Principles of Economics - 3e Chapter 32 Macroeconomic Policy Around the World

Policy Around the World FIGURE Looking for Work Job fairs and job centers are often available to help match people to jobs . This fair took place at a college in the a country with policies to keep unemployment levels in check . Unemployment is an issue that has different causes in different countries , and is especially severe in the and economies around the world ( Credit of College of Hosts Career Fair 2015 36 by COD , BY ) CHAPTER OBJECTIVES In this chapter . you will learn about The Diversity of Countries and Economies across the World Improving Countries Standards of Living Causes of around the World Causes of in Various Countries and Regions Balance of Trade Concerns Introduction to Policy around the World HOME Youth Unemployment Chad Harding , a young man Cape Town , South Africa , completed school having done well on his exams . He had

768 32 Policy Around the World high hopes for the future . Like many young South Africans , however , he had difficulty a job . I was just stuck at home waiting , waiting for something to come up , he said in a interview . In South Africa over 60 of young adults are unemployed . In fact , the problem is not limited to South Africa . million of the world youth aged 15 to 24 are currently unemployed , according to the International Labour Organization . This chapter will look at policies around the world , specifically those related to reducing unemployment , promoting economic growth , and stable inflation and exchange rates . There are extraordinary differences in the composition and performance of economies across the world . What explains these differences ?

Are countries motivated by similar goals when it comes to policy ?

Can we apply the same framework that we developed in this text to understand the performance of these countries ?

Lets take each of these questions in turn . Explaining differences Recall from Unemployment that we explained the difference in composition and performance of economies by appealing to an aggregate production function . We argued that differences in productivity explain the diversity of average incomes across the world , which in turn were affected by inputs such as capital deepening , human capital , and Every economy has its own distinctive economic characteristics , institutions , history , and political realities , which imply that access to these ingredients will vary by country and so will economic performance . For example , South Korea invested heavily in education and technology to increase agricultural productivity in the early 19505 . Some of this investment came from its historical relationship with the United States . As a result of these and many other institutions , its economy has managed to converge to the levels of income in leading economies like Japan and the United States . Similar goals and Many economies that have performed well in terms of per capita income better or motivated by a similar goal to maintain the quality of life of their citizens . Quality of life is a broad term , but as you can imagine it includes but is not limited to such things as low level of unemployment , price stability ( low levels of ) and the ability to trade . These seem to be universal goals as we discussed in The Perspective . No country would argue against them . To study policy around the world , we begin by comparing standards of living . In keeping with these goals , we also look at indicators such as unemployment , and the balance of trade policies across countries . Remember that every country has had a diverse set of experiences therefore although our goals may be similar , each country may well require policies tailored to its circumstances . LINK up For more reading on the topic unemployment , visit this website to read Generation Jobless in the Economist . The Diversity of Countries and Economies across the World LEARNING OBJECTIVES By the end of this section , you will be able to Analyze and per capita as a measure of the diversity of international standards of living Identify what a country as low income , income , income , or high income Explain how geography , demographics , industry structure , and economic institutions standards of living The national economies that comprise the global economy are remarkably diverse . Let us use one key indicator of the standard of living , per capita , to quantify this diversity . You will quickly see that Access for free at

The Diversity of Countries and Economies across the World 769 this diversity is fraught with challenges and limitations . As we explained in The Perspective , we must consider using purchasing power parity or international dollars to convert average incomes into comparable units . Purchasing power parity , as we formally in Exchange Rates and International Capital Flows , takes into account that prices of the same good are different across countries . The Pers explained how to measure , the challenges of using to compare standards of living , and the of confusing economic size with distribution . In China case , for example , China ranks as the second largest global economy , second to only the United States , with Japan ranking third . However , when we take China of trillion and divide it by its population of billion , then the per capita is only , which is lower than that of Japan , at , and that of the United States , at . Measurement issues aside , it worth repeating that the goal , then , is to not only increase , but to strive toward increased per capita to increase overall living standards for individuals . As we have learned from Economic Growth , countries can achieve this at the national level by designing policies that increase worker productivity , deepen capital , and advance technology . The related measure gross national income ( per capita also allows us to rank countries into , middle , or groups . The World Bank updates the each year . Low income countries are those with per capita per year countries have a per capita between and countries have a per capita between and while countries have over per year per capita income . According to the 2022 , there are 27 nations and 80 nations . The other 110 measured nations occupy the two tiers of nations , and are comprised of the vast , of the world population . Despite the population and quantitative majority , these nations only produce one third of global and have nearly of the worlds people living in poverty . in of Global Population of Global Income Group , billions ) millions ) Population Low income ( or less ) and 757 ( High income ( more than ) 63 World Total income TABLE World Income versus Global Population Note that while the income categories are determined by , many other economic measures use . Source World Bank ,

32 Policy Around the World Low income Low Income ( Middle Income HIgh Income ( 36 ) 63 ) High Income ( 15 ) Middle Income ( 75 ) a ) Percentage oi global by country Income ( Percentage of by country Income FIGURE Percent of Global and Percent of Population The two pie charts show that countries represent less than of global income and make up of global population . The combined countries represent of income and make up of global population . And the countries have 63 of the world income and make up of the population . Source ) An overview of the regional averages of per person for developing countries , measured in comparable international dollars as well as population in 2018 ( Figure , shows that the differences across these regions are stark . As Table 322 shows , nominal per capita in 2020 for the 652 million people living in Latin America and the Caribbean region ( excluding high income countries in that region ) was , which far exceeds that of South Asia and Africa . In turn , people in the world nations , such as those who live in the European Union nations or North America , have a per capita three to four times that of the people of Latin America . To put things in perspective , North America and the European Union ( plus the United Kingdom ) have slightly more than 10 of the world population , but they produce and consume about 44 of the world . per In US dollars I 34 000 110300 I I 5800 I I I . FIGURE Per Capita in . Dollars There is a clear imbalance in the across the world . North America , Australia , and Western Europe have the highest while large areas of the world have dramatically lower . Access for free at

