Question

Discuss how investment from abroad helps an economy's growth.

Discuss how education helps an economy's growth.

Discuss how property rights and political stability helps an economy's growth.

Answer 1

Ans1 - Foreign direct investments (FDI) is often underlined as a precondition for a successful economic venue by most governments of less developed countries. Strategists in high developed countries seem to be more cautious. Loudly arguing for a free movement of capital western governments do a lot in restricting the entrance of foreign investors to their own market. Moreover, maybe they have a good reason of doing so. The aim of the paper is to represent a theoretical framework for measuring economic and welfare effects of incoming FDI. The objective of the paper is to present and critically evaluate different theoretical approaches to FDI and their economic impacts. The conclusions of the paper are that the effects of FDI can be both positive and negative. They depend on type of FDI (greenfield FDI has more positive externalities then M&A actions), sector, scale, duration, location of business, density of local firms in the sector and many other secondary effects. Rather than proposing narrowly defined pro-FDI policies, attractive terms to investors should be seen as part of a country's overall industrial policy and be available on equal terms to all investors, foreign as well as domestic. Creating a theoretical framework for better understanding the impacts of FDI this paper might contribute establishing more realistic approach when attracting the foreign direct investment to domestic markets.

Ans2 -

Education is a form of capital. Think of the huge box of tools that an auto mechanic owns. Those tools enable him to do a great many jobs on multiple kinds of cars. The mechanic spent a lot of money buying those tools and you better have permission before borrowing one.

Education is knowledge, stored in your head, that enables you to do a great many jobs. Just as a mechanic can work for many different car dealers and repair shops, your education enables you to work for many different employers who want someone to do the things that your education enables.

This is an especially useful analogy for college freshmen, thinking about what to major in. Your major determines the tools that will wind up in your tool box, the kinds of jobs you can do, and the places that might hire you. Choose wisely.

The more education that people have, and the better their educations, the more they can produce. Increasing production grows the economy. Economic growth doesn’t come from giving every generation the same education as the previous generation. Economic growth comes from continuously upgrading educations.

Ans3 -

Political instability hurts any country democratic or otherwise and here are some reasons why.

1. Businesses need to be able to plan long term. The government does many things like imposes regulations, taxes, and issues business licenses. When a business sets up it plans according to the rules at the time. If extreme change seems imminent some businesses may either relocate or avoid investing further or starting in said country.
2. Political instability can manifest itself in a civil war or revolution. In these cases the violence and sheer damage to buildings is obviously bad for business.
3. Weak and ineffective governments can’t enforce property rights, make effective trade deals, and enforce contracts. If businesses have no way of repossessing defaulted loans, enforcing contracts, or protecting intellectual property the consequences are disastrous. If it wasn’t for patents companies could just wait for someone else to spend money and resources developing a new technology or drug and simply steal the end result. This would result in research coming to a screeching halt. If you have no recourse for a client violating a contract that hurts your business you limit transactions to cash advance short term deals, which hurts growth. If banks can’t recoup losses they fail.
4. Government plays a role in establishing fiscal policy. Governments print currency and can cause high inflation. Also most countries currencies are now backed by nothing more then the faith in their government. The more unstable the government the weaker the currency. Zimbabwe for example has such high inflation and such an unstable government that many citizens are now using U.S. currency as a medium of exchange. I saw pictures of people using Zimbabwe dollars as toilet paper. Venezuela has a similar problem.
5. It’s easier for a stable government to borrow money. People don’t want to lend to a government that seems unstable. The stability of the U.S. Constitution is part of why U.S. treasury bonds have such a low interest rate because it’s a pretty safe bet.
6. Governments create treaties and trade deals. Some businesses are built around existing trade deals and changes like a tariff could put them out of business.

In regards to countries like the U.S. and European nations. An extreme change like Trump to Bernie Saunders would be seem as political instability. The drastic differences in economic policies would leave businesses uneasy. Much of this can be chopped up to the fear of the unknown, but let’s say you own a medical supply company. If in 2020 Bernie faced off against Trump the Medical industry would be afraid to invest, because depending on who wins will determine if their business will survive. Obama was bad for coal for example, so a coal company that started under say Clinton or Bush might have gone out of business under Obama. When the rules change not everyone can survive. Coal companies are an example of an industry that’s survival is up to politics, and so political stability is very important to many industries like coal and medical as well as a slew of others.