Welcome to EC 382 International Economics By Dr Jacqueline Khorassani Week Five 1 Week Five Class One Tuesday October 2 14 10 15 00 AC 202 Return ICA Expect ICA tomorrow 2 Thanks for your feedback I just wanted to mention that in Ireland we spell Labour with a u as shown I felt a lot of the Irish students might be getting confused by this Thank you for your time Evan Coady 3 A request Could you please outline the format of our exam on the 10th of October in class on Tuesday Sure the exam will have two parts Part One Multiple Choice Questions You choose the best answer There are no negative marks Part Two Short essay questions and or problems 4 Who are Immigrants Individuals that permanently change their country of residence to a foreign country In 1965 75 million people lived in a country outside their country of birth In 2000 immigrants residing in a new country was greater than 150 million 5 What are the reasons for international movements of labor you asked questions Fact most immigration comes from developing countries Push factors push labor out of these countries low standard of living in developing countries high rates of unemployment Poverty 6 What are the reasons for international movements of labor you asked questions Pull factors pull workers into developed nations Higher incomes Higher standard of living 7 Is Conor Lawlor here today Evan Coady and the rest of us wish you a very Happy 21 Birthday Conor 8 What are the effects of international movements of labor Assume that India is labor abundant and the U S is capital abundant Wages in the U S are higher than India Indian labor would migrate to the U S 9 What are the effects of international movements of labor on Indians Workers in India will benefit from higherwages with the reduction in supply rises India s capital to labor ratio Increase in India s labor productivity Indian wages will rise India s total output will fall Returns to owners of capital in India fall because of Higher wages paid Reduced production 10 What are the effects of international internationa movements of labor on Americans Increase in labor force lowers the amount of capital each worker has available to work with Capital to labor ratio falls in the U S which decreases labor productivity Wages in U S fall Total output rises 11 What are the effects of international movements of labor on Americans Owners of capital in the U S gain Lower wages paid Produce more output U S labor will oppose open immigration Owners of capital favor open immigration The output of the world economy rises since workers can move to countries where they are more productive Note I will not go over Figure 5 2 You are responsible to know it 12 Immigration and Public Policy To maximize the world s total output policy should be completely open immigration Wages drop in the host country Few countries have open immigration but few have a ban on immigration Policies to prevent the brain drain The movement of skilled or professional workers from one country to another 13 Immigration and Public Policy The guest worker programs of Europe allow workers from developing countries to work there temporarily rather than to immigrate permanently Other issues Unemployment insurance Education Housing Healthcare 14 Immigration and Public Policy Offshore assembly provisions Allow firms to export materials and parts of a good to foreign countries for final assembly When the assembled goods are returned to the home country duties are assessed only on the value added in the foreign country 15 Immigration and Public Policy Firms have used foreign labor to process paperwork as well as subcontract design and engineering work 16 What is a Multinational Corporation A firm that conducts part of its business across national boundaries MNC Why Labor shortages in home country Increase efficiencies by internalizing certain activities instead of contracting them out Control 17 Slides 19 24 Will not be discussed in class unless there are questions You are responsible for the material covered in these slides 18 The OLI approach A framework that explains why MNCs engage in foreign direct investment O is ownership commonly ownership of an intangible asset A good or process a firm has developed that other firms find difficult to replicate It is a source of comparative advantage 19 The OLI approach L is for locational advantages It may be in the firm s global interests to locate outside home country For example location of natural resources Take advantage of cheaper imports vertical integration Natural and legal barriers to trade 20 The OLI approach I is for internalization A firms propensity to perform functions internally that outside firms could do Firm derives benefit from internalizing process 21 Host country s policy toward MNC Host country could ban activities of MNCs Host country could treat MNCs as a domestic firm national treatment Most likely regulation falls between the two extremes Generally MNCs must pay taxes on profits of local subsidiaries 22 Home country s policy toward MNC Home country gives tax credit against local tax liability for taxes paid abroad 23 Transfer pricing over or under pricing of goods in intra firm trade of MNC Allows firms to use intra firm pricing to maximize after tax profits Was used to transfer profits out of countries with exchange controls Some transfer pricing will occur until income taxes are uniform across countries 24 International Economics Week Five Class 2 Wednesday October 3 11 10 12 00 PM Tyndall 25 ICA3 True or False 1 2 3 FDI tends to raise the welfare of the owners of capital in the host country Immigration may lower domestic wages but it also augments the total output of the country The return to capital in the host country will tend to increase as the domestic supply of capital is augmented with foreign capital 26 What is a tariff Tax on imported goods Why Revenue for Government Protect domestic suppliers of similar goods from foreign completion Protect jobs 27 What are the types of tariff 1 Specific tariffs Tax per unit specific tariff is regressive Why A specific tariff of 1 000 on each imported auto a high percentage of the value of less expensive cars a low percentage of the value of high priced cars 28 Under specific tariff what type of cars will be imported less Expensive cars Cheap cars Cheap cars A specific tariff encourages domestic producers to produce less expensive goods 29 What are the types of tariff 2 Ad valorem tariffs Taxes fraction of the