Author Question: What factors lie behind capital inflows to the developing world? What will be an ideal ... (Read 82 times)

sarasara · **on:** Jun 30, 2018

What factors lie behind capital inflows to the developing world?

What will be an ideal response?

Question 2

Since foreign credit dries up in crises when it is most needed, developing countries can protect themselves from default by

A) cutting off imports of goods.
B) allowing the exchange rate to float.
C) using equity finance only.
D) accumulating high levels of international reserves.
E) avoiding the international capital market.

jaaaaaaa · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Many developing countries have received a lot of capital inflows that lead them to a huge debt to foreigners. These debts are been produced because the economy of the developing world is very small compared to the economy of the industrial world. Since developing countries face a lot of poverty and poor financial institutions, national savings is often low and because of that, they are always facing current account deficit. Even though, these countries are very poor in capital, there are opportunities for profitable introduction or expansion of firms and equipments, and these opportunities give good reason for a high level of investment. However, because these countries always have deficits in their current account, a country can obtain resources from abroad to invest even if its domestic savings level is low. This means that the country is going to have to borrow money from a foreign country. These ways of production are the one that lie behind capital inflows because by helping these countries to grow and expand, the price to be pay is a big debt which they know based on their circumstances its going to be hard to repaid.

Answer to Question 2

D