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Question: Explain the short and long run effects of capital transition in the form of Foreign Direct Investment in manufacturing in a country on the wages of workers, production, nominal and real rentals of capital and land

30 Oct 2022,6:20 PM

 

Question 1:

 

1.1 Explain the short and long run effects of capital transition in the form of Foreign Direct Investment in manufacturing in a country on the wages of workers, production, nominal and real rentals of capital and land, and the marginal productivities of labour, capital and land in the receiving country.

 

[25%]

 

1.2 Discuss four possible characteristics of a receiving country that increases the inflow of Foreign Direct Investment in the form of capital?

 

[25%]

 

 

Question 2:

 

2.1 In the model of trade under monopolistic competition, discuss the short- and long-run monopolistic competition equilibrium with trade, detailing changes in demand, prices, number of goods and producers, profit, and costs. Compare the no trade and trade equilibria.

 

[25%]

 

2.2 Discuss three possible gains and losses of a country in monopolistic competition when starting trade?

 

[25%]

 

 

Question 3:

 

3.1 Given the Specific-Factors model, imagine two countries, Home and Foreign (marked with *) producing two goods with three production factors: labour (L), capital (K) and land (T). The two goods produced are: Food (A) using Land and Labour, Cars (M) using Capital and Labour. The relative price for cars is lower in the home country than in the foreign country before trade.

 

In which good would home country have a comparative advantage? How would the real wages for labour, real rental for capital and real rental for land change when home country starts trading with the foreign country, exporting the good it has a comparative advantage in?

 

[25%]

 

3.2 Due to Brexit and other circumstances, demand and prices for goods in the UK have recently changed. Explain what possible effects such changes in demand and prices for goods can have on the comparative advantages, import and export volume and nominal & real wages in the UK.

 

[25%]

Expert answer

 

In the long run, capital transition in the form of Foreign Direct Investment (FDI) in manufacturing can have a number of different effects on wages, production, and marginal productivity in the receiving country.

 

In terms of wages, FDI can lead to an increase in average wages as well as wage inequality. On the one hand, FDI can help to raise average wages by providing access to new technology and knowledge. On the other hand, FDI can also lead to increased wage inequality as foreign firms often bring in high-skilled workers from their home countries, leaving local workers at a disadvantage.

 

In terms of production, FDI can lead to an increase in overall output as well as productivity. On the one hand, FDI can help to increase output by providing access to new technology and capital. On the other hand, FDI can also lead to increased productivity as foreign firms often adopt best practices from their home countries.

 

Finally, in terms of marginal productivity, FDI can have different effects depending on the factor being considered. For labour, FDI can lead to an increase in marginal productivity as foreign firms often bring in new technology and management practices that make workers more productive. For capital, FDI can lead to a decrease in marginal productivity as foreign firms often displace existing capital with newer and more efficient machinery. Finally, for land, FDI can lead to an increase in marginal productivity as foreign firms often develop underutilized or undeveloped land.

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