Model Exercise: Immigration and Structural Change
Download Exercise: Immigration and Structural Change
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Summary
Immigration has multi-dimensional effects, with social, cultural, political, and economic ramifications for the destination country. In this exercise, you will examine one aspect of the economic effects of immigration – structural change – using the Rybczynski theorem to organize your analysis and explain your results.
The theorem, named after the economist
Tadeusz Rybczynski, posits that if prices are constant, an increase in the
supply of one factor will lead to an expansion of output in the production
activity that is most intensive in the use of that factor and a decline in
output of activities intensive in the use of other factors. This
occurs because the increased factor supply and the resulting fall in the factor
price is most cost-saving for the sector intensive in that factor. The
expansion of that industry pulls in productive resources from other sectors, causing them to contract.
Furthermore, an increase in the supply of a factor is likely to affect the composition of trade. Export-oriented production activities sell a relatively large share of their output to foreign markets, and import-competing activities produce commodities for which imports account for a relatively large share of consumption. If the factor used intensively in the production of exportable commodities increases, so will production and the export supply of that good. The increased production of exports will cause production of the importable good to fall, increasing the demand for imports of that good. Hence, both exports and imports will increase. The opposite occurs if the factor used intensively in the production of importable commodities increases. As production of the importable good rises, import demand for that good will fall, and production and export by the export-oriented will also fall.
In this case study, you will examine the results of an experiment in which immigration increases the supply of US labor. You will explore whether the resulting structural changes in production and trade in your model can be explained in terms of the Rybczynski theorem.
Optional Challenge: Change the value of the Armington elasticity of import demand and compare results.