EJC Econs 2021 A-Level H2 P1 Q2 SAMS

Suggested Answers for 2021 A -Level H2 P1 Qn 2: The Impact of Foreign Direct Investment (FDI) Flows in South-East Asia (a) State what is meant by foreign direct investment (FDI) and identify the component of the balance of payments accounts in which FDI is recorded. [2] FDI is long-term capital flow which reflects the sale and purchase of real assets (e.g. manufacturing plants, factories, acquisition of existing firms, equipment, etc.) between a country and the rest of the world. It is recorded in the capital and financial account of the BOP. (b) (i) Explain the opportunity cost of investment expenditure that uses domestic funds. [2] Opportunity cost refers to the benefits of the next best alternative foregone. funds for investment expenditure, it competes for loanable funds within the country, hence resulting in opportunity costs in terms of consumption expenditure foregone when consu mers find it more expensive/harder to borrow from banks. (ii) Using a production possibility curve diagram, show the impact of infrastructure improvements in a country such as Singapore or Vietnam. [2] The infrastructure improvements in a country such as Singapore or Vietnam includes an improvement in transport which would improve the efficiency of resources such as labour and capital. This causes the PPC to shift outwards from PPC1 to PPC2 as the ability to produce capital goods and consum er goods given infrastructure improvement has increase d, reflecting an increase in productive capacity. (c) Explain how the current account of the balance of payments of Singapore or Vietnam is likely to be affected in the long run by increased FDI. [6] The current account of the balance of payments records the value of exports and imports of both goods and services (balance of trade) and international transfers of capital (net income transfers and net current transfers). Increased FDI brings about actual growth and potential growth . As sustained growth is achieved, there is price stability as general price level falls. This improves export price competitiveness. Assuming demand for Vietnam’s exports is price elastic, this improvement in export competiti veness will bring about a more than proportionate rise in quantity demanded, hence export revenue (X) rises, improving Vietnam’s balance of trade and hence current account balance in the long run.

However, the increased FDI also brings about rise in Vietnam’s real national income. With greater purchasing power to purchase more goods and services, not only from the domestic market but also from international market. The rise in import expenditure would worsen Vietnam’s current account balance in the long run. Or Increased FDI brings about an improvement in production methods, leading to a lower unit cost of production of goods. This increases export price competitiveness, ceteris paribus. If demand for exports is price elastic, this improvement