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191hw1sol - ECON191 Spring 2009 Outline of suggested...

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1 ECON191 Spring 2009 Outline of suggested solutions to Problem Set 1 1) Poor country square4 Capital flows into the poor country bright More firms will operate and demand for labor increases (demand curve shifts out in the diagram) bright Wage rate of labor increases in the poor country and workers are better off square4 Return to capital in the poor country may go down because foreign investors have hired away some of the workers bright Domestic investors are not better off and may be worse off square4 Income inequality narrows in the poor country Rich country square4 Capital flow out of the rich country bright Demand for labor in the rich country drops (demand curve shifts in) bright Wage rate for labor decreases and workers are worse off in the rich country square4 Return to capital in rich country increases because part of the capital has left (MPK goes up when K goes down). Investors are better off in the rich country.
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