Explain with a graph the effect of capital flight in a country!

Expert Solution

FPI or foreign portfolio investment is a form of foreign capital investment which is highly volatile in nature. Such investments are attracted towards economies experiencing positive economic situation or boom like situation. Such investments are also known as 'hot money' and tend to be extremely volatile.
When an economy slows down or experiences a downturn foreign investors tend to leave the narket and that causes a huge capital outflow and in a situation of capital flight an economy is badly hit as its currency rapidly depreciates and the purchasing power of oeople declines rapidly. If the economy is already experiencing adverse economic situation such capital flight can cause further damage to the economy and the economy might spiral into a full fledged recession.
Capital flight can create a domino effect where in the assets of the country are devalued along with its currency.

Rahul Sunny answered 8 months ago

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