This is “End-of-Chapter Material”, section 5.7 from the book Theory and Applications of Macroeconomics (v. 1.0).
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We began the chapter with five stories from all around the world. Let us briefly review these stories, based on what we have learned in this chapter.
Niger is an extremely poor country. Life expectancy in Niger is 52, the infant mortality rate is over 10 percent, and less than 30 percent of the population can read and write. It is extremely poor because it lacks the key inputs to the production function. It is largely a subsistence agricultural economy: it has relatively little physical capital or human capital, little physical infrastructure, and poor social infrastructure as well. It is a natural target for World Bank help. The particular World Bank project that we cited is aimed at one particular input: its goal is to improve Niger’s human capital.
In a globalized world, savings and investment do not have to be equal in any individual economy. Savers can send their funds almost anywhere in the world in search of a high return on capital. Countries that are competitive, in the sense that they have a high marginal product of capital, will tend to attract such funds. One manifestation of these flows of capital is that multinational companies establish factories where they can produce most cheaply. In the story, we see that Vietnam, a low-wage economy, is attracting capital investment from a Taiwanese company. Capital flows have a similar effect to the migration of labor: when capital flows into a country, it increases the real wage; when capital flows out of a country, real wages decrease. Globalization benefits the world as a whole, but many individual workers may lose out.
United Arab Emirates
The policies of Dubai are straightforward to understand in the framework of this chapter. Dubai is actively trying to import foreign physical capital and human capital. It is encouraging multinational firms to establish operations in the country. This makes sense because, as we now know, increased physical and human capital will both tend to increase the marginal product of labor in Dubai, leading to higher wages and higher prosperity. Dubai’s claims of attractiveness rest largely on its social infrastructure.
The United Kingdom
Migrant workers are a global phenomenon, be they Poles traveling to England, Mexicans moving to the United States, or Filipinos moving to Saudi Arabia. Like the young Poles in this story, they move from country to country in search of higher wages. Worker migration across national boundaries tends to equalize wages in different countries. As workers leave Poland, for example, labor becomes scarcer there, so wages in Poland tend to increase. When they arrive in the United Kingdom, there is more labor supplied to the United Kingdom labor market, so wages there tend to decrease. However, labor migration is still quite limited because (1) countries restrict immigration and (2) most workers still do not want to suffer the upheaval of moving to a different country and culture.
The competitiveness initiatives of President Obama and President George W. Bush are designed to increase both human capital and knowledge within the United States. They include measures to strengthen education (human capital), increase research and development (R&D; knowledge), and encourage entrepreneurship and innovation. We have seen that the idea of competitiveness is subtle: nations do not compete in the same way that countries do. Still, improvements in technology and human capital will tend to increase the marginal product of capital, making the United States a more attractive place for investment. In that sense, they do make the country more competitive.
Table 5.3 An Example of a Production Function
Go to the website of the Bureau of Labor Statistics (http://www.bls.gov). Find the median hourly wage in the state in which you live. (If you do not live in the United States, pick a state at random.)