The Diversity of Countries and Economies across the World Russia and other former Soviet nations , as well as Argentina , Brazil , Chile , and Mexico , have a per capita of about . China , though a major economic engine world , is about . Egypt , India , Indonesia , and are lower at about . Credit of work by Commons ) Population ( in millions ) Per Capita East Asia and South Asia Africa Latin America and Caribbean 652 Middle East and North Africa 465 Europe and Central Asia 923 TABLE Regional Comparisons of Nominal per Capita and Population in 2020 per capita excludes high income countries in each region . Source ) Such comparisons between regions are admittedly rough . After all , per capita can not fully capture the quality of life . Many other factors have a large impact on the standard of living , like health , education , human rights , crime and personal safety , and environmental quality . These measures also reveal very wide differences in the standard of living across the regions of the world . Much of this is correlated with per capita income , but there are exceptions . For example , life expectancy at birth in many regions approximates those who are more . The data also illustrate that nobody can claim to have perfect standards of living . For instance , despite very high income levels , there is still undernourishment in Europe and North America . LINK IT UP Economists know that there are many factors that contribute to your standard of living . People in countries may have very little time due to heavy and may feel disconnected from their community . countries may be more community centered , but have little in the way of material wealth . It is hard to measure these characteristics of standard of living . The Organization for Economic and Development has developed the Better Life Index . Visit this website to see how countries measure up to your expected standard of living . The differences in economic statistics and other measures of , substantial though they are , do not fully capture the reasons for the enormous differences between countries . Aside from the neoclassical of growth , four additional are in a wide range of statistical studies and are worth mentioning geography , demography , industrial structure , and institutions . Geographic and Demographic Differences Countries have geographic differences some have extensive coastlines , some are landlocked . Some have large rivers that have been a path of commerce for centuries , or mountains that have been a barrier to trade . Some have deserts , some have rain forests . These differences create different positive and negative opportunities for commerce , health , and the environment . Countries also have considerable differences in the age distribution of the population . Many

772 32 Policy Around the World nations are approaching a situation by 2020 or so in which the elderly will form a much larger share of the population . Most countries still have a higher proportion of youth and young adults , but by about 2050 , the elderly populations in these countries are expected to boom as well . These demographic changes will have considerable impact on the standard of living of the young and the old . Differences in Industry Structure and Economic Institutions Countries have differences in industry structure . In the worlds economies , only about of comes from agriculture the average for the rest of the world is 12 . Countries have strong differences in degree . Countries also have strong differences in economic institutions some nations have economies that are extremely , while other nations have command economies . Some nations are open to international trade , while others use tariffs and import quotas to limit the impact of trade . Some nations are torn by armed other nations are largely at peace . There are also differences in political , religious , and social institutions . No nation intentionally aims for a low standard of living , high rates of unemployment and , or an unsustainable trade imbalance . However , nations will differ in their priorities and in the situations in which they themselves , and so their policy choices can reasonably vary , too . The next modules will discuss how nations around the world , from high income to low income , approach the four goals of economic growth , low unemployment , low , and a sustainable balance of trade . Improving Countries Standards of Living LEARNING OBJECTIVES By the end of this section , you will be able to Analyze the growth policies of countries seeking to improve standards of living Analyze the growth policies of countries , particularly the East Asian Tigers with their focus on technology and incentives Analyze the struggles facing countries wishing to enact growth policies Evaluate the success of sending aid to countries Jobs are created in economies that grow . What is the origin of economic growth ?

According to most economists who believe in the growth consensus , economic growth ( as we discussed in Economic Growth is built on a improvements . In turn , productivity increases are the result of greater human and capital and technology , all interacting in a economy . In the pursuit of economic growth , some countries and regions start from different levels , as the differences in per capita presented earlier in Table illustrate . Growth Policies for the Countries the countries , the challenge of economic growth is to push continually for a more educated workforce that can create , invest in , and apply new technologies . In effect , the goal of their policy is to shift their aggregate supply curves to the right ( refer to The Aggregate Sup Model . The main public policies targeted at achieving this goal are policies focused on investment , including investment in human capital , in technology , and in physical plant and equipment . These countries also recognize that economic growth works best in a stable and economic climate . this reason , they use monetary policy to keep low and stable , and to minimize the risk of exchange rate , while also encouraging domestic and international competition . early in the second decade of the , many countries found themselves more on the short term than on the long term . The United States , Western Europe , and Japan all experienced a combination of crisis and deep recession , and the of the unemployment likely to linger for several years . Most of these governments took Access for free at

