Economics for Managers - Essay Example

? Economics for managers Table of Contents Answer to Question 3 Answer to Question b) 5 References 7 Bibliography 7 Answer to Question GDP figures provide only a partial answer to the degree of well-being in a given society. These statistics are insufficient in the sense that they are incapable of measuring the degree of inequality that exists in a nation and also the amount of development that the economy has undergone. GDP figures are aggregate facts of a nation which specify the total output that the economy has produced in a given span of time, but they do not hint towards the discrepancy in standard of living in the society. However, GDP gives a hunch about the improving position of the economy at a macro level; but as measuring the overall well-being requires a minute understanding of standard of living at the micro level, GDP might not be regarded as a suitable measure of the economic situation (Hubbard & O’Brien, 2007, p. 246). This is the reason why the national governments of most of the nations attempt to enhance the GDP level of their respective economies. Some of the reasons why GDP of any nation could not be used to evaluate the standard of living prevailing in a nation and hence, its well-being, have been depicted underneath. Firstly, GDP takes no account of the distribution of wealth or income among the residents of a given nation and thus, does not portray a true account of the standard of living among various strata of the society. One appropriate example of a lack of discreteness of GDP, in measuring the well being of any nation could be derived from the terrorist attacks in USA in 2001. The attacks left the nation distraught and its citizens at a worse-off state. Many people lost their lives and among those who lived, many lost their jobs. Yet, the GDP of the nation was hiked primarily due to the fact that the statistic included the sums injected in the economy in the form of aids and fund reliefs (Baumol & Blinder, 2009, p. 474). Furthermore, the instance with that of the developing nations or rather the ones passing through the transition phase often record very high GDP values which does not go with the actual living standards prevailing in these nations. China and India are regarded to be the fastest developing nations in the world. These nations record one of the fastest economic growth rates even though the degree of well being in both of them are quite low with only a handful of the population base experiencing a betterment in their living standards. The primary reason behind this is the huge population bases in both the nations, which respectively are regarded as the ones endowed with the largest and second-largest populations in the world. A lion’s share of the population bases in both these nations live in utter poverty with dwindling resources. Though both these nations are associated with an economic growth rate of about 8 percent and more, the Gini coefficient in these nations are evident of the deteriorating living standards. While it is 33 for India that for China as measured in the year 2006 was, 44.7 (Gehring & Kulkarni, 2006, p. 12). Hence, though China is slightly better off than India, none could be regarded in a highly good social condition. But income inequality and prevalence of poverty in a nation are not the only factors which indicate towards a nation’s standard of living. There are certain other aspects such as environmental concerns which are equally essential in evaluating the same. Secondly, GDP does not deduct the used up values from its account which is why it gives a wrong impression about the true economic picture in a nation. It includes the values depreciated through usage of capital, natural resources depleted on account of deforestation or excessive deployment, reduction in mineral and fuel resource endowments, as well as loss of fertilisation of land. Thirdly, the extent of environmental pollution and degradation in a nation often hampers a variety of production processes in an economy which is why it is often counted as a drawback for the welfare of a nation. Environmental pollution is also a prime reason behind the deteriorating health conditions in a given region and the prevalence of harmful, sometimes fatal, diseases in the nation (Prescott-Allen, 2001, p. 270). The aforementioned causes are the reasons behind the decreasing importance of GDP as a measure of well-being and indication of the successful implementation of policies in a nation (Wenzel, 2009, p. 23). This is the reason why most of the nations count upon Human Development Index to get an idea about the actual development in terms of social, economic and political grounds, which a nation underwent in a given phase. Answer to Question 1(b) Foreign Direct Investment (FDI) inflows are often counted as one of the most important and dependable sources of enhancing the income of a nation. Not only do they provide investment opportunities to assist the nation in its growth path, there also arise opportunities for solving many socio-economic problems of