Question

b. What is a reason why international flow of financial capital is detrimental to the world

   economy and welfare? WHY?

1. What is the effect of Capital outflows on national income?

Answer 1

b. The international flow of financial capital is not permanent in nature. It is hot money in which main aim is maximization of returns of the investor. As the real interest rate in the economy increases, the inflow of financial capital takes place. But as sson as the real interest rate declines,these investors are the first one to leave the country. This impacts the economy negatively as there occurs deficit in capital account due to net capital outflow from the economy. This also makes economy's growth rate to decline. Thus, international flow of financial capital is detrimental to the world economy and welfare.