Foreign aid and donor's trade gains

Abstract

This paper shows that the impact of foreign aid on recipient output and donor's trade gains are greater when aid is utilized as intended by the donor than when foreign funds are funged in the form of tax relief. A lower impact of fungibility on output is caused by the fact that the multiplier effect is reduced when spending units are consumers because the latter save a part of the additional disposable income obtained from tax relief, whereas the government spends the entire aid amount.