This document provides a summary of the effects of labor and capital flows across countries through migration and foreign direct investment. It discusses several key points: 1) Immigration can lower wages in the short run by increasing the supply of labor, but in some cases wages have not fallen due to other factors. Capital flows through FDI can increase wages by raising productivity. 2) In the specific factors model, an inflow of labor or capital to one industry shifts resources to that industry from the other in the short run. 3) In the long run Heckscher-Ohlin model, factor price equalization means immigration does not affect wages, while output shifts between industries as resources move. Capital flows similarly reallocate

2. FLOW OF LABOUR AND
CAPITAL ACROSS THE
COUNTRIES (MIGRATION)
PRESENTATION
Presented by:
Students of MPhil
Economics
Presented to:
DR. AYZA SHOUKAT
Ph. D. Economics
University of the Punjab
Lahore, Pakistan
MUHAMMAD KASHIF JAVED
HAFIZ MUHAMMAD
SULTAN RAZA

3. INTRODUCTION
From May to September 1980,
boatloads of refugees from Cuba
arrived in Miami.
This would lead you to believe that
these less-skilled workers would
drive down wages.
However, this immigration does not
appear to have pulled down the wages
of other less-skilled workers in Miami.
Explaining this effect is one
goal of this Presentation

4. INTRODUCTION
A similar situation occurred with the
1989 emigration of Russian Jews to
Israel.
The immigrants were more
highly skilled than the existing
Israeli population.
However, the relative wages of
high-skilled workers in Israel
actually rose during the 1990s.
In other large scale immigrations,
the wages of domestic workers did
fall.

5. INTRODUCTION
The effects of movement of capital
Foreign Direct Investment (FDI) occurs when a
company from one country owns a company in
another country.
Finally, we will discuss the gains to the host
and destination countries, and to the world,
from the movement of labor and capital.

6. Flow of Labor and Capital across the
countries (Migration)
Migration is the flow of labor from the Foreign
country to the Home country.
The wages paid to labor and the rentals paid to
capital and land are determined by the prices of
goods purchased.
Prices of goods are determined by the world
market for those goods.
If prices of goods are fixed, how do the Home
wage and rentals paid change as labor moves
between countries?

7. Flow of Labor and Capital across the
countries (Migration)
Effects of immigration in the Short Run Specific-Factors Model:
In the short run, only labor is mobile
across industries
Remember the resource equation:
L = LM + LA
Determining the Wage:
Assume the Foreign equilibrium wage, W*, is
lower than Home equilibrium wage, W.
Workers will migrate from Foreign to Home.

8. Flow of Labor and Capital across the
countries (Migration)
Figure (1)
Home Labor
Market

9. Flow of Labor and Capital across the
countries (Migration)
Effects of immigration in the Short Run Specific-Factors Model:
We add the ΔL to figure 5.1,
The PAMPLA shifts right by ΔL.
The origin for manufacturing has not
changed so PMMPLM does not change.
Determining the Wage:
The new equilibrium Home wage is at B, at a lower wage.
The extra workers are shared between both industries since both
industries have more workers, but fixed amounts of capital and land.
The wage declines due to the diminishing marginal
product of labor.

10. Flow of Labor and Capital across the
countries (Migration)
The marginal
product of
labor curve
shifts right
also by L
Figure 1.2

11. Do you Know This ?
A new EU-wide “green card” would allow skilled workers already
in the 25-nation bloc to change countries without extra paperwork.
Europe's work force is expected to shrink by 20 million between
now and 2040.
Businesses complain regularly about a shortage of highly
skilled personnel.
EU commissioner Franco Frattini has a vision:
A Pakistani engineer could go to work in Europe, earn good money,
and return regularly to his hometown to start and maintain a
business.
Mr. Frattini uses the term “brain circulation” instead of the
accusatory term “brain drain.”

12. Flow of Labor and Capital across the
countries (Migration)
Other Effects of Immigration in the Short Run
Rentals on Capital and Land
U.S. and Europe have both welcomed foreign workers in
specific industries agriculture and high-tech.
Why do they do so if those foreign workers compete with
domestic workers in those industries.
Answer: Immigration increases rental rates on capital and
land.
Given this, it should not be surprising that owners of capital
and land often support more open borders.

13. Flow of Labor and Capital across the
countries (Migration)
Effect of Immigration on Industry Output
We showed before that immigration led to an increased
labor force in each industry.
With more workers and the same amount of capital and
land, output rises in both industries.
Immigration leads to an outward shift in the PPF.
This result depends on the short-run nature of the specific
factors model
If land and capital are not fixed, as in the long run, one
industry's output will rise while the other will fall.

14. Flow of Labor and Capital across the
countries (Migration)
Figure 1.2

15. Flow of Labor and Capital across the
countries (Migration)
In the long run, all factors are free to move between industries.
We now use the Heckscher-Ohlin model from before, except that labor can
move between countries.
Total capital: K = KA + KM earning rental R.
Total labor: L = LA + LM earning wage W.
Computers are capital intensive and shoes are labor intensive.
As before: LS/KS > LC/KC and KC/LC > KS/LS
How is equilibrium affected by the inflow of labor into Home due to
migration?

