Questions for review

1. In what sense are international flows of productive resources a substitute for

international commodity trade?

Besides commodity trade, there is an international movement of resources as

well. Thus, labour, capital and technology move across national boundaries.
International trade and movement of productive resources from one country to
the other are regarded as substitutes for one another.
A country like the United States, which is capital abundant and labour scarce,
can export capital-intensive commodities or capital, and import labour intensive
commodities or allow immigration of workers from countries, which are abundant
in labour.
Movement of productive resources from places of plenty and low compensation
to places of scarcities and high compensation is beneficial for all.
However, international trade and movement of factors have different economic
effects on the nations involved.

2. What is meant by portfolio investments? Through what institutions do they

usually take place?

A portfolio investment is ownership of a stock, bond, or other financial asset with

the expectation that it will earn a return or grow in value over time, or both. It
entails passive or hands-off ownership of assets as opposed to direct investment,
which would involve an active management role.
The portfolio investment is done through financial institutions like banks and
investment funds. Portfolio investments are held directly by an investor or
managed by financial professionals. In economics, foreign portfolio investment
is the entry of funds into a country where foreigners deposit money in a country's
bank or make purchases in the country's stock and bond markets, sometimes for
speculation.

3. What is meant by direct investments? By what organizations are they usually

undertaken internationally?

Direct investment is more commonly referred to as foreign direct

investment (FDI). FDI refers to an investment in a foreign business enterprise
designed to acquire a controlling interest in the enterprise. The direct investment
provides capital funding in exchange for an equity interest without the purchase
of regular shares of a company’s stock.

Direct investment is done to start a subsidiary or take over another firm by

purchasing a major share of the stock. Multinational companies do direct
investment, which are engaged in manufacturing or provision of services. Thus,
direct investment is an important channel for international private flow of funds.