What are the prospects for domestic capital formation in DVC?

What will be an ideal response?


The prospects are bleak. Domestic capital formation requires a reallocation of some production from consumer goods to investment goods, and it requires a reallocation of incomes from consumption to savings. The reallocation of production from consumer goods to investment goods may not occur because there are few incentives for domestic capital formation in DVCs. The number of entrepreneurs willing to take risks is few and the economic incentives in the form of expected profits may not be sufficient to encourage much investment in capital goods. Furthermore, the lack of infrastructure and public capital that complement and enhance private investment makes any private domestic investment project more difficult or more likely to fail.
In addition, many citizens of DVC are too poor to save much of their incomes, which means the pool of savings for investment is small. Those richer citizens with higher incomes and savings may prefer to invest those savings in IACs rather than risk losing the funds in a DVC. This capital flight problem further reduces the pool of potential savings.

Economics

You might also like to view...

Refer to the above figure. Government policy that moved the economy from A to B would be accomplished by

A) a contractionary fiscal policy combined with an expansionary monetary policy. B) an expansionary fiscal policy combined with a contractionary monetary policy. C) a contractionary policy that would reduce the rate of inflation and would cause workers to remain unemployed longer than they were before. D) raising the minimum wage.

Economics

Real GDP is ________ determined in the classical model and ________ determined in the Keynesian model

A) supply; supply B) supply; demand C) demand; supply D) demand; demand

Economics

Which of the following is an important ingredient for the achievement of efficient economic organization?

a. highly restrictive exchange rate controls b. secure property rights and political stability c. high and variable rates of inflation d. high marginal tax rates

Economics

Consider an economy made up of 100 people, 60 of whom hold jobs, 10 of whom are looking for work, and 15 of whom are retired. The number counted as unemployed is

a. 10. b. 15. c. 40. d. 30. e. 90.

Economics