III. International factor migration
A. Labor migration

Results:

1. Unskilled labor migrates to higher wage countries
2. National welfare rises for both the US and Mexico
3. Wages rise in Mexico
4. Wages fall in the US
5. Immigrants earn higher wages than before

    Recall that trade caused redistribution from labor to capital
    Labor migration is similar

    Borjas (1996). The new economics of immigration:
    Labor immigration:
    --> change in income for capital owners: +$77B
        change in income for unskilled labor: -$70B
        change in national welfare: +$7B
    $10 redistributed for each $1 of efficiency gain

    22 years of BLS data: 3 years after lay-off:
    only 30% earn the same or more
    average wage change = -10%
    unemployed, retired, or perhaps at home with children (Lori G. Kletzer)

B. International investment

    Investment = the fundamental engine for growth
        Physical capital: plant and equipment
        Human capital: education and training

    Investment is financed by savings

    Two sources of savings and investment:
        Domestic: requires internal resources, but you then capture the returns on investment yourself
        Foreign: allows a country to benefit from using foreign savings, getting higher labor productivity and wages, but must pay foreign investors a return

    Examples:
    Direct investment -- control; own 10%+ of stock
    Portfolio investment -- seek profitable returns, not control
    Loans

    International investment is the mirror image of labor migration
    Results:

1. Capital migrates to higher-profit countries
2. National welfare rises for both the US and Mexico
3. Profits rise in the US
4. Profits fall in Mexico
5. Foreign investors earn higher profits than before

    We've already dealt with the case of labor migration: it's relatively easy to understand: workers physically move to another country and earn labor income there.
    The process of actually shifting savings to another country is not as straightforward as it is for labor.
    In the real world, resource migration moves both directions: diversification of investment.
    So how does capital migrate on balance?

--real investment versus financial investment

    see investment concepts worksheet -- top panel

    real investment (I in macro)
    = spending on plant and equipment 
    --> Demand for credit

    financial investment (= S in macro)
    = using your savings (S) to buy stock, make loans
    --> Supply of credit

    foreign investment = a type of financial investment
    i-ratea = domestic i-rate without foreign investment
    i-rateROW > i-ratea => make foreign investments (lend)
    i-rateROW < i-ratea => receive foreign investments (borrow)

Net foreign investment:

    see investment concepts worksheet -- bottom panel

How does a country come up with the money to make net foreign investments?

non-zero NFI requires unbalanced trade

The size of NFI = the current account balance (CAB)

Note: GDP = output produced within domestic boundaries
    GNP = output produced by domestic factors of production (best measure of income)