1 / 43

International Factor Movements

International Factor Movements. Factors of Production: Capital. Types of capital foreign investment Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI) FDI: Can involve individuals but the bulk is done by firms.

dexter-short
Download Presentation

International Factor Movements

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International Factor Movements

  2. Factors of Production: Capital • Types of capital foreign investment • Foreign Direct Investment (FDI) • Foreign Portfolio Investment (FPI) • FDI: Can involve individuals but the bulk is done by firms. • known as: multinational corporations (MNCs), Multinational Enterprise (MNE), Transnational Corporation (TNC), or Transnational Enterprise (TNE)

  3. Global FDI Flows • In 2011, the accumulated stock of global FDI was over $20 trillion. (UNCTAD data) • This stock is growing each year but the growth has slowd down since 2008 due to the impact of global crisis. • 65% of FDI flows is in developed economies and remaining 35% in developing economies. 12-3

  4. U.S. Direct Investment Position Abroad by Industry, 2007 12-4

  5. U.S. Direct Investment Position Abroad by Region or Country, 2007 12-5

  6. World’s Largest Corporations, 2008 (billions of $) 12-6

  7. Reasons for International Movement of Capital • To access growing markets. • To secure access to raw materials. • To avoid tariffs and NTBs. • To take advantage of low wages. • Defensive purposes to prevent loss of market share. • Risk diversification. • MNC efficiency over local suppliers. 12-7

  8. Capital Market Equilibrium MPPKII MPPKI Initially, suppose Country I has 0k1 as its capital stock. This means Country II will have 0'k1. MPPKII MPPKI 0 k1 0' 12-8

  9. Capital Market Equilibrium MPPKII MPPKI The price of capital will be r1 in Country I and r1’ in Country II. r1 r1' MPPKII MPPKI 0 k1 0' 12-9

  10. Capital Market Equilibrium MPPKII MPPKI Output in Country I r1 r1' MPPKII MPPKI 0 k1 0' 12-10

  11. Capital Market Equilibrium MPPKII MPPKI Payment to Labor Payment to Capital r1 r1' MPPKII MPPKI 0 k1 0' 12-11

  12. Capital Market Equilibrium MPPKII MPPKI Output in Country II r1 r1' MPPKII MPPKI 0 k1 0' 12-12

  13. Capital Market Equilibrium MPPKII MPPKI Payment to Labor Payment to Capital r1 r1' MPPKII MPPKI 0 k1 0' 12-13

  14. Capital Market Equilibrium If capital can flow freely across international borders, k2k1 units of capital will flow from II to I because r1 > r1’. Eventually, r will fall in I and rise in II until r = r2 = r2’ in both countries. MPPKII MPPKI r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-14

  15. Capital Market Equilibrium MPPKII MPPKI What happens to output in Country I? It rises due to the capital inflow. Increase in output r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-15

  16. Capital Market Equilibrium MPPKII MPPKI What happens to output in Country II? It falls because of the loss of capital. r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-16

  17. Capital Market Equilibrium MPPKII MPPKI What happens to output in Country II? It falls because of the loss of capital. Output after capital outflow Loss in output r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-17

  18. Capital Market Equilibrium MPPKII MPPKI Overall, world output rises. r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-18

  19. Economic Effects of International Capital Flows On Incomes • Output rises in country I (the country to which the capital flows), BUT: • Returns fall for capitalists, since their rate of return decreases. • Returns rise for laborers. • Capitalists are hurt; labor benefits. • Therefore, per capita income rises in Country I. 12-19

  20. Economic Effects of Int’l Capital Flows On Incomes MPPKII MPPKI Loss by capitalists in Country I r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-20

  21. Economic Effects of Int’l Capital Flows On Incomes MPPKII MPPKI Gain by laborers in Country I r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-21

  22. Economic Effects of Int’l Capital Flows On Incomes MPPKII MPPKI Net income gain in Country I r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-22

  23. Economic Effects of Int’l Capital Flows On Incomes • Output falls in country II (the country from which the capital flows), BUT: • Returns rise for capitalists, since their rate of return increases. • Returns for laborers fall. • Capitalists are better off; labor is worse off. • Because overall incomes rise, per capita income rises. 12-23

  24. Economic Effects of Int’l Capital Flows On Incomes MPPKII MPPKI Income gain by capitalists in Country II r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-24

  25. Economic Effects of Int’l Capital Flows On Incomes MPPKII MPPKI Lost labor income r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-25