Improving Countries Standards of Living aggressive , and in some cases controversial , steps to their economies by running very large budget as part of expansionary policy . These countries must adopt a course that combines lower government spending and higher taxes . Similarly , many central banks ran highly expansionary monetary policies , with both interest rates and unconventional loans and investments . For example , in 2012 , Abe ( see Figure , then newly elected Prime Minister of Japan , unveiled a plan to pull his country out of its slump in economic growth . It included both stimulus and an increase in the money supply . The plan was successful in some ways and unsuccessful in others . While real growth in Japan has averaged around since 2012 ( and was only in 2014 and in 2016 ) and while the rate has struggled to stay positive in recent years , the unemployment rate continued to decline through the 20105 . By early 2020 , prior to the pandemic , the unemployment rate stood at just . Public debt has also reached a plateau in the last years of about of , although this number did increase slightly in 2020 due to the pandemic . Abe stepped down as Prime Minister in 2020 , and was assassinated in 2022 . FIGURE Japan Former Prime Minister , Abe Japan used fiscal and monetary policies to stimulate its economy , which has helped bring down unemployment , but inflation remains stubbornly low . Credit of Abe , Prime Minister of Japan by Creative Commons , BY ) As we discussed in other chapters , needs to have both a and a focus . The challenge for many of the developed countries in the next few years will be to grapple with the consequences of the pandemic . With high unemployment and no end of the virus containment in sight , it will be challenging for these governments to refocus their efforts on new technology , education , and physical capital investment . Growth Policies forthe Economies The world great economic success stories in the last few decades began in the with that group of nations sometimes known as the East Asian Tigers South Korea , Thailand , Malaysia , Indonesia , and Singapore . The list sometimes includes Hong Kong and , although often under international law they are treated as part of China , rather than as separate countries . The economic growth of the Tigers has been phenomenal , typically averaging 55 real per capita growth for several decades . In the , other countries began to show signs of convergence . China began growing rapidly , often at annual rates of to 10 per year . India began growing rapidly , at rates of about per year in the , but then higher still in the decade of the 20005 . We know the underlying causes of these rapid growth rates China and the East Asian Tigers , in particular , have been among the highest savers in the world , often saving or more of as compared to the roughly of , which would be a more typical saving rate in Latin America and Africa . These countries harnessed higher savings for domestic investment to build physical capital . These countries had policies that supported heavy investments in human capital , first building up education and then expanding education . Many focused on encouraging math and science education , which is useful in engineering and business . Governments made a concerted effort to seek out applicable technology , by sending students and

774 32 Policy Around the World government commissions abroad to look at the most industrial operations elsewhere . They also created policies to support innovative companies that wished to build production facilities to take advantage of the abundant and inexpensive human capital . China and India in particular also allowed far greater freedom for market forces , both within their own domestic economies and also in encouraging their to participate in world markets . This combination of technology , human capital , and physical capital , combined with the incentives of a economic context , proved an extremely powerful stimulant to growth . Challenges that these countries faced are a legacy of government economic controls that for political reasons can be dismantled only slowly over time . In many of them , the government heavily regulates the banking and sector . Governments have also sometimes selected certain industries to receive loans or government subsidies . These economies have found that an increased dose of incentives for and workers has been a critical ingredient in the recipe for faster growth . To learn more about measuring economic growth , read the following Clear It Up feature . CLEAR IT UP What is the rule of 72 ?

It is worth pausing a moment to marvel at the East Asian Tigers growth rates . If per capita grows at , say , per year , then you can apply the formula for compound growth is ( a nation level of per capita will rise by a multiple of almost six over 30 years . Another strategy is to apply the rule of 72 . The rule of 72 is an approximation to out doubling time . We divide the rule number , 72 , by the annual growth rate to obtain the approximate number of years it will take for income to double . If we have a growth rate , it will take , or 12 years , for incomes to double . Using this rule here suggests that a grows at will double its every 12 years . In contrast , a technological leader , chugging along with per capita growth rates of about per year , would double its income in 36 years . Growth Policies for Countries Many or countries are geographically located in Africa . Other pockets of low income are in the former Soviet Bloc , and in parts of Central America and the Caribbean . There are policies and prescriptions that might alleviate the extreme poverty and low standard of living . However , many of these countries lack the economic and legal stability , along with market oriented institutions , needed to provide a fertile climate for domestic economic growth and to attract foreign investment . Thus , policies for low income economies are vastly different from those of the high income economies . The World Bank has made it a priority to combat poverty and raise overall income levels through 2030 . One of the key obstacles to achieving this is the political instability that seems to be a common feature of countries . Figure shows the ten lowest income countries as ranked by The World Bank in 2020 . These countries share some common traits , the most of which is the recent failures of their governments to provide a legal framework for economic growth . Civil and ethnic wars have impacted . Command economies , corruption , as well as political factionalism and are commonly adopted elements in these income countries . The Democratic Republic of the Congo ( often referred to as Congo ) is a country that has not been able to increase its subsistence standard of living due to the political environment . Access for free at

Improving Countries Standards of Living 700 600 500 400 300 200 100 II I ! 05 , Per capita income 2020 . Dollars FIGURE The Ten Lowest Income Countries This bar chart that shows the ten countries by per capita income . They are , from lowest income to highest , Mozambique , Madagascar , Central African Republic , Sierra Leone , Afghanistan , Democratic Republic of Congo , and . Source ) countries are at a disadvantage because any incomes that people receive are spent immediately on necessities such as food . People in these countries live on less than per year , which is less than 100 per month . Lack of saving means a lack of capital accumulation and a lack of loanable funds for investment in physical and human capital . Recent research by two MIT economists , and Esther , has that the households in these economies are trapped in low incomes because they can not muster enough investment to push themselves out of poverty . For example , the average citizen of , a country , on 239 per year ( adjusted to 2020 dollars ) According to Central Intelligence Agency data in its CIA , as of 2021 , 85 of population is agrarian , with bananas as the main income producing crop . Only one in two children attends school and , as Figure shows , many are not in schools comparable to what occurs in developed countries . Political instability has made it for to make headway toward growth , as by the of only 11 of households and 40 of its national income coming from foreign aid . FIGURE Lack of Funds for Investing in Human Capital In countries , people often spend all income on necessities for living and can not accumulate or invest in physical or human capital . The students in this photograph learn in an outside classroom void of not only technology , but even chairs and desks . Credit Living in by Creative Commons , BY )

776 32 Policy Around the World LINK IT UP The World website ( is loaded with maps , and other information about countries across the globe . Other countries share similar stories . These countries have found it to generate investments for themselves or to foreign investors willing to put up the money for more than the basic needs . Foreign aid and external investment comprise portions of the income in these economies , but are not to allow for the capital accumulation necessary to invest in physical and human capital . However , is foreign aid always a contributor to economic growth ?

