What are the effects on a small open economy due to investment tax incentives in a large open economy?
Suppose that a large foreign country begins to subsidize investment by instituting an investment tax credit. Explain how this policy would affect the world interest rate, real exchange rate, and investment and trade balance of our small open economy.
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Answer by leowin1948
Small economy has only very limited capacity to absorb investment,what ever concessions given.They do not have enough natural resources.Examples are Srilanka,Bangladesh.Limit to investment is decided by absorption capacity of the economy.Attempts to subsidise investment in Srilanka,Bangladesh etc failed.Trade balance of small economies who welcomed large scale foreign investment become adverse,resulted in inflation etc.Small economies can flourish by trade,not by production.In the case of Singapore,they mostly import and sell /export and make net profit.
Economic theory,will say since the small economy is open,it will have world wide market,and it will be benefitted with more trade balance,better exchange rate etc,but this will not materialise due to other limiting factors.
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2013-05-16 Russell Investments Center
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2013-05-16 Russell Investments Center
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