International Trade

Factor Mobility

Factor market equilibrium and mobility (for example, labour)

OHOF = world total labour.

Assume all labours are homogenous. Suppose initial allocation of labour is OHL1 for H and
OFL2 for F

(OHL1 + OFL1 = OHOF).

Given downward sloping MPPs (therefore, diminishing marginal return is assumed) for the two countries,

WH = OHD < WF = OFB.

H's labour will migrate to F for higher wages.

H's labour (and MPPH ) and
F's labour (and MPPF ).

Migration will cease when MPPH = MPPF (WH = WF).

Results

  • Labour's welfare changes: [1] WH , WF
  • F's surplus (which is return to capital) increases [2] from IAB to IEG, therefore F's capitalists will be better off.
  • H's surplus decreases [3] from HCD to HEF, therefore H's capitalists will be worse off.


    • World total production

  • Before migration: HCL1OH + IAL1OF
  • After migration: HEL2OH + IEL2OF


    • Therefore total production increases [4] by AEC.


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