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Lectured by: Mr. SOK Chanrithy
Our
world is getting smaller every day with the
astonishing pace of economic globalization.
During
the last three decades, international trade
volume has outgrown production.
We
now consider the movement of factors
◦ Labor Migration
◦ Financial capital ( international borrowing/
lending)
◦ MNC transaction (FDI)
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Movement of factors are similar to good and
services, it tend to be more political sensitive
and often restricted:
 Immigration restriction
 Capital controls
 Restriction on the MNC activities
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Example: In 2003, the value of world merchandise
exports reached over $7.3 trillion, 4.5 percent
increase over the physical volume of exports in
2002.
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1. foreign direct investment (FDI), FDI
stocks reached over $8.1 trillion and
accounted for about 23 percent of world
gross domestic product (GDP) in 2003.
2008: 15.8 Trillion, 15% increase from 2007
2. International labor movements
(immigration) also have grown rapidly. The
UN’s official estimate remains at 175
million migrants globally,
but they predict a total of between 185
million and 192 million migrants by 2005.
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3. According to Census 2000 Special Reports, the
foreign-born people’s share of the U.S. total
population is 11.1 percent in 2000, which is
historically the highest percentage since 1930.
During the last decade, 6.9 million legal
immigrants moved to the United States from
abroad.
As a result, understanding the connections
between the flow of goods, capital, and labor has
been an important focus for economists and
policymakers.
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According to the simple classical two
countries and two factors of production
model, labor and capital will move where
they can get the highest return under the
assumption of the law of one price and
identical technologies across different
economic regions.
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In other words, capital moves from where
the marginal product of capital is low to the
place where the marginal product of capital
is high,
while labor moves into the region where the
marginal product of labor is high until the
capital-labor ratio is equalized between two
countries.
Therefore, if the factors of production can
move freely among the countries, then they
should move opposite to each other at the
same time.
A higher wage is seen as the main reason
people move across countries.
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Factor mobility refers to the ability to move
factors of production - labor, capital or land
- out of one production process into
another.
The movement of factors between firms
within an industry
The standard assumptions in the literature
◦ factors of production are freely and
costless mobile between firms within an
industry and between industries within a
country,
◦ but are immobile between countries.
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In the Ricardian and Heckscher-Ohlin models,
factors are assumed to be homogeneous and freely
and costlessly mobile between industries.
There are no search, transportation or transaction
costs.
The final issue of mobility involves the mobility of
factors between countries
Workers migrate across borders, sometimes in
violation of immigration laws, while capital flows
readily across borders in today's markets.
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Domestic factor mobility refers to the ease
with which productive factors, like labor,
capital, land, natural resources, etc, can be
reallocated across sectors within the
domestic economy.
The textile firm employs a variety of workers
with different types of specialized skills.
One of these workers is an accountant
◦ a short-term reduction in salary,
◦ search costs to find another job
◦ the anxiety associated with job loss.
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Seamstress
If the textile industry as a whole is
downsizing then it is unlikely that she will
find a job in another textile plant.
Also, the skills of a seamstress are not
widely used in very many industries.
light truck owned and operated by the firm.
This truck could easily be sold and used by
another firm in a completely different
industry.
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the land on which the textile plant has
operated. Depending on the location of the
firm and the degree of new business
creations or expansions in the area, the land
may or may not be transferred easily.
The examples above suggest that the cost of
factor mobility varies widely across factors of
production
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The degree of mobility of factors across
industries is greatly affected by the passage
of time.
In the very short run, say over a few weeks
time, most unemployed factors are difficult
to move to another industry.
Even the worker whose skills are readily
adaptable to a variety of industries would
still have to take time to search for a new
job.
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Alternatively, a worker in high demand in
another industry might arrange for a brief
vacation between jobs. This means that
over the very short-run, almost all factors
are relatively immobile.
At the closed textile plant, some of the
managers, the accountants and some others
may find new jobs within 4-6 months.
1.
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Basic Assumptions
Two country , A, B
Use 2 factor, Labor and capital
Capital doesn’t change(move) between
countries
Marginal productivity of labor(MPL) is
downward sloping function of the amount
of labor employed
Country A is more labor than country B
Total Labor stock=> L=LA+LB