Lectured by: Mr. SOK Chanrithy

 Our world is getting smaller every day with the astonishing pace of economic globalization.  During the last three decades, international trade volume has outgrown production.  We now consider the movement of factors ◦ Labor Migration ◦ Financial capital ( international borrowing/ lending) ◦ MNC transaction (FDI)

 Movement of factors are similar to good and services, it tend to be more political sensitive and often restricted:  Immigration restriction  Capital controls  Restriction on the MNC activities  Example: In 2003, the value of world merchandise exports reached over $7.3 trillion, 4.5 percent increase over the physical volume of exports in 2002.

 1. foreign direct investment (FDI), FDI stocks reached over $8.1 trillion and accounted for about 23 percent of world gross domestic product (GDP) in  2008: 15.8 Trillion, 15% increase from 2007  2. International labor movements (immigration) also have grown rapidly. The UN’s official estimate remains at 175 million migrants globally,  but they predict a total of between 185 million and 192 million migrants by 2005.

 3. According to Census 2000 Special Reports, the foreign-born people’s share of the U.S. total population is 11.1 percent in 2000, which is historically the highest percentage since During the last decade, 6.9 million legal immigrants moved to the United States from abroad.  As a result, understanding the connections between the flow of goods, capital, and labor has been an important focus for economists and policymakers.

 According to the simple classical two countries and two factors of production model, labor and capital will move where they can get the highest return under the assumption of the law of one price and identical technologies across different economic regions.

 In other words, capital moves from where the marginal product of capital is low to the place where the marginal product of capital is high,  while labor moves into the region where the marginal product of labor is high until the capital-labor ratio is equalized between two countries.  Therefore, if the factors of production can move freely among the countries, then they should move opposite to each other at the same time.  A higher wage is seen as the main reason people move across countries.

 Factor mobility refers to the ability to move factors of production - labor, capital or land - out of one production process into another.  The movement of factors between firms within an industry  The standard assumptions in the literature ◦ factors of production are freely and costless mobile between firms within an industry and between industries within a country, ◦ but are immobile between countries.

 In the Ricardian and Heckscher-Ohlin models, factors are assumed to be homogeneous and freely and costlessly mobile between industries.  There are no search, transportation or transaction costs.  The final issue of mobility involves the mobility of factors between countries  Workers migrate across borders, sometimes in violation of immigration laws, while capital flows readily across borders in today's markets.

 Domestic factor mobility refers to the ease with which productive factors, like labor, capital, land, natural resources, etc, can be reallocated across sectors within the domestic economy.  The textile firm employs a variety of workers with different types of specialized skills.  One of these workers is an accountant ◦ a short-term reduction in salary, ◦ search costs to find another job ◦ the anxiety associated with job loss.

 Seamstress  If the textile industry as a whole is downsizing then it is unlikely that she will find a job in another textile plant.  Also, the skills of a seamstress are not widely used in very many industries.  light truck owned and operated by the firm. This truck could easily be sold and used by another firm in a completely different industry.

 the land on which the textile plant has operated. Depending on the location of the firm and the degree of new business creations or expansions in the area, the land may or may not be transferred easily.  The examples above suggest that the cost of factor mobility varies widely across factors of production

 The degree of mobility of factors across industries is greatly affected by the passage of time.  In the very short run, say over a few weeks time, most unemployed factors are difficult to move to another industry.  Even the worker whose skills are readily adaptable to a variety of industries would still have to take time to search for a new job.

 Alternatively, a worker in high demand in another industry might arrange for a brief vacation between jobs. This means that over the very short-run, almost all factors are relatively immobile.  At the closed textile plant, some of the managers, the accountants and some others may find new jobs within 4-6 months.

1. Basic Assumptions  Two country, A, B  Use 2 factor, Labor and capital  Capital doesn’t change(move) between countries  Marginal productivity of labor(MPL) is downward sloping function of the amount of labor employed  Country A is more labor than country B  Total Labor stock=> L=L A +L B