Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani

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Welcome to EC 382 International EconomicsBy
Dr. Jacqueline Khorassani

• Week Five

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Week Five Class One

• Tuesday, October 21410-1500AC 202
• Return ICA
• Expect ICA tomorrow

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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 gettingconfused by
  this. Thank you for your time.
• Evan Coady

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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

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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.

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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

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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

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Is Conor Lawlor here today?
Evan Coady and the rest of us wish you a very
Happy 21 Birthday Conor.
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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.

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What are the effects of international movements
of labor on Indians?

• Workers in India will benefit from ______ wages
  with the reduction in supply.
• Indias capital-to-labor ratio ________.
• Increase in Indias labor productivity.
• Indian wages will rise.
• Indias total output will fall.
• Returns to owners of capital in India fall
  because of
• Higher wages paid
• Reduced production

higher
rises
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What are the effects of international 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.

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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.

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Immigration and Public Policy

• To maximize the worlds 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.

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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

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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.

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Immigration and Public Policy

• Firms have used foreign labor to process
  paperwork as well as subcontract design and
  engineering work.

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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

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Slides 19-24

• Will not be discussed in class unless there are
  questions
• You are responsible for the material covered in
  these slides

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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.

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The OLI approach

• L is for locational advantages
• It may be in the firms 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

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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

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Host countrys 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.

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Home countrys policy toward MNC

• Home country gives tax credit against local tax
  liability for taxes paid abroad.

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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.

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International Economics

• Week Five- Class 2
• Wednesday, October 3
• 1110-1200 PM
• Tyndall

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ICA3 True or False

1. FDI tends to raise the welfare of the owners of
   capital in the host country.
2. Immigration may lower domestic wages, but it also
   augments the total output of the country.
3. The return to capital in the host country will
   tend to increase as the domestic supply of
   capital is augmented with foreign capital.

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What is a tariff?

• Tax on imported goods
• Why?
• Revenue for Government
• Protect domestic suppliers of similar goods from
  foreign completion
• Protect jobs

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What are the types of tariff?

• 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

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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.

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What are the types of tariff?

• 2. Ad valorem tariffs
• Taxes fraction of the value of the imported
  goods
• A 5 tariff on an international price of 10,000
  means that customs officials collect the fixed
  sum of _________.
• Importers have an incentive to under-voice the
  price of the imported good.
• Ad valorem tariffs are more difficult for a
  country to administer than specific tariffs.

500
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What are the types of tariff?

• 3. Compound tariffs
• a combination of an ad valorem and a specific
  tariff
• Common on agricultural products whose prices tend
  to fluctuate.

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What are different methods of valuing imports?

• Free alongside (FAS) price
• The price of the imported good in the exporting
  nation before loading the good for shipment to
  the importing country
• Free on Board (FOB) price
• FAS the cost of loading the good in the means
  of transportation

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What are different methods of valuing imports?

• 3. Cost, Insurance, and Freight (CIF) price
• FOB all inter-country transportation costs up
  to the importing countrys port of entry.

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What is consumer surplus (CS)?
The difference between the highest price
consumers would be willing to pay (Price on
demand curve) and the market price. Graphically,
it is equal to the area under the demand curve
and above the price
P1
The higher the CS the ___________ the consumers
Better off
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What is producer surplus (PS)?
The difference between the market price and
lowest price producers will sell a good (price on
the supply curve). Graphically, it is equal to
the area under the price and above the supply
curve
E
Producer Surplus
P2
The higher the PS the ___________ the producers
Better off
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International Economics

• Week Five- Class 3
• Wednesday, October 3
• 1510-1600
• AC 201

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ICA3 True or False

• FDI tends to raise the welfare of the owners of
  capital in the host country.
• False, capital become more abundant, its return
  goes down.

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ICA3 True or False

• 2. Immigration (into a country) may lower
  domestic wages, but it also augments the total
  output of the country.
• True, supply of labor goes up
• Wage rate drops
• Production goes up

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ICA3 True or False

• 3. The return to capital in the host country will
  tend to increase as the domestic supply of
  capital is augmented with foreign capital.
• False, the same as question 1

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CS/PS
P1
E
P2
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How does a free trade affect consumer surplus and
producer surplus?
S
S
a
E
10
a
b
d
8
8
d
c
b
4
E
c
India
D
US
CS ? by b d, PS ? by b
CS? by b, PS ? by b d
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What are the economic effects of tariffs?

• Case of small importing nation
• Note A small nation can import as much as it
  likes at the same international price.
• World Price 8.
• Domestic government imposes a specific tariff on
  imported good in the amount of 2/unit
• Domestic Price 8 2 10

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What are the economic effects of tariffs in a
small importing nation?

• abcd loss in CS 75
• a added to PS 25
• b cost of resources transferred from their best
  use to the production of 5 more units of the
  good 5
• c government revenue 40
• d loss to consumers 5
• a c redistribution effect
• bd dead-weight loss

E
a
c
b
d