ECON6023 · International Trade
Movement of Labour and Capital: Migration and FDI
Week 6 applies the short-run specific-factors and long-run Heckscher-Ohlin frameworks to the international movement of factors — immigration and foreign direct investment — rather than to goods trade. The short-run/long-run contrast (wages and rentals move in the short run; Rybczynski quantities move with factor prices pinned in the long run) is the graded axis whenever a migration or FDI shock appears on the exam.
What this chapter covers
- 01Immigration short run (specific factors): widen the labour box → wage falls, both sectors' output rises, both specific rentals rise
- 02Immigration long run (Heckscher-Ohlin): Rybczynski output change with wage and rental unchanged (factor-price insensitivity)
- 03Foreign direct investment as movement of capital; greenfield investment; the ≥10% ownership definition
- 04FDI short run: capital inflow raises the wage, lowers the rental on capital, raises output of the receiving sector
- 05FDI long run: extra capital raises the capital-intensive industry's output (Rybczynski), factor prices unchanged
- 06The rental benchmark R = P_K(i + d) (price of capital × [interest rate + depreciation])
- 07World gains from factor flows: factors move to higher-return countries; welfare triangles; remittances
- 08Political economy: specific-factor owners favour inflows (higher rentals), incumbent workers oppose (lower wage)
Immigration: short-run vs long-run effects
- +1Short run — the wage. An inflow of labour widens the labour-allocation box; the common wage falls (W → W′) because more workers share the fixed specific factors and each sector's MPL declines as labour rises.
- +1Short run — outputs and rentals. Labour rises in both sectors, so output of both goods rises (the PPF shifts out). Each specific factor now works with more labour, so the marginal products of capital and land rise: the rentals on both specific factors rise. Owners of capital/land favour immigration; incumbent workers oppose it.
- +1Long run. With both factors mobile and goods prices fixed, factor-price insensitivity keeps the wage and rental unchanged; the extra labour is absorbed by the Rybczynski effect — the labour-intensive industry's output rises and the other's falls, at constant factor prices.
- +1Evidence. The Mariel boat lift (a sudden labour inflow to Miami) is the standard case: the long-run wage effect on incumbent workers was muted, consistent with the long-run adjustment through the output mix rather than through wages.
Key terms
- Foreign direct investment (FDI)
- Cross-border investment giving lasting control, conventionally a foreign holding of at least 10% of a domestic firm. Greenfield FDI builds new plants abroad; modelled as an international movement of capital.
- Greenfield investment
- FDI that builds new productive capacity abroad from scratch, as opposed to acquiring an existing firm. It adds to the host country's capital stock.
- Factor-price insensitivity (applied)
- In the long run, an inflow of labour or capital at fixed goods prices leaves the wage and rental unchanged; the endowment change is absorbed by shifting the output mix (Rybczynski), not by moving factor prices.
- Rental benchmark R = P_K(i + d)
- The competitive rental on capital equals the price of a capital good times the sum of the interest rate i and the depreciation rate d — the user cost of capital used in FDI applications.
- Remittances
- Income sent home by migrant workers. The channel by which a source country shares in the gains when its labour earns a higher return abroad; counted with source-country welfare.
- World gains from factor flows
- Factors moving from low-return to high-return countries until returns equalise raise world output; the triangle areas on a world factor-market diagram measure the gains to source, host and world.
Movement of Labour and Capital: Migration and FDI FAQ
Why does immigration lower the wage in the short run but not the long run?
In the short run the specific factors are fixed, so more workers mean a lower marginal product of labour and a lower wage. In the long run both factors are mobile: the economy absorbs the extra labour by expanding its labour-intensive industry and shrinking the other (Rybczynski) at unchanged goods prices, so the wage and rental need not change at all (factor-price insensitivity). The Mariel boat lift is the textbook illustration.
How is FDI different from immigration in these models?
FDI is a movement of capital rather than labour, so you shift the capital-related curve. Short run: a capital inflow raises the wage and lowers the rental on the receiving sector's capital, and raises that sector's output. Long run: by Rybczynski the capital-intensive industry expands and the other contracts, with factor prices unchanged. The short-run/long-run logic is the same; only the moving factor differs.
Can AI help me with migration and FDI questions?
Yes. Sia can widen or shift the specific-factors labour box for a migration or FDI shock, sign the short-run wage and rentals, then switch to the Rybczynski long-run result and help you write the political-economy and evidence paragraphs. It explains the method and checks your reasoning; it does not do graded work, and USyd academic-integrity rules apply.
Do both the source and the host country gain from factor flows?
In the world factor-market diagram, yes — factors move to where their marginal product is higher, raising world output, and the triangle areas show gains to each side once you count migrants' income with source-country welfare and add remittances. Distribution within each country still shifts (incumbent workers vs factor owners), which is the political-economy tension.
Exam move
Anchor every migration/FDI answer on the time horizon: short run = specific factors (prices move — wage and rentals), long run = Heckscher-Ohlin (Rybczynski quantities move, prices pinned). Practise widening the labour-allocation box for a labour inflow and shifting the capital curve for an FDI inflow, signing a full table (wage, output, rentals) each time. Keep the Mariel boat lift and the R = P_K(i + d) benchmark ready as set pieces, and rehearse the who-gains/who-loses political-economy sentence. Confirm exam timing on Canvas.
Working through Movement of Labour and Capital: Migration and FDI in ECON6023? Sia is AskSia’s AI Economics tutor — ask any ECON6023 Movement of Labour and Capital: Migration and FDI question and get a clear, step-by-step explanation grounded in how ECON6023 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