16. Flow of Labor and Capital across the
countries (Migration)

17. Flow of Labor and Capital across the
countries (Migration)
Box Diagram
Length is total amount of labor at Home, L.
The vertical axes measure the total amount of capital, K, at home, in each industry.
OSA shows the amount of labor and capital used in shoes and OCA in computers.
The capital-labor ratio in each industry is the slope of the respective industry line.
OSA is flatter, so capital-labor ratio in shoes is less than in computers.

18. L
K K
L
LS
LC
KC
0S
0C
Labor allocated to computers
Capital
allocated to
shoes
Capital
allocated to
computers
Labor allocated to shoes
Total
Amount of
Capital in
the
Economy
Total Amount of Labor in the Economy
A
Figure 5.7
Flow of Labor and Capital across the
countries (Migration)

19. Flow of Labor and Capital across the
countries (Migration)
Remember: W = P*MPL and R=MPK
If there is a higher capital-labor ratio, then MPL is higher and MPK is lower.
Because each line in the box diagram is a particular ratio, it is also a
particular wage and rental rate.
Determination of the Real Wage and Real Rental
Increase in the Amount of capital-labor Home Labor
Immigration leads to increase in the amount of Home labor to L′ = L + ΔL.
Instead of allocating the extra labor to both industries, we allocate it all to
shoes the labor intensive industry.

20. Flow of Labor and Capital across the
countries (Migration)
Increase in the Amount of Home Labor
Because both labor and capital increase in shoes, the capital-labor ratio is
unchanged. Notice the slopes of the lines have not changed.
Since the capital-labor ratios are unchanged, so are the marginal products.
Therefore the wages and rentals are unchanged.
When capital can move freely between industries, immigration in the long
run has no impact on the wage and rental rates.

21. A
L
L L’
L’
B
K’
K
K’
K
0S
0’S
0C
L
ΔL
1. Increase in
Home labor due to
immigration:
additional labor
(ΔL) allocated to
shoes
2. Decrease
in Capital in
the Computer
industry
3. Increase in
Capital in the
Shoe industry
4. Decrease in Labor in the Computer industry
5. Additional
increase in
Labor in the
Shoe industry
Increase in Home Labor
Figure 5.8
Flow of Labor and Capital across the countries
(Migration)

22. Flow of Labor and Capital across the
countries (Migration)
Effect of Immigration on Industry Outputs
1. Since the factors of production both increase or decrease, it makes sense that output
will follow the same trend. Since labor and capital moved to shoes, shoe output
expands and capital production contracts.
On our PPF, due to the increase in labor, the PPF shifts out more in the direction of shoes.
Since prices are unchanged, the economy moves to equilibrium at point B in Figure 5.9.
More shoe production and less computer production
This only holds in the long run.

23. Flow of Labor and Capital across the
countries (Migration)
Effect of Immigration on Industry Outputs
the factors of production both increase or decrease, it makes sense that output will follow
the same trend. Labor and capital moved to shoes, shoe output expands and capital
production contracts.
On our PPF, due to the increase in labor, the PPF shifts out more in the direction of shoes.
Since prices are unchanged, the economy moves to equilibrium at point B in Figure 5.9.
More shoe production and less computer production
This only holds in the long run.

24. Output of Computers,
QC
Output of
Shoes, QS
Relative Price of
Computers,
PC / PS
Shift in
Home PPF
due to
immigration
An increase of both
capital and labor in
shoe production
causes an increase
in shoe output and a
decrease in
computer output
The Long-Run Effect on Industry
Outputs of an Increase in Home Labor
Figure
5.9
Flow of Labor and Capital across the
countries (Migration)

25. Flow of Labor and Capital across the
countries (Migration)
We can now look at how capital flow from one country to another through foreign direct
investment (FDI).
When a firm from one country owns a company in another country.
U.S. Department of commerce uses a 10% rule to determine FDI.
If a foreign country acquires 10% or more of a U.S. firm, that is FDI inflow to the U.S.
If a U.S. company acquires 10% or more of a foreign firm then that is FDI outflow
from the U.S.

26. Flow of Labor and Capital across the
countries (Migration)
Greenfield FDI—when a company builds a plant in a foreign country.
Acquisition FDI (or brownfield FDI)— when a firm buys an existing foreign plant.
FDI in the Short Run: Specific Factors Model
Manufacturing uses capital and labor.
Agriculture uses land and labor.
As capital moves into the economy, it will be used in manufacturing, raising the
marginal product of labor.
Therefore it will shift out the curve PMMPLM

27. 0A
0M
W
L
W’
L’
A
PA· MPLA
LA
Wage, W
LM
Total Labor in the Economy, L
B
PM· MPL’M
PM· MPLM
An inflow of capital
into the
manufacturing
sector shifts out the
marginal product of
labor curve in that
sector
Equilibrium shifts to
point B, increasing
wages and labor used
in manufacturing.
Labor is pulled out of
agriculture so labor in
that sector falls.
Increase in the
Capital Stock in the
Short Run
Figure 5.11
Flow of Labor and Capital across the
countries (Migration)

28. Flow of Labor and Capital across the
countries (Migration)