Development economics is a branch of economics that often focuses on answering that question and others like it . Development economists analyze the forces and outcomes of economics in developing nations . The is typically focused sometimes and implementing policies and practices to improve economic and social wellbeing in and nations or regions . But it is an extremely wide and varied area of study , often blending politics , policy , education , innovation , health and medicine , international trade , natural resources , and considerations . Many development economists have focused on understanding the best mix of approaches to foster equitable and sustainable growth . Like other economists , they may analyze practices or outcomes from the past and apply that knowledge to the present and future . And many prominent development economists challenge traditional ways of thinking . Moyo , for example , provides evidence indicating that foreign aid is rarely a positive solution and often does more harm than good . In her book Is Not Working and How There Is Another ( 2009 ) she lays out the failure of past aid , indicating that it typically ends up in the pockets of corrupt and has the adverse effect of minimizing other types of investment . At the time , Moyo proposed a complete stoppage of foreign aid into Africa . Moyo sees far greater promise in increases in trade and direct private investment , as well as other options such as bonds . CLEAR IT UP Does foreign aid to countries work ?

According to the Organization of Economic Cooperation and Development ( about 134 billion per year in foreign aid flows from the countries of the world to the ones . Relative to the size of their populations or economies , this is not a large amount for either donors or recipients . For countries , aid averages about percent of their . However , even this relatively small amount has been highly controversial . Supporters of additional foreign aid point to the extraordinary human suffering in the world income countries . They see opportunities all across Africa , Asia , and Latin America to set up health clinics and schools . They want to help with the task of building economic infrastructure clean water , plumbing , electricity , and roads . Supporters of this aid include formal institutions like the United Kingdom Department for International Development ( or independent organizations ( like CARE International that also receive donor government funds . For example , because of an outbreak of meningitis in Ethiopia in 2010 , channeled funds to the Ethiopian Ministry of Health to train rural health care workers and also for vaccines . These monies helped the Ministry offset in their budget . Opponents of increased aid do not quarrel with the goal of reducing human suffering , but they suggest that foreign aid has often proved a poor tool for advancing that goal . For example , according to an article in the Attache Journal , the Canadian foreign aid organization ( provided 100 million to to grow wheat . The project did produce wheat , but nomadic and other villagers who had lived on the land were driven off acres of land to make way for the project . The damage in terms of human rights and lost livelihoods was significant . Villagers were beaten and killed because some refused to leave the land . At times , the Access for free at

Causes of Unemployment around the World unintended collateral damage from foreign aid can be significant . William Easterly , professor of economics at New York University , argues that countries often receive aid for political reasons and the aid does more harm than good . If a country government creates a reasonably stable and oriented climate , then foreign investors will be likely to provide funds for many activities . For example , Facebook partnered with multiple organizations in a project called to provide access in remote and areas of the world , and Google began its own initiative called Project Loon in 2011 , although it was phased out in 2021 . Facebook first forays into providing internet access via mobile phones began in stable , countries like India , Brazil , Indonesia , Turkey , and the Philippines and continues its work in Africa by working with telecommunications corporations in China to develop an undersea cable network . are now wiser about foreign aid limitations than they were a few decades ago . In targeted and cases , especially if foreign aid is channeled to investment projects , foreign aid can have a modest role to play in extreme levels of deprivation that hundreds of millions of people around the world experience . LINK IT Watch this video on the complexities of providing economic aid in Africa . Causes of Unemployment around the World LEARNING OBJECTIVES By the end of this section , you will be able to Explain the nature and causes of unemployment Analyze the natural rate of unemployment and the factors that affect it Identify how undeveloped labor markets can result in the same hardships as unemployment We can categorize the causes of unemployment in the world countries in two ways either cyclical unemployment caused by the economy when in a recession , or the natural rate of unemployment caused by factors in labor markets , such as government regulations regarding hiring and starting businesses . Unemployment from a Recession For unemployment caused by a recession , the economic model points out that both monetary and policy tools are available . The monetary policy prescription for dealing with recession is straightforward run an expansionary monetary policy to increase the quantity of money and loans , drive down interest rates , and increase aggregate demand . In a recession , there is usually relatively little danger of taking off , and so even a central bank , with as its top priority , can some reduction in interest rates . With regard to policy , the automatic stabilizers that we discussed in Government Budgets and Fiscal Po lit should be allowed to work , even if this means larger budget in times of recession . There is less agreement over whether , in addition to automatic stabilizers , governments in a recession should try to adopt discretionary policy of additional tax cuts or spending increases . In the case of the Great Recession , the case for this kind of expansionary policy is stronger , but for a smaller recession , given the time lags of implementing policy , countries should use discretionary policy with caution . However , the aftermath of the Recession emphasizes that expansionary and monetary policies do not turn off a recession like a switch turns off a lamp . Even after a recession is over , and positive growth has returned , it can take some even a couple of believe the economic climate is healthy enough that they can expand their workforce .

