Also, there are different forms of aid. Tied aid is where the country gives the aid to the developing countries with certain restrictions on the spending of the aid, e.g. only spent on the industry of the developed countries. For example, Germany can give aid to Africa on buying more trucks and buses, with the restrictions that only Mercedes cars can be bought with that amount of money. Without this restriction, Africa will look for the lowest possible price and thus buy the maximum number of cars. However, since Germany is protecting its own car industry, which is less productive, economic resources are wasted and Africa pays an opportunity cost (best alternative forgone) because the extra amount of money could be used on other social welfare e.g. education and medical care.
If the aid is given in forms of military aid, it does not help the developing country of obtaining economic development (an increase in the general living standards of people in a particular country, which is based on a number of factors e.g. literacy rate, infant mortality rate, hygiene, level of democracy etc) A developed country can give military aid to a politically instable developing country, for example a country in war. By giving military aid, the developed country is militarily supporting one side and prolonging the duration of war, or increasing the firearms of the particular country, which does no good to the people of that country. Although giving military aid might possibly increase the GDP (Gross Domestic Product) of that country, it does not lead to economic development.
However, aid is very important to a developing country and is essential for development. Aid is an investment (making of capital goods) on that particular country, which will ultimately lead to its own sustainable economic development. If the aid is spent appropriately, e.g. building infrastructures like hospitals, factories, power stations, commercial buildings, aid can increase the amount of capital goods of that country, which pushes the production possibility frontier of that country to the right.
A shift of PPF to the right means that the power of consumption has increased, which means the country can now consume more. An increase in consumer goods will lead to an increase in GDP, which leads to economic growth and an increase in GDP per capita (GDP per population head). This is an increase in living standard, which helps the developing country. If the increase is on capital goods, the productivity of this country increases, which gives it a higher ability to have a sustainable development.
Also, the aid will be given to the country in forms of foreign currency. By this, the amount of foreign currency of that country increases. The developing country can now buy more imports that before, since imports are bought in a foreign currency. This also increases the living standards of the country. The aid-giving country must not give too much aid to a developing country, as giving too much aid can either cause inflation (a sustained increase in general price level of a country, measured every year through a basket of goods and services) or makes the country become depended on the developed country. These are not desirable for the developing country and the amount and forms of aid has to be regulated in order to avoid the above said problems.
