1. When looking for indicator of investment in specific country, which is more powerful and influencial; Gross Capital formation of foreign direct investments and why? 2. What is the difference between both of them; please try to simplify the answer. 3. When I can use Gross capital formation as indictor of investment versus the foreign direct investment and vice versa.

1. When looking for indicator of investment in specific country, which is more powerful and influencial; Gross Capital formation of foreign direct investments and why?
2. What is the difference between both of them; please try to simplify the answer.
3. When I can use Gross capital formation as indictor of investment versus the foreign direct invesmtment and vice versa.
Thanks

 

answer:

Gross capital formation is always a better indicator of investment that foreign direct investment. Gross capital formation merely considers capital formed within the domestic economy be it in the form of domestic investment by firms through borrowed funds or through increased savings which increases the amount of funds available for domestic investment. Foreign direct investment simply includes the flows of funds from abroad through foreign companies wanting to invest in the home country through increases investments by setting up subsidiaries in the country and also through purchasing large quantities of the home country’s currency. This does create capital formation but precludes all capital formation through domestic sources. So when we are looking at capital solely created within the home country we look at gross capital formation brought about by increased savings and also government spending. When considering investment through foreign sources we look at foreign direct investment.

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