KEY POINTS

  1. Holding the amount of capital and land fixed in both industries, as in the specific-factors model, immigration leads to a fall in wages. This was the case, for example, with the mass migration to the New World in the nineteenth century.
  2. As wages fall because of immigration, the marginal products of the specific factors (capital and land) rise, and therefore their rentals also increase.
  3. Fixing the amount of capital and land in a country is a reasonable assumption in the short run, but in the longer run, firms will move capital between industries, which will change the effect of immigration on wages and rentals.
  4. In a long-run model with two goods and two factors, both of which are perfectly mobile between the industries, additional labor from immigration will be absorbed entirely by the labor-intensive industry. Furthermore, the labor-intensive industry will also absorb additional capital and labor from the capital-intensive industry, so its capital–labor ratio does not change in the long run. Because the capital–labor ratio in each industry does not change, the wage and rentals remain the same as well. This results in what is known as factor price insensitivity.
  5. According to the Rybczynski theorem, immigration will lead to an increase in output in the labor-intensive industry and a decrease in the output of the capital-intensive industry. This result is different from that of the short-run specific-factors model, in which immigration leads to increased output in both industries.
  6. Besides trade in goods and the movement of labor, another way that countries interact with one another is through investment. When a company owns property, plant, or equipment in another country, it is called foreign direct investment, or FDI.
  7. In the short run, FDI lowers the rentals on capital and land and raises wages. In the long run, the extra capital can be absorbed in the capital-intensive industry without any change in the wage or rental.
  8. According to the Rybczynski theorem, FDI will lead to an increase in the output of the capital-intensive industry and a decrease in the output of the labor-intensive industry.
  9. The movement of capital and labor generates overall gains for both the source and host countries, provided that the income of the emigrants is included in the source country’s welfare. Hence, there are global gains from immigration and FDI.