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

a. Increase in Foreign Direct Investment leads to higher economic growth . Increase in FDI results the development of financial sectors and the education level of country. Human capital of a nation plays a n important role in achieving growth benefits from FDI. Final good production is carried out by foreign and domestic firms, both will compete for skilled labor , unskilled labor and intermediate products. FDI will increase the employment rate of skilled labor and unskilled labor . Along with this, FDI serves as a channel through which new technology is transferred from one country to another and thereby it increases output and GDP of recipient country Higher rate of employment and productivity rise level of output per worker b. Stepping into aging society that induces peoples to save more and spend less. If a nation's saving rate increases, without increases in consumption expenditure, results fall in national output and GDP. Fall in consumption level reduces the aggregate demand for good and services in the economy. It forces the firm to reduce the production level in the economy. Thereby it reduces the private investment and output and it will reduce output per worker. As a result economic growth rate will be fall