The international economy is built around global trade and economic interdependence. The United States has the highest Gross Domestic Product (GDP) and one of the very highest GDP per capita in the world. International trade represents about 25 percent of the U.S. GDP. International capital and labor mobility are drastically influenced by trade and investment among nations. Labor and capital mobility refers to the ability to move and make changes to the way labor and capital is used and allocated. Success in international trade leads to increased jobs and GDP per capita in the United States. This creates an increase in the international mobility of capital and labor.

CS Question #1: Why do you think labor and capital mobility might be important?

Labor mobility is the ability of labor to move to where the returns are the highest. Labor mobility, as it effects the labor supply, refers to the ability of workers to move from one job to another. As international trade creates job growth in the U.S. economy there is more potential for labor mobility of the worker. The worker may be able to demand higher wages or better working conditions. Businesses will have to consider labor mobility when making demands on workers. This among other factors may inspire a business to relocate their production to another area. A business's ability to relocate is the labor mobility of the demand for labor.

Capital mobility is the ability of individual and business investors to invest their capital where the returns are the highest. If an investment opportunity is in great demand it will cost more to invest in it. This limits the amount of individuals and businesses with enough capital mobility to make the investment. Investors may seek out investments that will give them a better rate of return. This may included making a foreign investment. The ability to move to the best return is the basis for the concept of capital mobility.

CS Question #2: Why might a business choose to relocate to a different location?

American businesses are attracted to foreign industrial and developing nations for decreased labor costs. Creating a new factory in a foreign nation is a form of foreign direct investment. The creation of new jobs leads to growth in the overall economy of the foreign nation. A new factory increases the production and improves the employment rate of that nation. The U.S. business increases profits by decreasing labor costs. This increases the capital of the economy in the United States. International labor mobility allows businesses to allocate labor efficiently among markets.

Historically, Untied State's foreign direct investment concentrated on industrial nations. Industrial nations offer the benefit of an infrastructure. Developing nations may offer more dramatically decreased labor prices. Currently, about 40 percent of new foreign direct investment targets developing nations.

CS Question #3: How does American business's relocation of a factory in a foreign nation affect that foreign nation?

U.S. investment in foreign nations is effected by the economic factors of that nation. This is true of both foreign direct investments and foreign indirect investments. A foreign nation may offer decreased taxes, lower interest rates or looser monetary policies. Further, the rate of exchange for the dollar may significantly increase the purchasing power of the U.S. investor. All of these factors can increase the rate of return on a foreign investment.

Foreign direct investment, such as building a new factory may also have increased capital benefits not related to the price of labor. Government restrictions such as environmental laws, building codes, property taxes among others, may be lessened or even non-existent in a foreign location. Decreased property costs and building costs can also offer advantages.

All of these factors which can increase purchasing power and rate of return are referred to as international capital mobility. Because the capital is being invested into a foreign nation, that nation increases its capital mobility as well. However, it may be hard for the foreign nation to maintain and does not always effect all of the population. Capital mobility can lead to unequal income distribution.

Individuals and businesses from foreign nations also invest directly and indirectly in the U.S. economy. Because the U.S. economy is comparably quite stable, it is easier to sustain the increased capital mobility such investments offer to the U.S. Investment in the U.S. economy also helps the balance of trade.

CS Question #4: What would be the most important factor you would look for in a foreign nation to increase your rate of return?

Further Thought:

1. If you were an the president of an American corporation, which would you most like concentrate your efforts on labor mobility or capital mobility? Explain your answer.
2. How can you improve your personal labor mobility?
3. How do you feel about the relocation of American businesses to foreign nations? (Remember that though there are economic benefits to the relocation, there is also potential loss of jobs for American workers).