778 32 Policy Around the World The Natural Rate of Unemployment Unemployment rates in European nations have typically been higher than in the United States . In 2020 , before the start of the pandemic , the unemployment rate was , compared with in France , 10 in Italy , and in Sweden . We can attribute the pattern of generally higher unemployment rates in Europe , which dates back to the 19705 , to the fact that European economies have a higher natural rate of unemployment because they have a greater number of rules and restrictions that discourage from hiring and unemployed workers from . Addressing the natural rate of unemployment is straightforward in theory but in practice . Government can play a useful role in providing unemployment and welfare payments , for example , by passing rules about where and when businesses can operate , and assuring that the workplace is safe . However , these intentioned laws can , in some cases , become so intrusive that businesses decide to place limits on their hiring . For example , a law that imposes large costs on a business that tries to or lay off workers will mean that businesses try to avoid hiring in the place , as is the case in France . According to Business Week , France has times as many companies with 49 employees as with 50 according to the French labor code , once a company has at least 50 employees inside France , management must create three worker councils , introduce sharing , and submit restructuring plans to the councils if the company decides to workers for economic This labor law essentially limits employment ( or raises the natural rate of unemployment ) Undeveloped and Transitioning Labor Markets and countries face employment issues that go beyond unemployment as it is understood in the economies . A substantial number in these economies provide many of their own needs by farming , or hunting . They barter and trade with others and may take a succession of or , sometimes receiving pay with food or shelter , sometimes with money . They are not unemployed in the sense that we use the term in the United States and Europe , but neither are they employed in a regular . The starting point of economic activity , as we discussed in Welcome to , is the division of labor , in which workers specialize in certain tasks and trade the fruits of their labor with others . Workers who are not connected to a labor market are often unable to specialize very much . Because these workers are not employed , they are often not eligible for social like unemployment insurance or such payments are even available in their country . Helping these workers to become more connected to the labor market and the economy is an important policy goal . Recent research by development economists suggests that one of the key factors in raising people in countries out of the worst kind is whether they can make a connection to a somewhat regular . Economist Sir Arthur Lewis examined such transitions of labor and the impact on economic development . His core theoretical dual sector that , essentially , the marginal product of workers is greater in the manufacturing sector than it is in the agricultural sector . That because most agricultural societies are both mature and have inputs ( land , water , and related resources ) the marginal product of additional farmers on that land is nearly zero , creating what Lewis termed surplus manufacturing sectors , however , have great need for workers , and can make better use ( greater marginal product ) of them . Their wages will remain low , but as stated above , the wages are more likely to be consistent and therefore move toward a transition of the labor force . We have seen this practically in many nations experiencing a shift in labor , particularly in China . In many regions , it is marked by a level of leaving rural areas for cities or manufacturing zones . At some point , nations achieve what economists call the Lewis turning point , in which the surplus agricultural labor is fully absorbed into the manufacturing sector . Typically , when this occurs , wages in both agricultural and manufacturing sectors begin to rise in a sustainable manner . Despite massive transformation in the Chinese economy over the past decades , economists dispute whether China has actually reached the Lewis Access for free at

Causes of Inflation in Various Countries and Regions turning point . Economic transition is not without its downsides . Many countries still rely heavily on their agricultural sectors for their own sustenance and as a core part of international trade . As the agricultural sector faces competition from manufacturing , and as people physically leave rural areas , farming economies can suffer and unpredictability . Finally , countries or individual farmers seeking to make up for their missing labor may encourage migration immigration that may cause political or . Causes of Inflation in Various Countries and Regions LEARNING OBJECTIVES By the end of this section , you will be able to Identify the causes and effects of in various economic markets Explain the of a converging economy of the economies appear to have learned some lessons about . First , whatever happens with aggregate supply and aggregate demand in the short run , countries can use monetary policy to prevent from becoming entrenched in the economy in the medium and long term . Second , there is no gain to letting become established . In fact , allowing to become lasting and persistent poses undesirable risks and . When is high , businesses and individuals need to spend time and effort worrying about protecting themselves against , rather than seeking better ways to serve customers . In short , the economies appear to have both a political consensus to hold low and the economic tools to do so . Despite this , periods of growing can stagnate economic growth and lead to political consequences for leaders . In 2022 , the rate reached , an unexpected peak that the country had seen since 1981 . As is often the case , President Joe was held politically responsible , and negotiated with Congress to pass a massive economic and climate bill titled the Reduction Act . In a number of and economies around the world , is far from a solved problem . In the early , Turkey experienced of more than 50 per year for several years and continues to experience high today . had of about 100 per year from 2000 to 2001 . From 2008 to 2010 , Venezuela and had rates to 30 per year . Indonesia , Iran , the Russian Federation , and Ukraine all had for most of the years from 2000 to 2010 . Zimbabwe had , with rates that went from more than 100 per year in the to a rate of several million percent in 2008 . In these countries , the problem high generally arises from huge budget , which the government by printing its domestic currency . This is a case of too much money chasing too few In the case of Venezuela , beginning in 2016 the government covered its widening by printing ever higher currency notes , with reaching by 2018 . The crisis continues today , with high rates of and high unemployment ( over 40 ) There is some discussion of , or a conversion from Venezuelan to dollars as the main currency , as a solution to the . Even in 2019 , over 50 of transactions in Venezuela were reportedly using dollars , and banks issued debit cards in dollars in 2021 . A number of countries have managed to sustain solid levels growth for sustained periods of time with levels that would sound high by recent standards , like 10 to 30 per year . In such economies , the governments index most contracts , wage levels , and interest rates to . Indexing wage contracts and interest rates means that they will increase when increases to retain purchasing power . When wages do not rise as price levels rise , this leads to a decline in the real wage rate and a decrease in the standard of living . Likewise , interest rates that are not indexed mean that money lenders will receive payment in devalued currency and will also lose purchasing power on monies that they lent . It is clearly perhaps sometimes a converging economy ( the economy of a country that demonstrates the

