What would be the direction of foreign direct investment (FDI)? Use a world-capital-market graph to show the effects of FDI on the two countries' rental rates of capital, GDP, and return to labor owners. Identify the net change in world output in the above graph.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Q1. Suppose that Brazil initially has a higher capital rental rate (r) than the United
States.
a. What would be the direction of foreign direct investment (FDI)?
b. Use a world-capital-market graph to show the effects of FDI on the two countries'
rental rates of capital, GDP, and return to labor owners.
c. Identify the net change in world output in the above graph.
d. How would the wage rate and the rental rate of capital in the recipient country be
affected in the long run?
e. Discussion: what other effects could FDI cause in the recipient and source countries
that are not captured in the model?
Transcribed Image Text:Q1. Suppose that Brazil initially has a higher capital rental rate (r) than the United States. a. What would be the direction of foreign direct investment (FDI)? b. Use a world-capital-market graph to show the effects of FDI on the two countries' rental rates of capital, GDP, and return to labor owners. c. Identify the net change in world output in the above graph. d. How would the wage rate and the rental rate of capital in the recipient country be affected in the long run? e. Discussion: what other effects could FDI cause in the recipient and source countries that are not captured in the model?
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