De Leon, Michy Marie D.

2-A BSBAHRMOUMN

Topic 3 – Connecting Countries through Trade and Factor

Movements:

TRADE and FACTOR MOBILITY THEORY

Assignment No. 3 – Discussion Questions

Answer the following questions based on our previous discussions:

1. Summarize the reasons for international factor movements and discuss their major
effects on countries/nations in general.
- Factor movements include labor migration, the transfer of capital via international
borrowing and lending, and the subtle international linkages involved in the
formation of multinational corporations.
International factor movements in today's world such as labor, capital
movements, and direct investment and examines the appropriate conception of
capital movements. Physical capital is transferred abroad through a trade surplus
and corresponds to the accumulation of ownership claims against capital located
in a foreign country. Hence, the appropriate concept of international capital
movements simply involves a change in the location but not the ownership of
physical capital. In growth models, the trade surplus corresponding to the
transfer of capital must be taken into account. In static models, there is a one-
time stock adjustment in which a portion of a fixed stock of physical capital simply
moves abroad. The chapter discusses income distribution and factor movements
in a general setting of r factors and n goods. International factor movements alter
the relative domestic supplies of productive factors and, hence, should change
the internal distribution of income. The MacDougall–Kemp model is useful for
making illustrative calculations of the impact of immigration on income
distribution. The model is limited by the fact that it uses only two productive
factors though it is easy to extend the model to more than two factors at the cost
of losing its sharp predictive powers.

2. Explain the difference between Adam Smith's theory of absolute advantage

and David Ricardo's theory of comparative advantage.
- Absolute advantage looks at the efficiency of producing a single product. It also
looks at how to produce goods and services at a lower cost by using fewer inputs
during the production process when compared to the competition.
Comparative advantage takes a more holistic view of production. In this case, the
perspective lies in the fact that a country or business has the resources to
produce a variety of goods and services rather than focus on just one product.
Comparative advantage is often contrasted with absolute advantage. Where
absolute advantage refers to the ability of an entity to produce a greater quantity
of a product or service, comparative advantage refers to the ability to produce
goods and services at a lower opportunity cost compared to the competition.