780 32 Policy Around the World ability to catch up to the technology leaders ) to live with a degree of uncertainty over that would be politically unacceptable in the economies . Balance of Trade Concerns LEARNING OBJECTIVES By the end of this section , you will be able to Explain the meaning of trade balance and its implications for the foreign exchange market Analyze concerns over international trade in goods and services and international flows of capital Identify and evaluate economic reforms In the and , and even into the , low and countries often viewed openness to global of goods , services , and capital in a negative light . These countries feared that foreign trade would mean both economic losses as trading partners exploited their economy and they lost domestic political control to powerful business interests and multinational corporations . These negative feelings about international trade have evolved . After all , the great economic success stories of recent years like Japan , the East Asian Tiger economies , China , and India , all took advantage of opportunities to sell in global markets . European economies thrive with high levels of trade . In the North American Free Trade Agreement ( the United States , Canada , and Mexico pledged themselves to reduce trade barriers . Many countries have clearly learned that reducing barriers to trade is at least potentially to the economy . Many smaller world economies have learned an even tougher lesson if they do not participate actively in world trade , they are unlikely the success stories among the converging economies . There are no examples in world history of small economies that remained apart from the global economy but still attained a high standard of living . Although almost every country now claims that its goal is to participate in global trade , the possible negative consequences have remained highly controversial . It is useful to divide these possible negative consequences into issues involving trade of goods and services and issues involving international capital . These issues are related , but not the same . An economy may have a high level of trade in goods and services relative to , but if exports and imports are balanced , the net of foreign investment in and out of the economy will be zero . Conversely , an economy may have only a moderate level of trade relative to , but find that it has a substantial current account trade imbalance . Thus , it is useful to consider the concerns over international trade of goods and services and international of capital separately . Concerns over International Trade in Goods and Services There is a long list about foreign trade in goods and services fear ofjob loss , environmental dangers , unfair labor practices , and many other concerns . We discuss these arguments at some length in the chapter on The International Trade and Capital Flows . Of all of the arguments for limitations on trade , perhaps the most controversial one among economists is the infant industry argument that is , subsidizing or protecting new industries for a time until they become established . Globalization and Protectionism explains this concept in more detail . Countries have used such policies with some success at certain points in time , but in the world as a whole , support for key industries is far more often directed at industries with substantial political power that are suffering losses and laying off workers , rather than potentially vibrant new industries that are not yet established . If government intends to favor certain industries , it needs to do so in a way that is temporary and that them toward a future of market competition , rather than a future of unending government subsidies and trade protection . As of July , was replaced with the United ( free trade agreement . It is broadly similar to the original . Access for free at

Balance of Trade Concerns 781 Concerns over International Flows of Capital Recall from The Perspective that a trade exists when a nation imports exceed its exports . In order for a trade to take place , foreign countries must provide loans or investments , which they are willing to do because they expect eventual repayment ( that the will become a surplus ) A trade surplus , you may remember , exists when a nation exports exceed its imports . Thus , in order for a trade to switch to a trade surplus , a nation exports must rise and its imports must fall . Sometimes this happens when the currency decreases in value . For example , if the had a trade and the dollar , imports would become more expensive . This would , in turn , the foreign countries that provided the loans or investments . The expected pattern of trade imbalances in the world economy has been that economies will run trade surpluses , which means they will experience a net of capital to foreign destinations or export more than they import , while low and economies will run trade , which means that they will experience a net of foreign capital . This international investing pattern can all sides . Investors in the countries because they can receive high returns on their investments , and also because they can diversify their investments so that they are at less risk of a downturn in their own domestic economy . The economies that receive an of capital presumably have potential for rapid economic growth , and they can use the international capital to help spur their physical capital investment . In addition , capital often come with management abilities , technological expertise , and training . However , for the last couple of decades , this cheerful scenario has faced two dark The cloud is the very large trade or current account in the economy . See The International Trade and Capital ) Instead of offering net investment abroad , the economy is soaking up savings from all over the world . These substantial trade may not be sustainable according to Sebastian Edwards writing for the National Bureau of Economic Research . While trade on their own are not bad , the question is whether governments will reduce them gradually or hastily . In the gradual scenario , exports could grow more rapidly than imports over a period ofyears , aided by dollar depreciation . An unintended consequence of the slow growth since the Great Recession has been a decline in the current account from to most recently . The other option is that the government could reduce the trade in a rush . Here is one scenario if foreign investors became less willing to hold dollar assets , the dollar exchange rate could weaken . As speculators see this process happening , they might rush to unload their dollar assets , which would drive the dollar down still further . A lower dollar would stimulate aggregate demand by making exports cheaper and imports more expensive . It would mean higher prices for imported inputs throughout the economy , shifting the aggregate supply curve to the left . The result could be a burst of and , if the Federal Reserve were to run a tight monetary policy to reduce the , it could also lead to recession . People sometimes talk as if the economy , with its great size , is invulnerable to this sort of pressure from international markets . While it is to rock , it is not impossible for the 17 trillion economy to face these international pressures . The second dark cloud is how the smaller world economies should deal with the possibility of sudden foreign capital and . Perhaps the most vivid recent example of the potentially destructive forces of international capital movements occurred in the East Asian Tiger economies in . Thanks to their excellent growth performance over the previous few decades , these economies had attracted considerable interest from foreign investors . In the , however , foreign investment into these countries surged even further . Much of this money funneled through banks that borrowed in dollars and loaned in their national currencies . Bank lending surged at rates of 20 per year or more . This of foreign capital meant that investment in these economies exceeded the level of domestic savings , so that

782 32 Policy Around the World current account in these countries jumped into the range . The surge in bank lending meant that many banks in these East Asian countries did not do an especially good job of screening out safe and unsafe borrowers . Many of the high as 10 to 15 of all loans in some of these to turn had . Fearing losses , foreign investors started pulling out their money . As the foreign money left , the exchange rates of these countries crashed , often falling by 50 or more in a few months . The banks were stuck with a mismatch even if the rest of their domestic loans were repaid , they could never pay back the US . dollars that they owed . The banking sector as a whole went bankrupt . The lack of credit and lending in the economy collapsed aggregate demand , bringing on a deep recession . If the and ebb of international capital markets can even the economies of the East Asian Tigers , with their stellar growth records , into a recession , then it is no wonder that other and countries around the world are concerned . Moreover , similar episodes of an and then an of foreign capital have rocked a number of economies around the world for example , in the last few years , economies like Ireland , Iceland , and Greece have all experienced severe shocks when foreign lenders decided to stop extending funds . Especially in Greece , this caused the government to enact austerity measures which led to protests throughout the country ( Figure . FIGURE Protests in Greece The economic conditions in Greece have deteriorated from the Great Recession such that the government had to enact austerity measures , strict rules ) cutting wages and increasing taxes on its population . Massive protests are but one byproduct . Credit of work by Creative Commons ) Many nations are taking steps to reduce the risk that their economy will be injured if foreign capital takes , including having their central banks hold large reserves of foreign exchange and stepping up their regulation of domestic banks to avoid a wave of imprudent lending . The most controversial steps in this area involve whether countries should try to take steps to control or reduce the of foreign capital . If a country could discourage some speculative capital , and instead only encourage investment capital that it committed for the medium and the long term , then it could be at least somewhat less susceptible to swings in the sentiments of global investors . If economies participate in the global trade of goods and services , they will also need to participate in international payments and investments . These linkages can offer great to an economy . However , any nation that is experiencing a substantial and sustained pattern of trade , along with the corresponding net of international capital , has some reason for concern . During the Asian Financial Crisis in the late , countries that grew dramatically in the years leading up to the crisis as international capital in , saw their economies collapse when the capital very quickly out . Access for free at

