Question

For each of the following economic changes, assess the likely impact on the growth rate and the level of output per worker over the the long-run. Explain your answer by using graphs.

a. An increase in foreign direct investment.

b. Stepping into aging society that induces people to save more and spend less.

Answer 1

Foreign Direct Investment is the cross border investment by a resident entity in one country with the objective of obtaining a lasting interest in an enterprise resident in another country. It will increase the growth rate and level of output per worker in long run. Because FDI is along term investment and is used by developing countries as source of their economic development , productivity ,growth ,to improve the Balance of Payment position and employment generation .The main aim of FDI is to increase the productivity in domestic economy by utilizing the resources to their maximum efficiency. It enhanced capital inflows to domestic nation. it will increase the employment rate in the economy. Because increasing of FDI provides wide range of job opportunities. It will increase the labor demand. Thereby it increase the level of output per worker in the economy. Thereby domestic nation will achieve economic growth. b. Stepping into aging society that induces people to save more and spend less. Aging population reduce the labor workforce. The aging of society has a negative effect on economic growth. This decline in economic growth will increase the pressure on public finances from an aging society. As saving rate increases due to stepping into aging society ,leads to fall in consumption expenditure. Fall in consumption expenditure leads to decline in aggregate demand on good and services. It will reduce the production level in the economy. Thereby it reduces the level of output per worker