The theory of international factor flows: The basic model

The basic model used to discuss the simultaneous international flow of labor and capital is a one-commodity model in which a common technology is shared between countries. The Ramaswami result, wherein an optimal restriction of labor inflows is superior to an optimal restriction on capital outflows for a capital abundant country, is extended to reveal that optimality requires inflows of both factors. Box diagrams and iso-welfare contours are used to show how optimal policy rankings are reversed if foreign labor must be paid higher home wages.