Impact of FDI

 

Question 1: Impact of FDI (15 marks)
Following the slow down in productivity in Canadian manufacturing during the 1990s and the
signing of NAFTA in 1994 there were large capital outflows (FDI) that moved from Canada into
the United States and Mexico. All countries produce two goods: a manufacturing good (M) and
an agricultural good (A). Manufacturing is capital intensive and uses labour and capital in both
the short and long run. The agricultural good is labour intensive and requires labour and land in
the short run but switches to capital and labour in the long-run.
(a) Using the Specific-Factors Model graph the short-run impact in Canada from the capital
outflows. Describe and explain the following:
(i) impact on the wages of workers.
(ii) impact on capital owners and land owners.
(iii) changes in the allocation of resources between industries and production.
(b) Using the Heckscher-Ohlin Model graph the long-run impact in Canada from the capital
outflows. Describe and explain the following:
(i) impact on the wages of workers.
(ii) impact on capital owners.
(iii) changes in the allocation of resources between industries and production.
(c) Using the imperfect competition model discuss which Canadian firms were most affected by
the capital outflows that occurred during this time?

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