Macroeconomics

Suppose that the equation of the Canadian real GDP, Y is given by:

= ^1/4(₁₂)^3/4

where A, K, N1and N2measure, respectively, total factor productivity, the amount of capital, the number of employed workers and the average hours of work by each employed individual in Canada.

In discussing the effects of immigrants on local workers we have assumed that immigrants compete with local workers because immigrants cause the labor supply to increase (immigrants substitute local labor). Conversely, immigrants benefit local capital owners (immigrants complement capital) because they cause the demand for capital to rise.

Q1.

Why would an increase in immigration stimulate the demand for capital? (the effects of immigration on the real rental cost of capital.)

Immigration can produce positive externalities that increase the productivity of all factors. For example, immigrants are more likely to innovate than locals; immigrants increase product variety; further, because immigrants tend to initially cluster in cities, immigration may increase the density of economic activity and reduce transportation costs.

Q2. Under these circumstances, can you predict the effect of the inflow of immigrants on the equilibrium real wage? (

The Canadian government adopts a system of preferences that targets the immigration of skilled workers (60% of the immigrants are highly educated).

Q3. Under these circumstances (and by appropriately modifying the production function by separating skilled and unskilled workers), how will the immigration affect the wage skill premium and the real wage of the unskilled? by assuming that the relative supply of skill is perfectly inelastic.