  26. Economic Effects of Int’l Capital Flows On Incomes MPPKII MPPKI Overall gain in income in Country II r1 r2' r2 r1' MPPKII MPPKI 0 k2 k1 K 0' 12-26

  27. International Capital Flows: A Summary • Both countries’ incomes rise as a result of capital flows. • World output rises. • Capitalists in inflow country (Country I) and Laborers in outflow country (Country II). • Capitalists in outflow country (Country II) and Laborers in inflow country (Country I) are better off. 12-27

  28. Potential Benefits of FDI to Host Country • Increased output • Increased wages • Increased employment • Increased exports • Increased tax revenues • Realization of economies of scale • Import of technical and managerial skills • Weakening power of domestic monopoly 12-28

  29. Potential Costs of FDI to Host Country • Adverse impact in the country’s commodity terms of trade • Transfer pricing • Decrease in domestic savings • Decrease in domestic investment • Instability in the balance of payments • Loss of control over domestic policy 12-29

  30. Potential Costs of FDI to Host Country (cont’d) • Increase in Unemployment • Establishment of Local Monopoly • Inadequate attention to the development of local education and skills • Loss of natural resources 12-30

  31. Why Migrate? • Simply put, migration occurs when the expected costs of migrating are less than the expected benefits. 12-31

  32. Economic Effects of Labor Migration GDP in Country I is given by the shaded area: MPPLII WII MPPLI WI Income of capitalists Income of laborers wII wII wI wI MPPLII MPPLI 0' 0 L2 12-32

  33. Economic Effects of Labor Migration GDP in Country II is given by the shaded area: MPPLII WII Income of capitalists MPPLI WI Income of laborers wII wII wI wI MPPLI MPPLII 0' 0 L2 12-33

  34. Economic Effects of Labor Migration If migration is possible, 0L1 workers will work in Country I and 0'L1 in Country II. The wage will be the same: Weq. MPPLII WII MPPLI WI wII wII weq weq wI wI MPPLII MPPLI 0' 0 L1 L2 12-34

  35. Economic Effects of Labor Migration What happens to Country I? GDP falls because of out-migration: MPPLII WII MPPLI WI Lost GDP wII wII weq weq wI wI MPPLII MPPLI 0' 0 L1 L2 12-35

  36. Economic Effects of Labor Migration • GDP falls in country I (the country from which the migrants come), BUT: • Wages rise for remaining workers. • It can be shown that the decrease in the Country I labor force is greater than the decrease in GDP, so per capita income rises. • Capitalists are hurt; labor benefits. 12-36

  37. Economic Effects of Labor Migration What happens to Country II? GDP rises because of in-migration: MPPLII WII MPPLI WI Increase in GDPII wII wII weq weq wI wI MPPLI MPPLII 0' 0 L2 12-37

  38. Economic Effects of Labor Migration • GDP rises in country II (the country to which migrants go), BUT: • Wages fall. • It can be shown that the increase in the Country II labor force is greater than the increase in GDP, so per capita income falls. • Labor is worse off; capitalists are better off. 12-38

  39. Economic Effects of Labor Migration Country I’s loss in GDP is smaller than Country II’s gain, so world GDP rises. MPPLII WII MPPLI WI Increase in GDPII wII wII weq weq wI wI MPPLI MPPLII 0' 0 L2 12-39

  40. Economic Effects of Labor Migration Country I’s loss in GDP is smaller than Country II’s gain, so world GDP rises. MPPLII WII MPPLI WI Decrease in GDPI wII wII weq weq wI wI MPPLI MPPLII 0' 0 L2 12-40

  41. Economic Effects of Labor Migration Country I’s loss in GDP is smaller than Country II’s gain, so world GDP rises. MPPLII WII MPPLI WI Increase in Total GDP wII wII weq weq wI wI MPPLI MPPLII 0' 0 L2 12-41

  42. International Migration: Other Considerations • Migrants now in Country II may send remittances back to Country I • So I’s per capita income rises by even more, and • II’s per capita income falls by even more. • If the migrants are “guest workers” and they can be paid a lower wage, it may be possible for capitalists in Country II to be better off without domestic labor being worse off. 12-42

  43. International Migration: Other Considerations • If the immigrants are low-skill workers, the host country may experience rising social costs. • If the immigrants are high-skill workers, the host country may benefit, and the migrants’ home countries may suffer. This is called the “brain drain.” 12-43

More Related