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Suppose the Cobb-Douglas production function given in equation 4-1 applies to a developing country. Instead of thinking of immigration from a developing to a developed country, suppose a developed country invests large amounts of capital (foreign direct investment, or FDI) in a developing country.
(a) How does an increase in FDI affect labor productivity in the developing country? How will wages respond in the short-run?
(b) What are the long-run implications of FDI, especially in terms of potential future immigration from the developing country?

Macroeconomics, Economics

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