Assume that Mexico receives an inflow of FDI. Suppose two factors (labor and capital) are used in...

Question

Assume that Mexico receives an inflow of FDI. Suppose two factors (labor and capital) are used in the production in two industries (food and televisions). Further assume that televisions are capital-intensive, as compared with food. Use the long-run specific-factors model to answer the following questions.

a.Show the impact of the inflow of FDI on Mexico in an illustration using a graph (you can upload your graph as an attachment), with the output of food (televisions) on the vertical (horizontal) axis. What happens to the output of each good?

b. How has wage changed in terms of food and televisions?

week-05-dwocdjsi.pdf

Soma · Accepted Answer

#1. 
Mexico is assumed to produce only two goods: television and food. The country only has two factors used in the production: labour and capital. Television is the capital-intensive industry but food is assumed to be labour intensive industry. In the long run set of specific factor model, both the factors are assumed to be mobile across the industries.
Food production is labour intensive compare to television industry
 In order to make it simple, the model further assumes that the relative price between television and food do not change 
We are using the PPF for Mexico to analyse the long run effects of FDI. 
Output of food
 Output of televisions
Mexico PPF
Shift of Mexico PPF due to FDI
Relative price of televisions 
B
A
Effect of FDI on industry output 
According to Rybczynski theorem, an increase in capital will increase the output of the capital-intensive industry television and decrease the output for food industry or the labour-intensive industry. 
With the increase in capital, the PPF shifts to the right, as shown in the above figure. 
The additional capital will be employed in television industry. Moreover, some labour and capital will also move from food industry to television industry. 
Keeping the price of both outputs remain unchanged,

Assume that Mexico receives an inflow of FDI. Suppose two factors (labor and capital) are used in the production in two industries (food and televisions). Further assume that televisions are...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment