Question

9. Why would the increase in foreign direct investments create new jobs and what happens next? Explain the process of the changes in equilibrium expenditure and real GDP that result from the increase in foreign direct investment.

10. What determines the increase in aggregate demand resulting from the foreign direct investment?

Answer 1

9.

Foreign Direct Investments or FDI in the present century is one of the major sources of capital for the countries. It holds value mainly to capital deficient and poor countries. FDI means actually investment directly made in home country from a foreign source.

FDI inflows into a country mean investment volume in that country is increased, production and business volume go higher level. This leads to the creation of more employment or job opportunities in the country. This process increases the private and personal income of the native people and ultimately the national income of that country increases. We know that income and expenditure have a positive correlation. With an increase in income, expenditure also increases though the rate is less than the growth rate of income. After all, due to FDI, the economy moves towards expansion business phase, aggregate demand volume increases at a sharp rate and ultimately collective national expenditure and the real GDP rise.

The initial increase in GDP caused the FDI itself will be followed by the positive multiplier effect on the home economy and thus in the process, the ultimate increase in national income is far huge than the first injection of FDI. It means GDP will be multiplied many times through the working of the mutual effect of autonomous expenditure and its multiplier effect.