Question

Define the following terms

- Foreign Direct Investment (FDI)

- The Low Income (or poverty) trap

- The Catchup Effect

- The Dutch Disease

Answer 1

Foreign Direct Investment (FDI) ?

Ans..

Direct investments are when companies make physical investments and purchases in buildings, factories, machines, and other equipment outside of their home country. Indirect investments are when companies or financial institutions purchase positions or stakes in companies on a foreign stock exchange. This type of investment isn't as favorable as direct investment because the home country can sell their investment very easily, on the the nest day if they choose, direct investments are useully long term investments in the ecinimics of a foregen country

Example……

Direct investments are when companies make physical investments and purchases in buildings, factories, machines, and other equipment outside of their home country.

The poverty trap ?

Ans..

The poverty trap is a mechanism, which makes it very difficult for people to escapepoverty. A poverty trap is created when an economic system requires a significant amount of various forms of capital in order to earn enough to escape poverty.

For example, natural disasters, plagues, and wars .... cycle of high population growth and low per capita income. Becker ...

The Catchup Effect..?

Ans..

The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income.

For example, in Africa, many citizens never had a landline or fax machine but jumped straight to the mobile phone and with the internet can benefit from very cheap phone calls. This new technology has significantly improved communication in developing economies and skipped out levels of investment.

The Dutch Disease..?

Ans…

The term “Dutch Disease” originated in the Netherlands during the 1960s, when the high revenue generated by its natural gas discovery led to a sharp decline in the competitiveness of its other, non-booming tradable sector. Despite the revenue windfall the new discovery brought, the Netherlands experienced a drastic decline in economic growth. This economic paradox has since been recognized as the situation in which a booming sector adversely affects the performance of other sectors of an economy, and in particular, the non-booming tradable sector. In the past two decades, a sizable literature on the Dutch Disease has examined the commodity booms experienced by some countries. The petroleum boom from 1973 to 1979 produced the most generally significant consequences

This resource boom impacts the lagging sector of the economy in two ways. Firstly, it switches labour away from the manufacturing sector towards exploiting the natural resources now at its disposal. While this helps to increase the short-term revenue gained from these resources it lowers the productivity of the manufacturing sector of the economy. This has major impacts in the long-run when the resources are all used up as now the manufacturing sector of the economy is extremely weak and unproductive and so the economy has nothing to fall back on