International factor movements

In international economics, international factor movements are movements of labor, capital, and other factors of production between countries. International factor movements occur in three ways: immigration/emigration, capital transfers through international borrowing and lending, and foreign direct investment. International factor movements also raise political and social issues not present in trade in goods and services. Nations frequently restrict immigration, capital flows, and foreign direct investment.

Trade in goods and services can to some extent be considered a substitute for factor movements. In the absence of trade barriers, even when factors are not mobile, there is a tendency toward factor price equalization. In the absence of barriers to factor mobility, commodity prices will move toward equalization, even if commodities may not freely move. However, complete substitution between factors of production and commodities is only theoretical, and will only be fully realized under the economic model called the Heckscher-Ohlin model, or the 2x2x2 model, wherein there are two-countries, two-commodities, and two factors of production. While the assumptions of that model are unlikely to hold true in reality, the model is still informative as to how prices of factors and commodities react as trade barriers are erected or removed.

International labor migration is a key feature of our international economy. For example, many industries in the United States are heavily dependent on legal and illegal labor from Mexico and the Caribbean. Middle Eastern economic development has been fueled by laborers from South Asian countries, and several European countries have had formal guest-worker programs in place for years. The United Nations estimated that more than 175 million people, roughly 3 percent of the world’s population, live in a country other than where they were born.

International labor mobility is a politically contentious subject, particularly when considering the illegal movements of people across international borders to seek work. For example, a number of European countries saw the rise in the 1990s of a number of anti-immigrant political parties such as the National Front in France, the National Alliance in Italy, and the Republikaner in Germany. The subject is equally contentious among academics who have espoused numerous theories for the effects of immigration, both illegal and legal, on foreign and domestic economies. Traditional international economic theory maintains that reducing barriers to labor mobility results in the equalization of wages across countries.

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