shift labor resources toward the production of wheat and increase its production. With the given information, we can calculate the ratio of wages in the two industries. W=P*MPL As wheat is exported, Home moves up the world price line BC. Home consumption occurs at point C, at the tangent intersection with indifference curve U 2 since this is the highest possible utility curve on the world price line. (2 > U1). Total exports are 60 bushels of wheat in exchange for imports of 40 yards of cloth and also that Home consumes 10 fewer bushels of wheat and 15 more yards of cloth relative to its pre- trade levels. Home’s exports and imports are equal when valued in the same units. Home’s utility increase with trade is a demonstration of the gains from trade. There are gains from trade for both countries. (as seen in foreign’s post-trade graph) Wages: Contrary to pattern of trade, wages are determined by absolute advantage. In competitive labor markets, firms will pay workers the value of their marginal product. Home produces and exports wheat, therefore they will be paid in terms of that good. The real wage is MPL =W4 bushels of wheat. The relative price of wheat is PW/P C 2/3. The real wage in terms of cloth: (P WP )CMPL = (2W3)*4 = 8/3 yards. Foreign workers earn less than Home workers as measured by their ability to purchase either good. This reflects Home’s absolute advantage in the production of both goods. • Labor productivity is measured by value-added per hour of work and can be compared with the wages paid in manufacturing in various countries. Countries with higher labor productivity pay higher wages. Export Supply Curve: When the relative price of wheat is 1/2, Home will export any amount of wheat between 0 and 50 bushels, along the segment Aʹ Bʹ of the Home export supply curve. For relative prices above / 2 Home exports more than 50 bushels, along the segment Bʹ Cʹ. For example, at the relative price of / , Home exports 60 bushels of wheat. 3 World Market for Wheat: The equilibrium price of a good on the world market is determined at the point where the export supply of one country equals the import demand of the other country. Terms of Trade: The price of a country’s exports divided by the price of its imports. • Home terms of trade is (P W /PC), b/c Home exports wheat. • Foreign terms of trade is (P c /Pw) b/c Foreign exports cloth. • In this case, having a higher price for cloth (Foreign’s export) or a lower price for wheat (Foreign’s import) would make the Foreign country better off. CHAPTER 3: Gains and Losses from Trade in the Specific-Factors Model In most cases, opening a country to trade leads to overall gains but also generates winners and losers. Specific-Factors Model (SFM): where land is specific to the agriculture sector and capital is specific to the manufacturing sector; labor is used in both sectors. • From the Ricardian model, we learned that free trade affects relative prices, and this in turn affects the earnings of factors of production. • SFM is a short-run model because capital and land could not move between the industries. • What is the characteristic of a short-run model? It hasn’t come back to equilibrium yet. • Specific-Factors Model: o Two countries: Home and Foreign o Two goods: Manufacture uses labor and capital; agriculture uses labor and land (Capital specific to manufacturing. Land specific to agriculture. Labor both depending on demand) o In both industries, increase in labor used is subject to diminishing returns, MPL declines as labor used increases. o Labor can move between the industries and earns the same wage in each. When the relative price of either good changes, then the real wage rises. The Home Country: The Home PPF shows the amount of agricultural and manufacturing outputs that can be produced in the economy with labor. It’s bow-shaped which reflects diminishing MPL as a country becomes more specialized in one kind of output. Firms hire labor up to the point where the cost of one more hour of labor (the wage) equals the value of one more hour of labor in production. M PPF= opp. cost of the manuf. output = Relative P. (good on x-axis)= –MPLA/MPLM Increase in the Relative Price of Manufactures: A: the production and consumption point in the absence of international trade. P MP A the relative price of manufactures, and the slope of the line tangent to the PPF and indifference curve U 1 at point A. (green) B: production point with international trade. C: consumption point with international trade. W The world relative price of manufactures: (M /PA) , is the slope of the line BC. The rise in utility from 1 to 2 is a measure of the gains from trade for the economy. • If the Home no-trade relative price of manufacturing is lower than the Foreign relative price. Then, Home has comparative advantage in manufacturing. Overall gains from trade: • The good whose relative price goes up (manufacturing, for Home) is exported. • The good whose relative price goes down (agriculture, for Home) is imported. • By exporting manufactured goods at a higher price and importing food at a lower price, Home is better off than it was in the absence of trade. Autarky: no international trade. Determination of Wages: With an increase in the price of the manufactured good the curve M • MPL sMifts up. Therefore, the labor used in manufacturing rises, and labor used in agriculture falls. The wages also increase, but this increase is less than the upward shift ΔW/W < ΔP /PMmeaMs that the amount of the manufactured good that can be purchased with the wage has fallen. Therefore, the real wage in terms of the manufactured good W/P has decreased. M Impact of ∆ in Relative Prices on Labor: • In the SFM, the increase in the price of the manufactured good has an