Ch. 9 Problems

Ch. 9 Problems - Problem 2 Research by David M. Gould...

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Chapter 9 Problems 1 and 2
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Problem 1 • Suppose that factor-price equalization prevails in the world but a large migration takes place from country A to country B (due to some political disturbances). Describe the adjustments that will occur if capital is also mobile internationally. What will happen if it is immobile?
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Problem 1 Answer The migration in labor from country A to B will make country B more labor abundant, and A less labor abundant. Therefore, the wage-rental ratio will fall in B and rise in A. If capital is internationally mobile, then capital also moves abroad with labor until the wage- rental ratio is equal across countries. If capital is not internationally mobile, then country B will produce more labor-intensive goods and country A will produce more capital-intensive goods. Country A will export some of the capital-intensive goods to country B in return for their excess labor-intensive goods.
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Unformatted text preview: Problem 2 Research by David M. Gould showed that the bilateral trade between the United States and other countries increases substantially in tandem with the number of a countrys citizens who have migrated to the United States. What mechanisms could account for this relationship? Might it apply to flows of foreign direct investment as well? Problem 2 Answer The fact that bilateral trade between countries tends to increase with the number of immigrants shared between the countries can be accounted for by several things. First, the immigrants have a taste bias for types of products that are produced in their native country. They would then import these products. Second, immigration may lead to consumers having greater knowledge of the goods and markets available in the immigrants home country. These types of arguments could also apply to the issue of foreign direct investment....
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This document was uploaded on 02/10/2012.

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Ch. 9 Problems - Problem 2 Research by David M. Gould...

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