unemployment, poverty and income inequality. Furthermore, the technological advances that the nation undergoes through an inflow of technical expertise, is also worth mentioning. This is the reason why most of the nations nowadays have opened their doors for foreign investors. In fact, there are many national governments who make it a point to add to the compatibility factor of these investors so as to attract them more and more. However the investors too, draw scores of benefits out of these ventures, irrespective of the degree of benefits that the recipient or host nations are enjoying. Many a times it is found that even though the foreign investors pour in a pour in a huge sum of money within a nation the host fails to derive benefits out of the same. Some of the reasons behind such a mishap could be that many-a-times, the host becomes dependent upon the political proceedings in a given nation which takes a toll upon the independence and sovereignty of the nation. Moreover, the national technical endowment might not be equipped with the skills necessary to adapt to the technical enhancements which is why the potential advantages arising out of a technological improvement, goes disregarded (OECD, 2002, p. 6). On the other hand, the foreign investors are highly benefitted out of any such ventures. Some of the reasons behind their advantageous position have been illustrated as follows. Firstly, the foreign nation which initiates the FDI inflow receives a great deal of attention from the host nation who rather frames policies to invite them in their nation. Hence, they naturally enjoy an upper hand, especially in the cases of developing nations or those undergoing the transition phase. The foreign investors tend to make the full advantage out of their advantageous position and often impose certain strategic measures which automatically take a toll upon the political independence of the host. Secondly, the foreign investors bring in a steady flow of capital within a nation which might be regarded as adding to the credit account of the concerned nation. However, the profit that the investor reaps out of his venture goes out of the nation apart from a certain proportion of taxes that the former needs to pay to the host. In fact, many developing nations charge a negligible amount of tax from foreign investors in order to solve other socio-economic problems such as production of employment opportunities, alleviation of poverty, etc. Thus, the profit being yielded out of the business operations goes out of the host nation. A third potential benefit for the foreign investors arises when they enjoy excessive attention from the national government of the host nation. It is often found that governments of developing nations or emerging market economies pay a special emphasis upon the degree of compatibility of foreign investors. However, the latter might tend to exploit the fact and demand privileges which are least necessary for the task they are supposed to accomplish. A corollary to this fact is that the nations to which these foreign investors belong to enjoy an inflow of foreign reserves and hence, enjoy a double advantage of increased income and accumulation of foreign reserves. However, the sufferers in this case are the domestic investment units which are believed of being capable to do just as well as their foreign counterparts given a chance such as an investment subsidy. Through such a way, the domestic resources will be made a complete use of and the nation will be equally benefitted (Kaminski, 1999, p. 13). But even if this issue is given a side-berth, there is ample room for the foreign investors to benefit out of FDI inflows in a host nation even if it means no significant improvement for the latter. References Baumol, W. J. & Blinder, A. S. (2009). Economics: Principles and Policy (11th ed.). USA: Cengage Learning. Gehring, K. & Kulkarni, K. G. (June, 2006). “Economic Growth and Income Inequality in India” [PDF]. Available at http://kulkarnibooks.com/assets/downloads/kishore_papers/Growth_and_Inequality_in_India_with_keith.pdf (Accessed: February 17, 2011). Hubbard, R. G. & O’Brien, A. P. (2007). Macroeconomics. India: Dorling Kingsley. Kaminski, B. (1999). The role of foreign direct investment and trade policies in Poland's accession to the European Union, Volumes 23-442. Switzerland: World Bank Publications. OECD. (2002). “Foreign Direct Investment for Development: Maximising benefits, minimising costs” [PDF]. Available http://www.oecd.org/dataoecd/47/51/1959815.pdf (Accessed: February 17, 2011). Prescott-Allen, R. (2001). The wellbeing of nations: A country-by-country index of quality of life and the environment. Washington, D. C., USA: Island Press. Wenzel, T. (2009). Beyond GDP - Measuring the Wealth of Nations. Germany: GRIN Publishers. Bibliography Klein, M., Aaron, C. & Hadjimichael, B. (2001). Foreign Direct Investment and Poverty Reduction. Switzerland: World Bank Publications. Weigal, D. R., Gregory, N. F. & Wagle, D. M. (1997). Foreign direct investment. Switzerland: World Bank Publications. Read More