ambiguous effect on the real wage and therefore an ambiguous effect on the well being of workers. • Economists do not normally count the costs of unemployment as a loss from trade because people are often able to find new jobs. Payments to capital and Land: • If LaborM▯, MPK ▯; because each machine has more labor to work it. • LaborA▯, MPT ▯; because each acre of land has fewer labor to work it. So, R /T ▯A so rental on land ▯, and landowners cannot afford to buy as much food. So, landowners are worse off from the rise inMP . Specific factors used in export industry will gain from trade; specific factors used in import industries lose. • Relative price of exports rise. Relative price of imports fall. General Equation for the change in Factor Prices: • The specific factor in the sector whose relative price has increased gains. • The specific factor in the other sector loses. CHAPTER 4: TRADE AND RESOURCES- THE HECKSCHER- OHLIN MODEL Heckscher-Ohlin (HO) model: a model that assumes that trade occurs because countries have different resources. o Has multiple factors of production (FOP) o All FOPs can move between industries. So, H-O model is a long-run model. H-O Model Assumptions: Assumption1: 2 factors of production, labor and capital, can move freely between the industries. Assumption2: Shoe production is labor-intensive; that is, it requires more labor per unit of capital to produce shoes than computers. Labor Intensity of each Industry: Shoe production being more labor-intensive than computers implies: L SK S L /C . Cshoes are labor intensive) K SL S K /LC(cCmputers are capital intensive) (If goodA in labor intensive, goodB must be capital intensive) Assumption3: Foreign is labor-abundant, by which we mean that the labor–capital ratio in Foreign exceeds that in Home, Equivalently, Home is capital-abundant, so that Assumption4: The final outputs, shoes and computers, can be traded freely (i.e., without any restrictions) between nations, but labor and capital do not move between countries. Assumption5: The technologies used to produce the two goods are identical across the countries. Assumption6: Consumer tastes are the same across countries. No-Trade Equilibrium in Home and Foreign: Home PPF is skewed toward computers because Home is capital abundant and computers are capital intensive. (Vice versa for Foreign) Point A: The Home no-trade (autarky) equilibrium. The flat slope indicates a low relative price of computers, (PC/P S . Point A*: The Foreign no-trade equilibrium. The steeper slope indicated a high relative price of computers, (P* /P* ) *. C S Foreign has higher relative price because doesn’t have enough capital so it costs higher to produce. Indifference curve: summarize preferences. International Free-Trade at Home: • With free trade, home produces at point B, and consume at point C, exporting computers and importing shoes. • Triangle: o Base of the triangle=export. (Q − Q ) is the difference between computers C2 C3 produced and consumed at home. o Height of the triangle= import. (Q −S3 ) isS2he difference between the amount consumed of shoes and the amount produced with trade. • At point A (no-trade relative price): home exports of computers = ZERO • In panel (b): zero exports at relative price ofC(P SP ) , o At (P /PC) S (Q C2 − Q C3amount of exports. International Free-Trade Equilibrium in Foreign: • With free trade, Foreign produces at point B*, and consume at point C*, exporting shoes and importing computers. Determination of Free-Trade World Equilibrium Price: World Relative price is determined at the intersection of the Home export supply and Foreign import demand, at point D. Because Home exports = Foreign imports, there is no reason for the relative price to change and so this is a free-trade equilibrium. Pattern Of Trade: Home exports computers, which is capital intensive and home is capital abundant. Foreign exports shoes, which is labor intensive and home is labor abundant. This result is called the Heckscher-Ohlin theorem. Reversal of Factor Intensities: one industry may be relatively capital intensive compared to the other at high relative wages and labor intensive at low relative wages. Leontief’s paradox: The first test of H-O theorem was performed by economist Wassily Leontief in 1953. o Supposed that after 1947, the U.S. would be capital abundant, therefore, would export capital-intensive goods. o Used numerical data. Contrary to the H-O model, he found that K/L ratio for exports was less than K/L ratio for imports. Why? • U.S. and foreign techs are not the same, contrary to H-O theorem and Leontief’s assumptions. • Only focused on capital and labor, but neglected LAND. • Did not distinguish between skilled and unskilled labor. (U.S. exports are skilled- labor intensive) • WWII aftermath still in play for unusual consequences. • U.S. was not engaged in completely free trade, contrary to H-O theorem. What makes a country abundant in one factor? We compare the country’s share of that factor with its share of world GDP. • If its share of a factor > its share of world GDP, then the country is abundant in that factor. • If its share in a certain factor is < than its share of world GDP, then the country is scarce in that factor. Effect of Trade on the Wage and Rental at Home: Determination of Home Wage/Rental: RD: the economy-wide relative demand for labor. (In the middle) ????