Growth,foreign investment,and the real-income gap between source and host countries

This article studies how endowment changes affect the real-income gap between source and host countries in a world where some factors are internationally mobile. Emphasis is given to endowment changes of equal magnitudes in both countries. For example, in a benchmark situation where the two countries are equivalent except in their relative endowments of mobile capital versus immobile labor, internationally balanced labor growth (1) raises the world price of the mobile factor, (2) increases host-to-source remitted earnings, and (3) widens the source-versus-host real-income gap. Tendencies such as these, however, must be treated with care. The world price of the mobile factor could fall if there are more than two factors. Overall remitted earnings could also fall if the source country imports one or more mobile factor. Furthermore, an increase in remitted earnings may fail to increase the real-income gap if there are offsetting effects on product prices or domestic products.