4-14. Suppose the Cobb-Douglas production function given in equation 4-1 applies

Question

4-14. Suppose the Cobb-Douglas production function given in equation 4-1 applies to a
developing country. Instead of thinking of immigration from a developing to a
developed country, suppose a developed country invests large amounts of capital
(foreign direct investment, or FDI) in a developing country.
(a) How does an increase in FDI affect labor productivity in the developing country?
How will wages respond in the short-run?
(b) What are the long-run implications of FDI, especially in terms of potential future
immigration from the developing country?

Explanation / Answer

a) labor productivity will increase as the competition increases ) labor price will increase in short run b)immigration from developing country to developed country will decrease

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