Question

Suppose you want to analyze the level of foreign aid that Canada gives to developing countries each year. You are told that Canada’s aid depends on the population of these countries, their level of poverty, and how good governance is in these countries (measured by absence of corruption, etc.) Indicating your notation, write this information:

i) As a general function.

ii) As a linear function.

iii) Comment on the likely sign of the coefficients in your linear function. (Note: your mark will depend heavily on the quality of your explanation. So be sure to be clear; explain your line of reasoning.)

Answer 1

Foreign aid refers to the transfer of money by one country to another country in the form of loans, grant or gifts.

I) In general form, the function for Canada's foreign aid can be written as

Aid = f(population, poverty, good governance,...)

ii) In linear form, we can write the function as follows -

Aid = A +bPopulation + cPoverty +dGoodgovernance

Here A is autonomous aid.

b, c&d are responsiveness to these variables.

iii) The likely coefficient of population should be negative. Countries tend to provide less aid to the more populous countries of the world. It may be due to the distributional ineffectiveness reason or other reasons.

The coefficient of poverty would be positive because the poorer a country, the more is it in a need for aid. Poor countries like African countries receive high amount of funds for the upliftment of their people.

The coefficient of good governance will also be positive. Thus, foreign aid should increase in case of good governance. The donor country has its own motives for donating like economic, sociological, etc. A good government ensures that the motives of the foreign aid is fulfilled by the country receiving aid.