Suppose that the United States initially has a lower capital rental rate (r) than Mexico.

• 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 total return to labor owners.
• Identify the net change in world output in the above graph.
• If the source country restricts the amount of outward FDI, how would the net change in world output identified in part (c) above be affected? Illustrate your answer in the same graph above.
• Discussion: what policy could governments use to attract inward FDI? What are the tradeoffs of such policy?