Question

1. What is the relationship between international capital inflows of funds and a) wages, b) employment, c) inflation, d) interest rates? Please appropriate use of facts, theories and ability to analyse, appraise and comprehend issues.

Answer 1

There is a mutual relationship between international capital inflow and the country's wage rate and employment. Capital inflow builds the stock of productive capital and increase the life standard of the people. If there is high capital flow through international trade, this will increase the average wage rate. On the other hand, the capital outflows will reduce the domestic wage rates. The high flow of capital will induce the investment level. This will increase the production and also increase the level of GDP. This high inflow will increase the foreign liabilities. The better access of the international trade improves the international relations and there is high level transfer of skills and ideas from foreign market. The capital inflow of a country rises, the employment opportunity and the demand for labour increased. The rise in investment increase the production and this will leads to the demand for labour. This will raise the productivity of labour through adoption of technology and skill from other foreign markets. On the other hand this high inflow of capital leads to inflation. Because of the high production and investment. If there is high capital inflow the rate of returns will be reduced. This can be depicted through a diagram. Rate o returns R1 RO K1 KO Capital