Balance of Trade Concerns Economic Reforms The standard of living has increased dramatically for billions of people around the world in the last half century . Such increases have occurred not only in the technological leaders like the United States , Canada , the nations of Europe , and Japan , but also in the East Asian Tigers and in many nations of Latin America and Eastern Europe . The challenge for most of these countries is to maintain these growth rates . The economically challenged regions of the world have stagnated and become stuck in poverty traps . These countries need to focus on the basics health and education , or human capital development . As Figure illustrates , modern technology allows for the investment in education and human capital development in ways that would have not been possible just a few short years ago . FIGURE Technology Modern technologies , such as and , enable students to obtain education even in remote parts of a country without electricity . These students in are laptop provided by a van with . Credit Hands on computer class children in Ho , Volta Region , by Creative Commons , BY ) Other than the issue growth , the other three main goals of is , low unemployment , low , and a sustainable balance of involve situations in which , for some reason , the economy fails to coordinate the forces of supply and demand . In the case of cyclical unemployment , for example , the intersection of aggregate supply and aggregate demand occurs at a level of output below potential . In the case of the natural rate of unemployment , government regulations create a situation where employers become unwilling to hire workers . is a situation in which aggregate demand outstrips aggregate supply , at least for a time , so that too much buying power is chasing too few goods . A trade imbalance is a situation where , because ofa net or of foreign capital , domestic savings are not aligned with domestic investment . Each of these situations can create a range of easier or harder policy choices . BRING IT HOME Youth Unemployment Spain and South Africa had the same high youth unemployment in 2020 , but the reasons for this unemployment are different . Spain current account balance is negative , which means it is borrowing heavily . To cure cyclical unemployment during a recession , the model suggests increases in government expansion or monetary expansion . Neither option is open to Spain . It currently can borrow at only high interest rates , which will be a real problem in terms of debt service . In addition , the rest of the European Union ( EU ) has dragged its feet when it comes to debt forgiveness . Monetary expansion is not possible because Spain uses the euro and can not devalue its currency unless it convinces all of the EU to do so . What can be done ?

The Economist , 783 784 32 Policy Around the World summarizing some ideas of economists and , suggests that Spain only realistic ( although painful ) option is to reduce wages , which would allow it to reduce government spending . As a result , the government would be able to lower tax rates on the working population . With a lower wage or lower tax environment , will hire more workers . This will lower unemployment and stimulate the economy . Spain can also encourage greater foreign investment and try to promote policies that encourage domestic savings . South Africa has more of a natural rate of unemployment problem . It is an interesting case because its youth unemployment is mostly because its young are not ready to work . Economists commonly refer to this as an employability problem . According to interviews of South African as reported in the Economist , the young are academically smart but lack practical skills forthe workplace . Despite a big push to increase investment in human capital , the results have not yet borne fruit . Recently the government unveiled a plan to pay unemployed youth while they were or apprenticed in South African firms . The government has room to increase expenditure , encourage domestic savings , and continue to fund investment in education , vocational training , and apprentice programs . South Africa can also improve the climate for foreign investment from technology leaders , which would encourage economic growth . India has a smaller youth employment in terms of percentages . However , bear in mind that since this is a populous country , it turns out to be a problem in raw numbers . According to , writing for the , there are 45 national laws governing the hiring and decisions of and close to four times that amount at the state level . These laws make it difficult for companies to workers . To stay nimble and responsive to markets , Indian companies respond these laws by hiring fewer workers . The Indian government can do much to solve this problem by adjusting its labor laws . Essentially , the government has to remove itself from hiring and decisions , so that growing Indian can freely employ more workers . Indian workers , like those in South Africa , do not have workforce ski . Again , the government can increase its spending on education , vocational training , and workforce readiness programs . Finally , India has a current account . This is mainly a result of and capital flows . To solve this , India has by lifting the limitation on domestic savers from investing abroad . This is a step in the right direction that may dampen the growth in the current account . A policy possibility is to improve domestic capital markets so many Indians can obtain access to capital to realize their business ideas . If more can obtain access to capital to start businesses , employment might increase . Access for free at

