Suppose there are two countries in the world, Canmerica and Chinam, that initially have no economic interaction. The wage rate in Canmerica is $20 per hour and the annual rate of return on capital investment is 10%. The wage rate in Chinam is $5 per hour and the annual rate of return on capital investment is 25%.
a) If workers have equal skills in both countries, what might account for the differences between returns to labor and capital in the two countries?
b) If the two countries decide to drop barriers to labor movement and labor movement is costless, what will happen to labor and capital compensation in these two countries (account for wins and who loses and the net gain or loss to open migration)?
c) If the countries maintain barriers to migration but allow for free movement of capital and goods, how will your answer to (b) change (assume movement of capital and goods is also free).