 Good afternoon. Today, we will continue with our discussion on the effects of immigration in the long run. We had seen earlier, while discussing the effects of immigration in the short run, that immigration tends to have an impact on the output mix of manufacturing and the agricultural sector. The output of both agriculture and manufacturing sector increases reason being that the labor gets absorbed in both the sectors, that is manufacturing, which is capital specific and agricultural sector, which is land specific. And because the labor increases in both the sectors, marginal productivity of labor goes down. So, the wages go down in the short run, but then the marginal productivity of capital and marginal productivity of land increases in the short run. So, we will further see the empirical evidence of the effects of immigration in the short run. Now, coming to the effects of immigration in the long run, you will see that we will resort to the Rizbinski theorem. The Rizbinski theorem can best explain what is the possible impact of immigration in the long run. Please recall that the Rizbinski theorem is that an increase in supply of a factor keeping more, this is very important, product price is constant. And when you assume product prices to be constant, you further assume that the relative wage rates are same, you assume capital labor ratio eventually is the same. And so, the Rizbinski theorem is that an increase in supply of a factor keeping product prices constant increases the output of the commodity, which uses the expanding factor intensively and decreases the output of the other commodity. So, what we are saying is that in the long run, there will be a change in the output mix, there will be an increase in production of the labor intensive product and a decline in production of the capital intensive product, assuming that the product prices, the relative wage rates and the capital labor ratio does not change. So, marginal productivities do not change. So, by assumption Rizbinski theorem relates the supply of factor to the output of the commodity. Now, you can see in this diagram, there are two industries, one is the shoes and the other is the computer industry, shoe is the shoe industry is labor intensive, while the computer industry is capital intensive. And you can see with the slope of this particular line, 0 S A is smaller than the slope of the other line, which is O C A. So, the labor the total amount of labor in the economy is from this origin to this end and the labor allocated to shoes is this much, the rest is the labor allocated to computers, the capital allocated to shoes is from 0 S K and the capital allocated to computers is O C K. So, you can see from the diagram that the shoe industry employs more of labor, while the computer industry employs more of capital. Now, see what happens, if you are talking of a long run impact of immigration in the economy. So, I am skipping the explanation and I will straight away go to the figure to increase to show you what happens in the, when there is an effect of immigration in the long run. Now, you can see that the increase in home labor due to immigration is allocated entirely to the shoe production. So, you see a left word shift of the origin from 0 S to 0 S dash. So, the difference between the short run and the long run impact is, so you can see in this diagram, which is from Feinstra and Taylor that what happens with an increase in home labor that is immigration takes place. Now, the difference between the short run and the long run is that the entire it is assumed that the entire home labor gets absorbed in the labor intensive industry, which is the shoe industry. Now, you can see in this diagram the 0 S point shifts to the left and it is now 0 dash S. So, the origin changes from 0 S to 0 dash S, implying that the entire home labor gets absorbed in the shoe industry. Now, when the entire labor gets absorbed and we are assuming that the eventually the capital labor ratio has to be the same. So, for this some capital needs to move from the computer industry to the shoe industry. So, you will see a decrease in capital in the computer industry. Now, if you see to the right of this diagram K K dash is the decrease in capital in the computer industry. Now, so the capital moves because it is long run. So, the capital moves from the computer industry to the labor industry eventually there is a reorganization taking place. Some additional increase in labor also happens in the shoe industry. So, you see that there is a movement of capital and labor from the computer industry to the shoe industry and at the end capital labor ratio remains the same in each of the industry, but then reallocation is already taken place. The computer industry loses capital and labor, the shoe industry increases the amount of accumulation of capital and labor, but at the end capital labor ratio remains the same. So, then because of this there is an increase in output of the labor intensive industry and a decline in output of the capital intensive industry which is the computer industry. Now, this red line 0 from 0 s dash to b signifies that the capital labor ratio in both the industries eventually remains the same even though you have more of capital and more of labor in the shoe industry and you have less of capital and less of labor in the computer industry eventually capital labor ratio in both the industries remain the same. So, what has happened the output of the shoe industry has gone up, the output of the computer industry the capital intensive industry has gone down. So, that is the effect of immigration in the long run it has an impact on the output mix rather than on the relative wage rates rather than the impact on the marginal productivity is rather than the impact on the capital labor ratio the impact is on the output. Now, what we need to see is whether empirically something of similar sort has happened. So, I am skipping what I have already explained and I am giving you the effects of the mariel boat lift on industry output in Miami. I am talking of