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(a) Foreign aid helps countries to improve the economic condition of less developed or the developing. But when it comes to the income and consumption, the biggest concern is the appropriate and effective use of foreign aid. As we know that in less developed or the developing countries there are a big gap between the reach people and the poor people leaving behind the poverty line. Now if a country with this gap receives foreign ad then the impact of this foreign aid on the income level will mainly depend on the distribution of this foreign aid keeping the income inequality in mind. So distribution of foreign aid is the main factor that will decide its immediate impact on the income level of the country. Now if the income level gets improved due to a well managed distribution of foreign aid then automatically consumption of the country will increase in an effort to increase the standard of living of the country man. As far as the immediate impact is concerned it depends on the policies of the country. If the country transfers the foreign aid directly to the people there will be an immediate impact on the income level of the people of that country.
(b) The Solow graph in the economic aid
The above graph is the Solow model. As we can see change in the foreign aid in terms of capital from K to K (2) the income level of the country rises to the level of (Y2=$600). Here K is the normal capital available at the developing country whereas K (2) is the capital available to the country after foreign aid. As we can see, due to the saving of 0.10 the income of the people declines to $270 and this represents that the income of the people goes to saving by 10%. Here the straight line represents the decline in foreign aid.
(c) In the long run the income and consumption of the country tends to become constant as the income level of the country increase with a multiplier effect with increase in the economic growth of the country but a point will reach where the income and consumption will become constant as the saving and investment will be crowed out. This happens in the long run.
(d) If the foreign aid is given in the form of capital (electric power plants, plows, trucks etc) the increase in the income level won't be with immediate effect but there will be a slow growth in the income level. The main reason behind this is the impact of the foreign aid will pass through few steps to reach to the common people.
(e) Foreign aid is more effective in short run as leaves an impact on the economic growth of the country. If we look at the Solow Model we can find that in short run the economic growth of the country increase pace with a slow rate but in long run its impact goes off and the economic growth of the country become constant. But if we look at the history we can find that the growth expectations of aid proponents, however, have often been disappointed for countries taking foreign aid. The main reason for this is the high expectation level of the people on the foreign aid; numerous reasons have been given as to why aid might be largely ineffective in generating growth by researchers. If we look at the most genuine reason we can find that aid largely goes to consumption, and this in turn crowds the domestic savings and investment, this effect in long run makes the saving and investment ineffective in the progress of the economic growth making the population and technological growth as the biggest source of economic growth.
(f) Here the factor that is missing includes the population. The population of the country has a great impact on the impact of foreign aid on the country economy. If the population of the country is big then impact of the same foreign aid will be lower than its impact on the low populated economy.