prakash_jaiswal_0821002774_impact of immigration on economy

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

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