32 Key Terms 785 Key Terms converging economy economy ofa country that has demonstrated the ability to catch up to the technology leaders by investing in both physical and human capital East Asian Tigers the economies of , Singapore , Hong Kong , and South Korea , which maintained high growth rates and rapid industrialization between the early and 1990 allowing them to converge with the technological leaders in countries growth consensus a series of studies that show , statistically , that 70 of the differences in income per person across the world is explained by differences in physical capital ( country nation with a per capita income of or more typically has high levels of human and physical capital country a nation that has a per capita income of less than a third of the population country a nation with per capita income between and 12 , 475 and that has shown some ability , even if not always sustained , to catch up to the technology leaders in countries Key Concepts and Summary The Diversity of Countries and Economies across the World policy goals for most countries strive toward low levels of unemployment and , as well as stable trade balances . Economists analyze countries based on their per person and ranked as , middle , and countries . are those earning less than ( less than ) of global income . They currently have of the world population . countries are those with per capital income of ( of global income ) They have of world population . High income countries are those with per capita income greater than ( of global income ) They have 12 of the world population . Regional comparisons tend to be inaccurate because even countries within those regions tend to differ from each other . Improving Countries Standards of Living The fundamentals of growth are the same in every country improvements in human capital , physical capital , and technology interacting in a economy . Countries that are tend to focus on developing and using new technology . Countries that are focus on increasing human capital and becoming more connected to technology and global markets . They have charted unconventional paths by relying more on support rather than relying solely on markets . countries have many health and human development needs , but they are also challenged by the lack of investment and foreign aid to develop infrastructure like roads . There are some bright spots when it comes to development and mobile communications , which suggest that countries can become technology leaders in their own right , but it is too early to claim victory . These countries must do more to connect to the rest of the global economy and the technologies that work best for them . Causes of Unemployment around the World We can address cyclical unemployment by expansionary and monetary policy . The natural rate of unemployment can be harder to solve , because it involves thinking carefully about the involved in laws that affect employment and hiring . Unemployment is understood differently in countries compared to and countries . People in these countries are not unemployed in the sense that we use the term in the United States and Europe , but neither are they employed in a regular job . While some may have regular , others are part of a barter economy . Causes of Inflation in Various Countries and Regions Most economies have learned that their central banks can control in the medium and the long term . In addition , they have learned that has no but potentially

786 32 Questions substantial costs if it distracts businesses from focusing on real productivity gains . However , smaller economies around the world may face more volatile because their smaller economies can be unsettled by international movements of capital and goods . Balance of Trade Concerns There are many legitimate concerns over possible negative consequences of free trade . Perhaps the single strongest response to these concerns is that there are good ways to address them without restricting trade and thus losing its . There are two major issues involving trade imbalances . One is what will happen with the large trade , and whether they will come down gradually or with a rush . The other is whether smaller countries around the world should take some steps to limit of international capital , in the hope that they will not be quite so susceptible to economic whiplash from international capital in and out of their economies . Questions . Using the data in Table rank the seven regions of the world according to and then according to per capita . Population ( in Per Population Per Capita ( in millions ) Capita millions ) East Asia and South Asia Africa Latin America and , 588 Caribbean East and North Africa Europe and Central Asia TABLE and Population of Seven Regions of the World . What are the drawbacks to analyzing the global economy on a regional basis ?

Create a table that the policies for a country , a country , and a country . Use the data in the text to contrast the policy prescriptions of the , and income countries . What are the different policy tools for dealing with cyclical unemployment ?

Explain how the natural rate of unemployment may be higher in countries . How does indexing wage contracts to help workers ?

Use the model to show how increases in government spending can lead to more . Show , using the model , how governments can use monetary policy to decrease the price level . 10 . What do international of capital have to do with trade imbalances ?

Access for free at 32 Review Questions 787 11 . Use the of foreign currency graph to determine what would happen to a small , open economy that experienced capital . Review Questions 12 . What is the primary way in which economists measure standards of living ?

13 . What are some of the other ways of comparing the standard of living in countries around the world ?

14 . What are the four other factors that determine the economic standard of living around the world ?

15 . What other factors , aside from labor productivity , capital investment , and technology , impact the economic growth of a country ?

How ?

16 . What strategies did the East Asian Tigers employ to stimulate economic growth ?

17 . What are the two types problems ?

18 . In countries , does it make sense to argue that most of the people without are unemployed ?

19 . Is likely to be a severe problem for at least some economies in the near future ?

20 . Is likely to be a problem for at least some and economies in the near future ?

21 . What are the major issues with regard to trade imbalances for the economy ?

22 . What are the major issues with regard to trade imbalances for and countries ?

Critical Thinking Questions 23 . Demography can have important economic effects . The United States has an aging population . Explain one economic and one economic cost of an aging population as well as of a population that is very young . 24 . Explain why is it difficult to set aside funds for investment when you are in poverty . 25 . Why do you think it is for countries to achieve high growth rates ?

26 . Is it possible to protect workers from losing theirjobs without distorting the labor market ?

27 . Explain what will happen in a nation that tries to solve a structural unemployment problem using expansionary monetary and policy . Draw one diagram , based on the model , for what the nation hopes will happen . Then draw a second diagram , based on the neoclassical model , for what is more likely to happen . 28 . Why are dangers lower in the economies than in and income economies ?

29 . Explain why converging economies may present a strong argument for limiting of capital but not for limiting trade .

788 32 Problems Problems 30 . 31 . 32 . 33 . 34 . 35 . Retrieve the following data from The World Bank database ( for India , Spain , and South Africa for the most recent year available in constant international dollars or Population per person in constant international dollars Mortality rate , infant ( per live births ) Health expenditure per capita ( current dollars ) Life expectancy at birth , total ( years ) Prepare a chart that compares India , Spain , and South Africa based on the data you . Describe the key differences between the countries . Rank these as , and countries , explain what is surprising or expected about this data . Use the Rule of 72 to estimate how long it will take for India , Spain , and South Africa to double their standards of living . Using the research skills you have acquired , retrieve the following data from The World Bank database ( for India , Spain , and South Africa for , if available Telephone lines Mobile cellular subscriptions Secure Internet servers ( per one million people ) Electricity production ( Prepare a chart that compares these three countries . Describe the key differences between the countries . Retrieve the unemployment data from The World Bank database ( for India , Spain , and South Africa for . Prepare a chart that compares India , Spain , and South Africa based on the data . Describe the key differences between the countries . Rank these countries as , and countries . Explain what is surprising or expected about this data . How did the Great Recession impact these countries ?

Retrieve data from The World Bank data base ( for India , Spain , and South Africa for . Prepare a chart that compares India , Spain , and South Africa based on the data . Describe the key differences between the countries . Rank these countries as , and . Explain what is surprising or expected about the data . Access for free at