Transcript INTERNATIONAL FACTOR MOVEMENT

International
Factor
Movements
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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)
12-2
Global FDI Flows
 In 2011, the accumulated stock of
global FDI was over $20 trillion.
(UNCTAD data)
 This stock is growing each year but
the growth has slowd down since
2008 due to the impact of global
crisis.
 65% of FDI flows is in developed
economies and remaining 35% in
developing economies.
12-3
U.S. Direct Investment Position
Abroad by Industry, 2007
Industry
Finance and Insurance
Manufacturing
Wholesale Trade
Mining
Information
Depository Institutions
Other Industries
Total
Value ($,
Share
billions)
$531.9 19.1%
531.3 19.0%
183.0
6.6%
147.3
5.3%
111.9
4.0%
91.8
3.3%
1,193.8 42.8%
2,791.3 100.0%
12-4
U.S. Direct Investment Position
Abroad by Region or Country,
2007
Region or
Country
Europe
Latin America
Asia/Pacific
Canada
Middle East
Africa
Total
Value ($,
billions
$1,551.2
472.0
454.0
257.1
29.4
27.8
2,791.3
Share
55.6%
16.9%
16.3%
9.2%
1.1%
1.0%
100.0%
12-5
World’s Largest Corporations,
2008 (billions of $)
Company
Wal-Mart
Home Country
U.S.
Revenues
$378.8
Exxon Mobil
Royal Dutch Shell
BP
U.S.
Netherlands
U.K.
$372.8
$355.8
$291.4
Toyota Motor
Chevron
ING Group
Japan
U.S.
Netherlands
$230.2
$210.8
$201.5
France
U.S.
U.S.
$187.3
$182.3
$178.6
Total
GM
Conoco Phillips
12-6
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
Capital Market
Equilibrium
MPPKI
Initially, suppose Country I has 0k1
as its capital stock. This means Country II
will have 0'k1.
MPPKII
0
MPPKII
MPPKI
k1
0'
12-8
Capital Market
Equilibrium
MPPKI
The price of capital will be r1
in Country I and r1’ in Country II.
MPPKII
r1
r1'
MPPKII
0
MPPKI
k1
0'
12-9
Capital Market
Equilibrium
MPPKI
MPPKII
Output in Country I
r1
r1'
MPPKII
0
MPPKI
k1
0'
12-10
Capital Market
Equilibrium
MPPKI
MPPKII
Payment to Labor
Payment to Capital
r1
r1'
MPPKII
0
MPPKI
k1
0'
12-11
Capital Market
Equilibrium
MPPKII
MPPKI
Output in Country II
r1
r1'
MPPKII
0
MPPKI
k1
0'
12-12
Capital Market
Equilibrium
MPPKI
MPPKII
Payment to Labor
Payment to Capital
r1
r1'
MPPKII
0
MPPKI
k1
0'
12-13
Capital Market
Equilibrium
MPPKI
If capital can flow freely across international
MPPKII
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.
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-14
Capital Market
Equilibrium
MPPKI
What happens to output in Country I?
It rises due to the capital inflow.
MPPKII
Increase in output
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-15
Capital Market
Equilibrium
MPPKI
What happens to output in Country II?
It falls because of the loss of capital.
r1
r2
r2'
r1'
MPPKII
0
MPPKII
MPPKI
k1 k2
K
0'
12-16
Capital Market
Equilibrium
MPPKI
What happens to output in Country II?
It falls because of the loss of capital.
MPPKII
Output after capital outflow
Loss in output
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-17
Capital Market Equilibrium
MPPKI
MPPKII
Overall, world output rises.
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-18
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
Economic Effects of Int’l
Capital Flows On Incomes
MPPKI
Loss by capitalists in Country I
r1
r2
r2'
r1'
MPPKII
0
MPPKII
MPPKI
k1 k2
K
0'
12-20
Economic Effects of Int’l
Capital Flows On Incomes
MPPKI
Gain by laborers in Country I
r1
r2
r2'
r1'
MPPKII
0
MPPKII
MPPKI
k1 k2
K
0'
12-21
Economic Effects of Int’l
Capital Flows On Incomes
MPPKI
Net income gain in Country I
r1
r2
r2'
r1'
MPPKII
0
MPPKII
MPPKI
k1 k2
K
0'
12-22
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
Economic Effects of Int’l
Capital Flows On Incomes
MPPKI
MPPKII
Income gain by capitalists in Country II
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-24
Economic Effects of Int’l
Capital Flows On Incomes
MPPKI
MPPKII
Lost labor income
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-25
Economic Effects of Int’l
Capital Flows On Incomes
MPPKI
MPPKII
Overall gain in income in Country II
r1
r2
r2'
r1'
MPPKII
0
MPPKI
k1 k2
K
0'
12-26
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
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
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
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
Why Migrate?
 Simply put, migration occurs when
the expected costs of migrating are
less than the expected benefits.
12-31
Economic Effects of Labor
Migration
GDP in Country I is given by the
shaded area:
MPPLI
WI
MPPLII
WII
Income of capitalists
Income of laborers
wII
wII
wI
wI
MPPLII
0
MPPLI
L2
0'
12-32
Economic Effects of Labor
Migration
GDP in Country II is given by the
shaded area:
Income of capitalists
MPPLI
WI
MPPLII
WII
Income of laborers
wII
wII
wI
MPPLI
MPPLII
0
L2
wI
0'
12-33
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.
MPPLI
WI
MPPLII
WII
wII
weq
wII
weq
wI
wI
MPPLII
0
MPPLI
L1
L2
0'
12-34
Economic Effects of Labor
Migration
What happens to Country I? GDP falls
because of out-migration:
MPPLI
WI
MPPLII
WII
Lost GDP
wII
weq
wII
weq
wI
wI
MPPLII
0
MPPLI
L1
L2
0'
12-35
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
Economic Effects of Labor
Migration
What happens to Country II? GDP rises
because of in-migration:
MPPLII
WII
MPPLI
WI
Increase in GDPII
wII
weq
wII
weq
wI
MPPLI
MPPLII
0
L2
wI
0'
12-37
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
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
weq
wII
weq
wI
MPPLI
MPPLII
0
L2
wI
0'
12-39
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
Decrease in GDPI
wII
weq
wII
weq
wI
MPPLI
MPPLII
0
L2
wI
0'
12-40
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
Increase in Total GDP
wII
weq
wII
weq
wI
MPPLI
MPPLII
0
L2
wI
0'
12-41
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
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