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Factors that affect foreign direct investment (FDI)

Readers Question: why some countries are more successful in attracting Foreign Direct Investment than others? Foreign direct investment (FDI) means companies purchase capital and invest in a foreign country. For example, if a US multinational, such as Nike built a factory for making trainers in Pakistan; this would count as foreign direct investment. Factors affecting foreign direct investment 1. Wage rates A major incentive for a multinational to invest abroad is to outsource labour intensive production to countries with lower wages. If average wages in the US are $15 an hour, but…

Fall in global inflation rates

Fall in global inflation rates

Since the 1970s, we have seen a fall in average global inflation rates. There have been periods of inflation (often due to rise in oil prices), but the overall trend has seen much lower inflation rates. In the 1970s, inflation was seen as one of the main macro-economic challenges, but now many feel the challenge is that inflation has become too low risking deflation. Global inflation shows a marked fall since 1977. The spike in inflation…

Lump of labour fallacy – immigration

Lump of labour fallacy – immigration

The lump of labour fallacy is the contention that the amount of work available in an economy is fixed.  But, most economists argue this belief there is a fixed number of jobs (or fixed number of hours) is usually incorrect. In summary Fallacy – “Immigrants take jobs of native workers.” Why this is a fallacy – immigrants who gain work, also gain income to spend in the rest of the economy, creating new jobs. The number of jobs is not fixed….

Why does capitalism cause monopoly?

Why does capitalism cause monopoly?

Readers question: Firstly, I wholeheartedly praise the magnificent work done by you in exhibiting economic knowledge and demystifying it to us, the mediocre audience. I seriously question one fact that you presented about capitalism and how it “inevitably causes monopoly”. I grew really surprised and perplexed the moment I read that in “The problems of Capitalism” of yours. If you reconsider, Capitalism with its competitiveness, equal free chances, and free markets with no intervention from a higher authority ( The government ) actually endeavour towards diminishing Monopoly. A good…

Relationship between the interest rate and saving ratio

Relationship between the interest rate and saving ratio

Is there any relationship between the base interest rate and the savings ratio? In theory, interest rate can affect the decision to save in two ways. Substitution effect of change in interest rate – lower interest rates reduce the incentive to save because of relatively poorer returns. There is a bigger incentive to spend rather than keep savings. Income effect of a change in interest rates – lower interest rates reduce the income received from saving, and so people may need to save more in order to gain a…

Will further interest rate cut stimulate economic activity?

Will further interest rate cut stimulate economic activity?

Interest rates have been cut to a record low of 0.25% – essentially due to grim economic news from the short-run demand side shock of Brexit. Economic theory states that in normal circumstances, lower interest rates should boost aggregate demand (AD). To give a quick recap, lower interest rates should in theory: Reduce the incentive to save – increasing consumer spending Cheaper borrowing costs – encourage investment and spending Lower mortgage interest payments. – increase disposable income and can cause a rise in consumer spending. Rising asset prices. Lower interest rates…

Effect of lower interest rates

Effect of lower interest rates

A look at the economic effects of a cut in the Central Bank base rate. Summary: Lower interest rates make it cheaper to borrow. This tends to encourage spending and investment. This leads to higher aggregate demand (AD) and economic growth. This increase in AD may also cause inflationary pressures. In theory, lower interest rates will: Reduce the incentive to save. Lower interest rates give a smaller return from saving. This lower incentive to save will encourage consumers to spend rather than…

What are the economic functions of a government?

What are the economic functions of a government?

Readers question: What are the function of government in a capitalist economy? In summary, the economic functions of a government include: Protection of private property and maintaining law and order / national defence. Raising taxes. Providing public services not provided in a free market (e.g. health care, street lighting) Regulation of markets, e.g. regulations on environment / labour markets / monopoly. Macro-economic management, e.g. use of fiscal and monetary policy to control business cycle – recession and inflation. Reducing inequality / poverty.