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Comment on the Likely Economic Benefits of an Increase in Fdi for Countries in the Sub-Saharan [10]

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Comment on the likely economic benefits of an increase in FDI for countries in the sub-Saharan [10].

Foreign Direct Investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country.

(insert graph showing shift in AS and AD to the right and new equilibrium points)

Countries in the sub-Saharan tend to have low labour cost. This tends to attract business’s to build manufacturing plants (FDI – capital investment) in those countries to take advantage of lower labour cost. This means that FDI can cause an increase in jobs and employment. With an increase in employment house hold income will increase, meaning that consumer spending will also increase leading to an increase in aggregate demand causing it to shift to the right from AD 1 to AD 2 causing GDP to also increase. However in the short run this may lead to an excess in demand causing price to rise leading to demand pull inflation and unsustainable growth.
Another benefit to an increase in employment is an increase in tax revenue, providing the government with money to invest into the infrastructure of the economy and/or education. Investment in education will lead to an increase in the skills of the workforce which may lead to an increase in the productivity of the economy. This leads to an increase in output causing aggregate supple to shift from AS 1 to AS 2 meaning there is an increase in consumer choice there for an increase in consumer welfare and an increase in GDP. However an increase in AS may not actually increase consumer welfare. As production increase at a rapid rate pollution may also increase as a result of factories releasing harmful gases into the atmosphere. As pollution increases the likely hood of lung disease will also increase leading to a reduction in consumer welfare. With an increase in health risks the government…...

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