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International trade and investment lecture 5
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International trade and investment lecture Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 3
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w = MPL x Pand the price thus equals marginal costs → P = w / MPL
and the real wage thus equals MPL → w / P = MPL
Central vehicle: How are real rents and real wages distributed amongst workers and
landowners?
The total area under the MPL-curve equals total production as
that area gives the sum over all workers of each worker’s
marginal contribution to output.
Total production equals total real income
The level of the real wage separates the real income of
workers and landowners:
Total real wages = the level of the real wage times the total
number of workers. The remainder of the total income then gives the total real rent income
that accrues to the landowners.
MPL foreign is upward sloping.
Foreign real wage level is B. Home real wage is C.
Migration or international labour mobility is now allowed for.
Migration from Home to Foreign will take place due to the
fact that the real wage is larger in Foreign than in Home
(B>C).
Migration will continue until real wages are equalised
across the two countries (A). Migration brings redistribution
of income.
Migrants move from a low-wage country to a high-wage country. Production in Home
decreases after migration. Production in Foreign increases. The net gain of production is
triangle ABC, because workers move to the country where they’re more productive.
Workers in Home who stay there, see their income increase, because there are less
workers, so higher MPL.
For landowners Home the income goes down, because wages increases and there are less
workers to produce.
Effects:
A. Migration alters real wages in Home and in Foreign
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