Question

In an economy closed to international trade, what are two sources of finance to pay for gross private domestic investment spending?

Answer 1

The first source of finance is the private savings or domestic savings that reach out to the market that can be used by the private firms for their investment spending. The second source of finance is raising funds by issuing shares or debentures by the firms to sell it to private parties, institutions and other entities in the economy to raise funds and fill the need of private investment spending. Depending upon the size of the issue, the issuing companeis can opt for the level of distribution of shares or bonds in the economy so that transaction cost is minimized.