again that same time period in 1980 when around 125000 Cubans because of various I am not going into the political aspect of this, but they moved from Cuba to place in Florida which is Miami. Now, if you wish to see the impact of this immigration taking place on the US economy you will see apparel industry which is a labor intensive industry. In Miami you will see that there is a deceleration taking place, but the city of Miami does better than the other cities signifying that there is a some sort of a Rizbinski effect taking place as labor moved from Cuba to US the output of the labor intensive industry went up. Now, you see a deceleration because that was a time when you had deceleration in the economy in the US economy you see a downward trend, but then if you see this yellow the yellow line it does better than the other cities which are colored in red in light green and dark green signifying that there is some sense of the Rizbinski impact coming in. If you see the impact on the capital intensive industry high skilled industries you can see that the Miami trend shows a downward trend it does worse than the other cities signifying that as labor moves from Cuba to US the output of the labor intensive industries go up, but the output of the capital intensive industry goes down. So, you can see the Miami trend although all of them have shown a downward trend the city of Miami does badly more badly than the other cities in terms of the high skilled industries. So, you do see an impact of the Rizbinski impact of the migration of the Cuban labor to the US economy. Now, I want to show you one the application again in terms of figures this is the percentage change in the wages of workers which education level less than 12 years, 12 years, 13 to 15 years then 16 years or more and overall average. Now, part a shows the effect of total immigration from 1990 to 2004. Now, there are two assumptions one when capital and land is fixed. So, we are talking of the short run phenomena where we can use the specific factor model to explain what happens to the wages. So, you will see that the percentage change in the wage of workers which education level less than 12 years when capital and land was fixed is minus 9 percent. Please recall what happens when the migration takes place in the short run the labor gets absorbed in both the industries. So, the marginal productivity of labor goes down. So, you see with less than 12 years the percentage change in wage of workers is minus 9 percent and for 16 years or more it is minus 5 percent. For 12 years and 13 to 15 years the impact is lesser than the impact that you have on the wages for workers which education level less than 12 years and 16 years or more. Please recall our discussion yesterday that in U S most of the foreign born immigrants are belong to a group of workers which education levels either with less than 12 years or there are substantial foreign born immigrants who have who belong to workers with education level 16 years or more. So, here you can see the short run impact that the wages in the lower and the higher end get effect the overall average is also negative at minus 3.2 percent. But then if you see the long run where the marginal productivity is does not change or the real returns to capital is fixed you will see that of the there is a decline of the wages in less than 12 years. But for all other years it is positive. So, the overall average is 0.3 it is positive. So, when the immigration takes place and you are analyzing a long time period you see that the effect of immigration on the percentage change in workers is positive rather than negative. So, this is a result which proves the Rizbinski the Rizbinski impact and generally it negates the myths sometimes which says that immigration leads to a decline in wages essentially. So, at least in the US case you see that in the long run the wages of all the workers go up. This is my last point on the immigration and US wages. Now, I come to the movement of capital between countries which is foreign direct investment. This is again a very sensitive issue when it comes to FDI in coming in in the developing countries. But our analysis will be the same of what we did when we were trying to understand the impact of when we are trying to understand the impact of immigration labor immigration on the economy. Now, the differences that you have capital coming in from the developed nations to the developing nations. So, again in the short run we will resort to the Ricardo Weiner theorem which is also called the specific factor model. In the specific factor model there are two industries one is manufacturing the other is agriculture manufacturing is capital specific agriculture is land specific and labor is the mobile factor. So, there are three factors of production two goods and if you talk of two countries you have country A and country B country A is a developed country B is the developing countries. So, then the capital moves from the developed to developing countries and it comes to the manufacturing industry because manufacturing industry is the capital specific industry. So, unlike labor which moved in the short run and it got absorbed in both the industries when you are talking of capital it gets absorbed in the manufacturing industry. Now, when the capital comes in the one assumes the law of diminishing marginal productivity when there is more capital you will see that the returns to capital go down. So, there is diminishing marginal productivity, but then because you have more capital and so the marginal productivity of labor goes up and when capital comes in in the manufacturing industry the output goes up when the output goes up it will require more of labor that labor will move from the agricultural industry to the manufacturing industry. So, the output in the agricultural industry will go down the output in the manufacturing industry go up. So, three impact one the marginal productivity of capital goes down the marginal productivity of labor in the manufacturing industry goes up. The marginal