Question 1
a) Suppose that the United States conducts foreign direct investment in Vietnam. What would be the effect of the FDI on production, the rental rate and the wage (both real and nominal) in Vietnam in the long-run? How do you know (no graph or equations necessary)?
b) What do you expect would happen to the rental rate on capital and the wage in Vietnam in the short-term, if we now consider manufactured goods (M) versus agricultural goods (A)? Explain using a graph or equations.
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c) Policymakers ask you whether the foreign direct investment harmed or helped the U.S. and Vietnam. What would you tell them? Use a graph to show gains or losses.
Question 2
Suppose that the U.S. doubles in both population and capital. What would happen to the relative prices of both the goods (Pc/Ps) and the factor endowments (w/r) compared to your answer in 1. above? Why? (No graph necessary.)
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