Assignment: International trade movement of factor

1. Agriculture products (A) are produced with land and labor, and manufacturing products (M) are produced using capital and labor. Labor is perfectly mobile between industries but cannot move internationally.

(a) Suppose there are two countries, Home and Foreign that are identical except that Home has a larger endowment of labor than Foreign. The two countries are engaged in free trade. Given this scenario, is there any motive for capital to move internationally? If so, which direction would it move?

Hint: what is the marginal product of capital in Home and Foreign.

(b) Assume that the international prices of A and M do not change and that capital moves from Foreign to Home. What will FDI do to Home's level of production of M and of A? Show using the following diagram.

(c) What is the impact of this inward FDI on the real wage of labor, the real rental of capital, and the real rental of land in Home?

(d) How does the outward investment affect the real earnings of labor in Foreign?

2. There are two countries, Home and Foreign. The two countries are identical except that Home has a labor force of 100 and Foreign has a labor force of 200. Given this allocation of labor across Home and Foreign, the value of the marginal product of labor in Home is 30 and the value of the marginal product of labor in Foreign is 20. If labor were to be free to move, the wage in both countries would be 25.

(a) If immigration were free between countries, how much would the value of output change in Home?

(b) What is Home's national gain in allowing immigration?

Hint: calculate the area of the correct triangle.

(c) Who benefits from this immigration in Home and how much?