productivity of land goes down because in the agricultural industry labor moves from the agricultural industry to the manufacturing industry. So, we will see what happens in the short run you will see that because now again this is a diagram where you have the determination of wages you have the blue curve which is P m into M P L M which is the value of marginal productivity of labor in the manufacturing sector and you have P A into M P L A which is the value of marginal productivity in the agricultural sector. Wherever these two curve intersect you have the determination of the wages. Now, see what happens when the capital moves in the manufacturing sector the marginal productivity of labor in the manufacturing sector goes up reason that labor now has more of capital. So, the marginal productivity of labor goes up. So, the wages in the manufacturing sector goes up. So, as soon as that happens you will see that the there is a shift in the home P P F due to F D I there is more production of the manufacturing sector and there is a decline in production of the agricultural sector that is the short run impact. So, the rentals on capital the rentals on capital fall because please recall that rentals on capital can be determined is a price into marginal productivity of capital. So, if the marginal productivity of capital goes down the rentals on capital also goes down. But, there can be another argument saying that when you increase the production of the manufacturing sector then the labor moves from the agricultural industry to the manufacturing industry. Now, that may increase the marginal productivity. So, then there are two forces coming in one the capital has come in from outside which reduces marginal productivity of capital. But, at the same time the output of the manufacturing industry goes up when the output of the manufacturing industry goes up the labor shifts from the agricultural sector to the manufacturing sector which can lead to an increase in MPK. So, then one needs to clarify further this point that what will happen to the decline in MPK. Now, this rentals on capital can also be worked out using this formula that it is rentals is P M into Q M that is the total output minus what you pay to the labor in the manufacturing sector divided by capital which is used in the manufacturing sector and this is equal to the rentals on capital. Now, you can see that if the wages are higher then you would see that the rentals on capital will go down. So, if you have higher wages and if you have increase in K, K M if this goes up this W goes up then the rentals on capital goes down. So, even if you use this formula you would see that the with FDI in the short run you would see a decline in rentals on capital. Now, what we need to see is empirically whether this holds or not there is the effect of FDI on rental and wages in Singapore. Now, what Singapore did was that it encouraged foreign firms to establish subsidiaries with its borders specially in its electronic industry and Singapore had the fourth largest amount of FDI coming in after say China being the first. So, one needs to understand what has happened to the returns to the capital in the short run. So, you will see that the results are consistent with the specific factor model. You can see that the real rentals have gone down the real wages have gone up. So, the implied productivity which is sum of the increase in productivity in labour and capital is nearly 0, but you see that in the short run you would see that in case of Singapore there is a decline in marginal productivity of capital and an increase in marginal productivity of labour. You can see the real rentals are minus 5 percent minus 1.9 percent minus 3.4 percent while the real wages are positive. So, the implied productivity is nearly 0, but then there is a second approach to calculating the rentals on capital. If the capital was rented instead of purchased what would the rental be then the rental agency needs to make the same rate of return on renting the capital equipment that it would make it make if it invested elsewhere. So, if it invests p k at interest rate i it could expect p k into i as the returns. So, and we may also consider depreciation on the capital. So, the real rental is another procedure to work out the real rental works out to be the p k p the returns. So, if this is capital which is rented instead of purchased. So, you have p k and then there is a depreciation of the rate d. So, r by p is p k by p i plus d. Now, you can see if you assume that then it would show the use the calculated rentals and actual wages the using the formula that I just mentioned and the interest rate used are the bank lending rates the return on equity and the earning price ratio. So, again in the short run if there is a foreign direct investment coming in the marginal productivity of labor goes down the impact is negative for the return on equity and earning price ratio and some positive amount for bank lending rate. But real wages are here if you work that out if you calculate the actual real wages it turns out to be positive. Now, this table is in contradiction with what we had discussed earlier in the earlier table the implied productivity turns out to be positive. So, on the one hand one set of figures are giving a productivity which is 0 on the other hand the implied productivity here if you use another formula turns out to be positive. But so then which scenario is correct is a source of debate for economists. So, most believe that productivity increased, but that believe is challenged by the part part a. So, one cannot say for sure with some conviction that the growth that happened in Singapore was it because of the productivity growth or was it just because of the factor accumulation. Now, there are some economists like Krugman who believed that the high growth of the Asian economies is was not very different from the growth of Soviet Union in the 50s and 60s it was more due to factor accumulation. So, if it was more due to factor accumulation it would eventually lead to a decline in returns