/????: the relative supply. Vertical because the total amount of resources in Home is fixed. A: equilibrium point, intersection determines the wage relative to the rental, W/R. Relative supply Relative demand Increase in the price of computers Initially, Home is at equilibrium AA with relative price of computers (PC/PS) . ▯ in the rel. price of computers to the world W price line (C /PS) (steeper) pushes production from A to B. In return, more production of computers, less of shoes. Effect of a Higher Relative Price of Computers on Wage/Rental: ▯ in the rel. price of computers shifts the RD curve towards demand of computers, which causes relative wages to fall. As a result, (W/R)1falls to (W/R) 2 Since, labor is cheaper, both industries increase their labor to capital ratios. (shown by changes from L CK Cnd LS /KS) CHAPTER 5: MOVEMENT OF LABOR AND CAPITAL BETWEEN COUNTRIES In the long run, an increase in labor will not lower the wage, as industries have more time to respond to the inflow of workers. Effects of Immigration in the Short Run: Specific-Factors Model L M L = A When the amount of labor at Home ▯ by the amount ΔL, the origin for agriculture shifts to the right by that amount, from 0 to 0 ʹ. A A The MPL curve in agriculture also shifts right by the amount ΔL. B: new Home labor market equilibrium in the Home. Wages have fallen to Wʹ and the amount of labor has increased in manufacturing (to 0MLʹ) and in agriculture (to Aʹ Lʹ). Rentals on Capital and Land: Computing the rentals; Method1. revenue earned in either manufacturing or agriculture and subtract the payments to labor. If wages fall, then there is more left over as earnings of capital and land, these rentals are higher. Method2. Capital and land earn their marginal product in each industry times the price of the industry’s good. As more labor is hired in each industry (because wages are lower), the marginal products of capital and land both increase. The increase in the marginal product occurs because each machine or acre of land has more workers available to it, and that machine or acre of land is therefore more productive. So under the second method, too, the marginal products of capital and land rise and so do their rentals. • Land and capital owner often support open boarders, which provides foreign workers that can be employed in their industries. Shift in Home PPF: With the increase in labor at Home from immigration, the production possibilities frontier shifts outward and the output of both industries increases, from point A to point B. Output in both industries increases because of the short-run nature of the specific-factors model; in the short run, land and capital do not move between the industries, and the extra labor in the economy is shared between both industries. Effects of Immigration in the Long Run A: equilibrium point, domestic production amount • Top and bottom axes measure labor. While the total amount of labor and capital used in • Side axes measure capital. each industry changes, the capital-labor ratios are • The K/L ratios in the two industries are unaffected by immigration, which means that the measured by the slopes ofSO A andCO A. immigrants can be absorbed with no change at all in the real wage and real rental. To determine the wage and rental in the economy, we use the MPL and MPK, which are determined by the capital-labor ratio in either industry. • If K/L is higher (more machines per worker), then by the law of diminishing returns, the MPK and the real rental must be lower. • Having more machines per worker means that the MPL (and hence the real wage) is higher because each worker is more productive. Increase in Home Labor: ▯ in Home labor from ???? ???????? ???? + ΔL, the origin for the shoe industry shifts from 0 to S ʹ. S In the long run, industry outputs adjust so that the K/L in each industry at point B are unchanged from the initial equilibrium at point A (the slopes of 0 ASand 0 A)C To achieve this outcome, all new labor resulting from immigration is allocated to the shoe industry, and capital and additional labor are transferred from computers to shoes, keeping the capital- labor ratio in both industries unchanged. With an increase in the amount of labor at Home, the PPF shifts outward. The output of shoes increases while the output of computers declines as the equilibrium moves from point A to B. The prices of goods have not changed, so the slopes of the PPFs at points A and B (i.e., the relative price of computers) are equal. The finding that an increase in labor will expand one industry but contract the other holds only in the long run; in the short run, both industries will expand. Rybczynski Theorem: states that in the H-O model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry. Factor prices do not need to change as a result of immigration. • B/c the economy can absorb the extra amount of a factor by increasing the output of the industry using that factor intensively and reducing the output of the other industry. • The finding that factor prices do not change is sometimes called the factor price insensitivity result. Factor Price Insensitivity Theorem The factor price insensitivity theorem states that: in the HO model with two goods and two factors, an increase in the amount of a factor found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices. Movement of Capital Between Countries: Direct Investment: • FDI: occurs when a firm from one country owns a company in another country. o For cheap resources, access to foreign markets, etc. Greenfield Investment: occurs when a company builds a plant in another country. FDI in the Short-Run: • The equilibrium in the labor market moves from point A to B, and the wage increases from W to W ʹ. Labor used in the manufacturing industry increases from 0 L to 0 Lʹ. M M These workers are pulled out of agriculture, so the labor used there shrinks froA 0 L to 0AL ʹ. • In panel (b), with the inflow of capital into manufacturing, and the extra labor used in that sector, the output of manufacturing increases. • Because labor has been drawn out of agriculture, the output of that sector falls. These changes