In the diagram in Question #9 above, if restrictions on capital flows were removed and Capital was allowed to flow from the low-return country to the high-return country, then National income (i.e., GNP) in country I would __________ by the amount of area__________.

Question

Quizplus · Accepted Answer

National income (GNP) in country I would increase by the amount of area EFG. This is because capital would flow from country I to country II, which would increase investment and output in country II. This would lead to an increase in national income in country II, which would in turn lead to an increase in demand for goods and services from country I. This would increase exports from country I and lead to an increase in national income in country I.

In the Diagram in Question #9 Above, If Restrictions on Capital