ECON 203 Lecture Notes - Lecture 7: Foreign Portfolio Investment, Investment Goods, Diminishing Returns

• School: University of Calgary
• Department: Economics
• Course: ECON 203
• Professor: Aamir Hashmi

Document Summary

We can boost productivity by increasing k (physical capital), which requires investment. This extra saving funds the production of investment. Since resources are scarce, producing more capital requires producing few consumption goods. goods. The govt can implement policies that raise saving and investment. K will rise, causing productivity and living standards to rise, however this faster growth is temporary, due to diminishing returns to capital: as k rises, the extra output from an additional unit of k falls. The catch-up effect: the property whereby poor countries tend to grow more rapidly than rich ones. To raise k/l, the govt can also encourage foreign direct investment: a capital investment that is owned and operated by a foreign entity. Or foreign portfolio investment: a capital investment financed with foreign money but operated by domestic residents. Some of the reutnrs from these investments flow back to the foreign countries that supplied the funds. Especially beneficial in poor countries that cannot generate enough savings.