in outputs are shown by the outward shift of the PPF (due to the increase in capital) and the movement from point A to point B. Effect of FDI on the Wage: • As a result of the shift inMP • MPLM, the equilibrium wage increases, from W to W′. More workers are drawn into the manufacturing industry. Effect of FDI on the Industry Outputs: • An FDI inflow and the shift in PM• MPL wMll cause workers to be pulled out of agriculture, and since there is no change in the amount of land used there, output of the agriculture industry must fall. Effect of FDI on the Rentals: • With regard to the rental on land, we know that with an inflow of FDI, fewer workers are employed in agriculture, and each acre of land cannot be used as intensively. • The value of marginal product of land, K = PA• MPT ,Afalls. • If MPT Aalls and P Aemains unchanged, then land rental must fall. • One way to measure the impact of FDI on the rental of capital is by the value of the marginal product of capital, or K = PM• MPK .MHowever, using this method is difficult to determine how the rental on capital changes. The Effect of an Increase in Capital Stock on the Rental on Capital The rental on capital is lower at point B than at point A. Therefore, the rental on capital declines when the capital stock increases through FDI. Assume the capital stock expands due to FDI. Suppose we hold the wage constant, and let the labor used in manufacturing expand up to point C. Because the wage is the same at points A and C, the marginal product of labor in manufacturing must also be the same (since the wage is W = PM• MPL ).MThe only way that the marginal product of labor can remain constant is for each worker to have the same amount of capital to work with as he or she had before the capital inflow. In other words, the capital–labor ratio in manufacturing L MK mMst be the same at points A and C: the expansion of capital in manufacturing is just matched by a proportional expansion of labor into manufacturing. But if the capital–labor ratio in manufacturing is identical at points A and C, then the marginal product of capital must also be equal at these two points (because each machine has the same number of people working on it). Therefore, the rental on capital, K = PM• MPK , Ms also equal at points A and C. FDI in the Long-Run: When there is an inflow of capital, the equilibrium moves to point B. Similar to the box diagram for immigration, the K/L ratios remain unchanged by allocating the new capital, as well as additional capital and labor from shoes to computers. Effect of FDI on Outputs and Factor Prices • As the Rybczynski theorem states, the increase in capital has increased the output of the capital-intensive industry and reduced the output of the labor-intensive industry. • This change in output is achieved without a change in the K/L in either industry. • Because K/L are unchanged, the wage and the rental on capital are also unchanged. • In the long-run model, an inflow of either factor of production will leave factor prices unchanged. Gains From Labor and Capital Flows: • Foreign investment and immigration are both controversial policy issues. • Most countries have at some point controlled FDI but later became open to foreign investment. However, almost all countries impose limits on immigration. • U.S. immigration controls were established by the Quota Law of 1921. It allows a limited number of persons arriving annually from each country of origin. • The Immigration and Nationality Act Amendments of 1965 revised the country-specific limits and allowed immigration on a first-come first-served basis up to a limit. • Subsequent revisions to the immigration laws in the U.S. have changed policies, including: • penalties for employers hiring illegal immigrants • allowing some illegal immigrants to gain citizenship • tightening border controls • deporting other illegal immigrants Gains From Immigration: Immigration benefits the host country in the specific factors model. • If we include the immigrant earnings with Foreign income, then we find that emigration benefits the Foreign country, too. The same argument can be made for FDI. World Gains From Migration: Initially, Home has OL workers and Foreign has O L workers. * Th* Home wage is W, as determined at point A, which is higher than the Foreign wage W at A . Workers will move from Foreign to Home to receive higher wages. The equilibrium with full migration is at point B, where wages are equalized at Wʹ. The gain to Home from migration is measured by triangle ABC, and triangle A BC represents the gains to Foreign. Combining the gains to the Home and Foreign countries, we obtain the triangular region ABA , the world gains from immigration. Turning the tria*gle on its side, its base equals (W – W ), the difference in the Home and Foreign wage in the absence of any migration. The height of the triangle is (Lʹ – L), the number of foreign workers that would emigrate in the equilibrium with full migration. So, the area of the triangle is (To solve for the area, we need to know the difference in wages before any migration and the number of people who would emigrate. One way to think about the world gains from migration is that they equal the increase in world GDP due to immigration.) World Capital Market: With 0K units of capital at Home, the Home rental is R, at point A. The remaining capital 0 K is in Foreign, and the Foreign rental is R , at point A . * Capital will move from Home to Foreign to receive a higher rental. The equilibrium with full capital flows is at point B, where rentals are equalized at Rʹ. Triangle ABC measures the gains to Home from the capital outflow, and triangle A BC * measures the gains to Foreign.
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