Question

An emerging economy changes its policy, attracting more foreign direct investment, which leads to the accumulation of a more productive capital stock. (a) How does this policy afect the aggregate output, consumption, employment, and real wage? Explain your results with a diagram and illustrate the income and substitution efects.

Answer 1

When emerging economies attract foreign investment it helps to boost the economic growth . Increase in investment leads to rise infrastructure expenditure by the government causing demand for more productivity , this increases labor demand and employment is generated in the long run when demand increases product become more productive and are sold at high prices . High price is then substituted by increase in nominal wage which means it has a positive effect on the real wage in the economy.