How can we model the long-run effect of FDI flows on wages and rentals?
A) Use a simple supply-and-demand approach.
B) Use the Ricardian comparative advantage model.
C) Use the Heckscher-Ohlin model with the assumption that capital can migrate.
D) Use the Rybczynski theorem.

Question

Quizplus · Accepted Answer

The Heckscher-Ohlin model assumes that capital can migrate, and therefore can explain the long-run effects of FDI on wages and rentals. The model shows that when capital flows from a capital-abundant country to a labor-abundant country, wages in the labor-abundant country increase while rentals decrease. Therefore, the model is useful for understanding the impact of FDI on the factors of production in the receiving country. The other options (A, B, D) do not explicitly account for the movement of capital, which is critical in analyzing the effects of FDI.

How Can We Model the Long-Run Effect of FDI Flows