Answer to Question #164461 in Economics for haroon

Question

In practice much foreign aid is "tied"; that is, it comes with restrictions that require that the recipient spend the aid on goods from the donor country. For example, France might provide money for an irrigation project in Africa, on the condition that the pumps, pipelines, and construction equipment be purchased from France rather than from Japan. How does such tying of aid affect welfare of recipient.?

Answer 1

With this formulation of the financial situation, the recipient is deprived of freedom of choice, that is, there is no competitive advantage in the choice of goods. Thus, the welfare of the receiving party is reduced.