economics

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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…

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…

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.

Pros and cons of wind energy

Pros and cons of wind energy

Wind farms seek to offer an environmentally sustainable source of energy that will help reduce our dependence on non-renewal fossil fuels. However, this clean and safe source of energy is controversial with many opposed to their use, often on grounds of aesthetics or lack of efficiency. This looks at pros and cons of wind farms. Eyesore or the way forward for providing clean energy? Pros of wind energy Creates virtually no pollution which damages environment,…

NHS spending cuts

NHS spending cuts

To what extent has the UK seen cuts in spending to the NHS and health care spending in recent years? In short: Actual spending on the NHS has increased. Real spending per capita has been broadly flat in recent years. As a share of the nations wealth, it is falling and it is true to say there have been cuts to health care spending as a % of GDP. In addition “non-NHS” spending e.g. public health services and capital spending have seen cuts to budgets in certain years. Real spending on…

Basic questions of economics

Basic questions of economics

The fundamental economic problem is one of scarcity. The basic question of economics becomes: What to produce? How to produce? For whom to produce? You could also add When to produce? What to produce? Given limited resources of labour, raw materials and time, economic agents have to decide what to produce. Most primitive economies concentrate on producing food and shelter – the basic necessities of life. However, with increased productivity, the economy has more available resources which can be used for non-necessary goods,…

Cherry picking of data

Cherry picking of data

Cherry picking of data means we look for particular data and statistics that help to illustrate our point of view. It can also mean we present data in a certain way which is more favourable to creating the impression we want. Even the same statistic can be presented in different ways to give a very different impression. How to portray the recent record of the UK government? Since 2013, the UK has one of fastest growth rates in Europe, averaging close…