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8/8/2019 Prakash_Jaiswal_0821002774_Impact of Immigration on Economy
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Impact of Immigration on
EconomyByBy
Prakash Kumar JaiswalPrakash Kumar JaiswalRoll No.Roll No. 08210027740821002774
ProgramProgram-- PGP 3PGP 3--YearsYears
BatchBatch-- July 2008July 2008
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International Vs. Domestic
Trade Resources are free to move within a domestic
economy
Resources arenot free to move across cou
ntries.
International trade causes resource prices toconverge toward one another.
So international trade can substitute forinternational resource mobility.
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Assume that labor is mobile
across countries. The U.S. is capital abundant and India
is labor abundant.
Theory predicts that wages will be
higher in the U.S. than inIndia. Higher US wages cause workers from
India to migrate to the U.S.
Wages fall in the U.S. as supply (labor)increases.
Wages rise inIndia as supply (labor)decreases.
Migration ofIndian labor stops whenwages are equal between countries no more gains from migration.
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Now Assume Capital is
Mobile Across Countries US is capital abundant and India is labor abundant. Returns to capital are lower in the US than inIndia
US capital will migrate to India to earn a higher rate of return.
The supply of capital falls in the US, causing US returns tocapital to rise.
The supply of capital rises inIndia, causing Indian returns tocapital to fall
US capital will migrate until the rate of return is the same in thetwo countries.
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Factor Price Equalization
Factor prices across countries will move to
equality through trade or through factor
movements.
International trade is a substitute for factor
movements among countries.
In general, immigration issues make labor
less mobile than capital among countries.
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International
Movements of Capital Foreign Direct Investment = a domestic
corporation opening a foreign subsidiary or
buyin
g con
trol of existing foreig
nfirm
About 90% ofFDI originates in developed
countries.
And about 75% ofFDI is made in developed
countries.
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International Movements of
Capital
Table 5.2
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Reasons for the International
Movement of Capital Higher return on capital in capital scarce
countries from a lower supply of capital inlabor-intensive countries.
Obstacles to buildin
g in
foreign
countriesmust be less than the benefits.
Extraction ofnatural resources
Severe trade restrictions -- Set up plant tomanufacture good not allowed or severely
restricted by trade barriers High transportation costs -- Exporting the
good is so expensive that locating a plant inthe foreign country is less expensive.
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Reasons for the International
Movement of Capital Differentiated products - Modification of
products may be necessary for export.
Horizontal differentiation in the productionprocess
Lower operating costs
Vertical integration in production
process Production process separated and
located in different countries where
production costs are lower
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Gains and Losses from the
InternationalMovement of Capital
Source country = The country that sends thefactor of production to another country (US).
When capital moves out of the sourcecountry, the supply of capital decreaseswhich causes an increase in the rate ofreturn to capital.
Owners of capital in source country benefit
Owners of transferred capital benefit fromhigher rate of return in foreign country.
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Figure 5.1: Outputand Welfare Effects of InternationalCapital Mobility
International
Movements of Capital
Return to Capital, U.S.
Capital Stock, U.S.
Return to Capital, India
Capital Stock, India
RUS
RUS
RI
R
I
DDUSUS DDINDIINDI
AA
Sk Sk SkSk
E
F E
F
a
d
e
c
b
a
d
e
c
b
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International
Movements of Capital Reduction in supply of capital means less
capital for labor to use.
Capital-to-labor ratio declines Productivity of labor declines
Slower rate of growth of labor productivity
and wages in source country
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International
Movements of Capital Host country = The country that receives the
factor of production from another country(India).
Supply of capital increases which decreasesthe rate of return.
Labor benefits from increased capital perworker.
Return to labor increases.
Opening of trade increases wages anddecreases returns to capital in the labor-abundant country.
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Governments restrict the free flow of
foreign direct investment in several ways. Industrial Policy
A government policy designed to
stimulate the development and growth
of an
in
dustry. It tends to favor local firms at the
expense of foreign firms.
Capital Movements and Public Policy
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International
Movements of Labor Immigrants
Individuals that permanently change theircountry of residence to a foreign country.
In 1965, 75 million people lived in a countryoutside their country of birth.
In 2000, the number of immigrants residing ina new country was greater than 150 million.
Till 2008, its more then 200 Million.
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International
Movements of Labor
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International
Movements of Labor Reasons for the International Movement
of Labor
Most immigration comes from developingcountries.
Low standard of living in developingcountries close to poverty
Skilled labor may leave due to high rates of
unemployment. Poverty and unemployment are push
factors.
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International
Movements of Labor High incomes in other countries creates a
pull factor.
Standard of living can be improved bymoving to higher-income country.
Workers in low income countries may
move to middle-income countries.
Both push and pull factors make a
conducive environment for migration of
labor.
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Gainers and Losers from
Migration of Labor Source Country
Labor migrates to take advantage of higher
wages elsewhere. Labor supply falls, capital to labor ratio
rises, wages rise.
Total output falls.
Returns to owners of capital fall. Higher wages paid
Reduced production
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International
Movements of Labor Host country
Increase in labor force lowers the amountof capital each worker has available towork with.
Capital to labor ratio falls, labor productivityfalls, wages fall.
Total output rises.
Owners of capital gain from Lower wages paid
More output
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International
Movements of Labor Host country labor organizations will oppose
open immigration.
Host country owners of capital favor open
immigration. Immigration policy should balance lower
wages and higher total output.
The output of the world economy rises sinceworkers can move to countries where they
are more productive.
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International
Movements of LaborFigure 5.2: Outputand welfare Effects of International
Labor Migration
Wagesin the U.S.
LaborForce in U.S.
Wagesin India
LaborForce in India
WUS
WUS
WI
WI
DDUSUS DDINDIINDI
AA
SlSl Sl Sl
E
F
E
F
a
d
e
c
b
a
d
e
c
b
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Immigration and Public Policy
To maximize a countrys total output,policy should be completely open
immigration.
Output would be maximized but wagesmay be harmed.
Few countries have open immigration
but few completely ban
immigration.
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Immigration and Public Policy
Some countries use policies that allow
market forces to allocate labor efficiently on a
global basis compatible with public
preferences on immigration.
For example, the guest worker programs of
Europe allow workers from developing
countries to work there temporarily rather
than to immigrate permanently. These programs can increase social costs:
Unemployment insurance, Education,
Housing, Healthcare
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Offshore assembly provisions as a
substitute for labor migration Allow firms to export materials and parts of a
good to foreign countries for final assembly;
When
the assembled goods are returned,duties are assessed only on the value added
in the foreign country.
Allows firms to take advantage of lowerforeign labor costs without importing labor.
U.S. maquiladoras in Northern Mexico. US subcontracting for paperwork
processing and design and engineeringwork.
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Resource movements between countries is asubstitute for international trade in goods.
Labor migration is one of the most controversialareas in public policy.
The international movement of capital canoccur for a variety of reasons.
Summary
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Thank You
Prakash Kumar Jaiswal