Question

1. Allow a one-time wave of immigrants, but only those who bring exactly the amount of capital needed to leave the steady-state capital/labor ratio unchanged. What would happen to per capital income in the short and long-run? Sketch the time path of k to show what happens in the short and longer term.

2. Allow a one-time wave of penny-less immigrants who bring no capital at all. What would happen to per capita income in the short and long run? Sketch the time path of k to show what happens in the short and longer term.

Answer 1

1. One time wave of immigrants who bring the amount of capital needed to leave the steady state of capital unchanged, the effect of increase in labor force and the pressure on resources brought along is nullified with the extra capital that the immigrants bring along. Hence the time path of capital per capita is constant believing that the economy was in steady state before the inflow of immigrants. The short run and long run behavior of the economy would be the same in this case.

2. In the second case when the immigrants are penny less, they do not contribute to the capital and hence the capital per capita will drop significantly at the time of inflow of immigrants, output per capita will drop but if the extra labor in the form of immigrants is used in a productive manner, than the situation might improve because of their contribution to capital and the time path of capital per capita will gradually increase