if one believes in the diminishing marginal productivity. So, growth will eventually come down and Paul Krugman was writing as before he was writing this in the mid 90s. And then you had that major East Asian crisis in 1997 where at least five major East Asian economies were impacted in the month of June of 1997 around 150 billion US dollars moved out of these five countries. As a result there was an impact on the exchange rate the exchange rate depreciated heavily it had an enormous impact on the inflation there was a deceleration on the output. But this was 97, but Krugman could predict this writing in a journal called foreign affairs in 1994. And his concern was that probably the Asian economies growth is due to factor accumulation rather than productivity growth. But there is a whole debate on this whether it is factor accumulation or is it productivity growth. So, other economies disagree and believe that Asian growth is due its significant part to improve productivity in addition to capital accumulation. So, then the the other view the third view is that it is both because of factor accumulation and an increase in productivity. Now, the gains from labor and capital flows if you look at the foreign investment and immigration are these are both controversial policy issues. So, most countries have had at some point controlled FDI, but later became open to foreign investment. However, almost all countries impose limits on immigration they like the US they have immigration control which was established as far back as the quota law of the 1921. So, it allows a limited number of persons arriving annually from each country of origin. If one wants to understand the gains from immigration now this is a diagram which would show the gains from immigration for both the home country and the foreign country. So, it is both the host and the source country which gains from this process of immigration. Now, see what happens a W is the wage rate which is prevailing in the home before immigration. W star is the wage which prevails in the foreign country before immigration and naturally because you have a lower wage in the foreign country there is an incentive for the foreign immigrants to migrate to the home country. The home country is the developed country. Now, what are the gains to home? Now, the last individual which emigrates he gets a wage which is equal to P into MPL. Now, see what happens when immigration takes place or immigration takes place eventually you will see an equalization of the wages in the very long run. So, eventually the wage rates that would prevail will be W where the demand and supply would be equal and then it will be like an equilibrium situation. Now, compare the wages of the people who are coming in in the home country what they get is price into MPL. So, the last person who has emigrated from the foreign country to the home country will get P into MPL. Subsequently because there is a diminishing marginal productivity taking place MPL will go down. So, what you would finally get is that the wages which prevail are W and the foreign immigrants which have come in P into MPL ratio is greater than the wages which prevail in the home country because what they are getting is P into MPL. MPL is declining, but the wages that they are paying is W because that is the equilibrium level of wage. So, the gain to the host country is that the contribution P into MPL their contribution is greater than the wages that they are getting. So, in that sense home country gains. What is the gain to the foreigner remember foreigner started with wage rates W star and eventually what will be the wages that they would get would be W and W is greater than the P into MPL that would prevail in the source country. So, this is the source country the gains are because the wages that the immigrants get is greater than what they would have contributed back home which is P into MPL. So, then the gains to home is A B C the gains to foreigners is B C A star. So, the entire gain from immigration is the triangle A A star C. Now, if you wish to work out the area of this triangle you already know the area of the triangle is half into base into height. The half base is the difference in the wages that prevailed between the home and the immigration which is W W star the height is the line B C. So, you can always work out the area of this triangle one can always go into the detail of it similar analysis can be done for the gains from foreign direct investments. The gains are now here because the rentals in the foreign country are higher than the rentals in the home the capital moves from the developed nation to the developing nations. So, in this scenario the gains to the foreign are A dash B C while the gains to home are A B C. So, this is similar to the analysis on the gains from the foreign direct investments. So, all in all let me like try to recapital it the issue of immigration and foreign direct investment it is a little sensitive issue, but if one believes in the economic forces then one can say that immigration and foreign direct investment in the long run tends to have an impact on output rather than on the wages and the rentals on capital. So, to understand the impact of a FDI one needs to understand one needs to take a longer time span to understand the impact of FDI. And then this analysis is a partial equilibrium analysis if you wish to analyze the FDI impact on the entire economy you have to bring in the other the other sectors you have to work out the spillover effects the backward and the forward linkages that would require another set of data set to say something more on the FDI's impact on the entire economy. But then what this analysis has shown that when people say that more of immigration leads to decline in wages that may be true in the short run, but in the long run it will have an impact on the outputs output of say labor intensive industry will go up the output of the capital intensive industry will go down. So, I will end up here and we will take up our last lecture next time. Thank you so much.