C h a p t e r

Problems
1. Rank the seven regions of the world from richest to poorest according to per capita GDP.
2. Compare per capita GDP for the high-income countries of the worldthe U.S., Europe, Japan,
Canadawith the other six regions of the world. Roughly speaking, what multiple is the per capita
GDP in the highest-income region of per capita GDP to each of the other regions? (That is, divide per
capita GDP in the highest-income region by per capita GDP in the other regions.)
3. What is the death rate for children under 5 in the region of the world where it is highest? What is the
life expectancy in the region of the world where it is lowest? What is the malnutrition rate for children
under 5 in the region of the world where it is highest? What is the illiteracy rate for men and women in
the region of the world where it is highest?
4. Give some of the ways that appropriate growth policies are the same across nations that are technology
leaders, converging nations, and technologically disconnected nations, and some of the ways that such
policies will differ.
5. Why are the converging economies in general more susceptible to being shocked, either negatively or
positively, by developments in global markets than are the United States, Japan, or Germany?
6. Roughly how many phones per 1,000 people are there in parts of the world where there are the fewest
phones? Roughly what share of roads are paved in the parts of the world with the most unpaved roads?
7. True or false: The best way for nations of the world to protect workers and reduce unemployment is to
pass a wide range of laws assuring high pay, generous health and pension benefits from employers, and
protection against being laid off or fired.
8. Explain what will happen in a nation that tries to solve a structural unemployment problem using
expansionary monetary and fiscal policy. Draw one AS AD diagram, based on the Keynesian model,
for what the nation hopes will happen. Then draw a second AS AD diagram, based on the
neoclassical model, for what is more likely to happen.
9. Why are inflationary dangers less in the high-income economies than in low-income and middle-
income economies around the world?
10. Describe a scenario in which the U.S. trade deficit declines without any severe economic disruption.
Then describe an alternate scenario in which it declines with some degree of economic disruption.
11. Explain why countries seek to deal with the risk of trade imbalances not by restricting international
flows of goods, but by limiting international flows of capital. What do international flows of capital
have to do with trade imbalances?

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Answers
1. The answer to this question is based on Exhibit 34-1 in the text. From richest to poorest, the regions are:

High income: U.S., Western Europe, Japan

East Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
East Asia and the Pacific
Sub-Saharan Africa
South Asia

2. Again, the answer is based on Exhibit 34-1 in the text. Per capita GDP in U.S., Western Europe, Japan
region, divided by per capita GDP in:

Latin America and the Caribbean
East Europe and Central Asia
Middle East and North Africa
East Asia and the Pacific
Sub-Saharan Africa
South Asia
multiple of about 9 (that is, 8.8)
multiple of about 9 (that is, 8.6)
multiple of about 18 (that is, 17.9)
multiple of about 23 (that is, 23.1)
multiple of about 45 (that is, 45.0)
multiple of about 54 (that is, 53.8)

3. All answers are from Exhibit 34-2 in the text.

Death rates for children under 5 are 16% in sub-Saharan Africa.

Life expectancy is about 46 years in sub-Saharan Africa.
The share of children who are malnourished is 51% in the South Asia region (which includes India and
Bangladesh).
Illiteracy rates are 40% in the South Asia region.

Notice that the two regions that have the lowest per capita GDP, as shown in Exhibit 34-1, also perform
the worst on these alternative measures of well-being. Although GDP does not measure standard of
living directly, a higher GDP is often associated with a broad increase in standard of living across many
dimensions, not just purely economic ones.

4. Growth policies in all nations, at a general level, will involve thinking about how to improve human
capital, physical capital, and technology in the context of a generally market-oriented economy. But the
emphases will differ across countries.
The technology leaders will focus more on pushing out the technology frontier and on finding ways
to use it.
The converging economies will focus more on making big steps toward increasing human capital, on
using technology first developed elsewhere, and on getting connected to the global economy.
The technologically disconnected may need some help in getting connected through communications
and transportation infrastructure and also in finding the sort of technology that works for them.

5. Their economies are generally smaller. As a result, an international movement of goods or capital that
would make relatively little difference in a large economy, like the U.S., Japan, or Germany, will have
quite a substantial impact on their economies. For an illustration of this, see Exhibit 34-3 in your text.

6. All answers are based on Exhibit 34-4 in your text.

In South Asia and Sub-Saharan Africa, there are 56-64 fixed line and mobile telephones for every
1,000 people.
 Chapter 34 Macroeconomic Policy around the World 393

In Sub-Saharan Africa, 13 percent of roads are paved, while 27 percent of roads are paved in Latin
America and the Caribbean.

7. False. Indeed, there are enough fallacies in this statement that its almost hard to know where to begin.
Probably the biggest fallacy is that having the government pass a law can make all these good things
happen. Another fallacy is that businesses wont react to these laws by categorizing workers as non-
workers, refusing to hire whenever possible, pushing workers into the informal labor market, and so on.
The way to make it possible for workers to receive high levels of compensation (either wages or
benefits) in the long run is to find ways for productivity to increase. Laws about benefits or layoffs can
be perfectly defensible, but the tradeoffs that they pose need to be designed and thought through
carefully, remembering that employers and workers can and will react to such laws.

8. The first diagram below shows an upward sloping AS curve (the Keynesian viewpoint). The original
intersection is to the left of potential GDP. The nation hopes that expansionary macro policy will shift
AD to the right and reduce unemployment.
But if the unemployment is structural rather than cyclical, the nation may actually be facing a
vertical neoclassical AS curve, drawn in the second diagram below. In this case, shifting AD out to the
right will only generate inflation.

Potential AS
GDP
Price Level

The nation hopes

this will happen

AD0 AD1

Real GDP

9. One reason is political: In many low-income and middle-income countries, a political consensus to
keep inflation low has not yet formed.
But other reasons are economic. Low-income and middle-income economies tend to be smaller in
size, which means that they are more likely to be buffeted by the international economy, so shocks to
the prices of key exports or imports, or sudden inflows or outflows of capital, can cause inflation.
Converging economies face an additional issue that when an economy is growing very fast, it can
experience situations where demand is more likely to outstrip supply by a substantial amountperhaps
because of a bank lending spreeand bring inflation in that way.

10. In the mellow scenario, foreign investors slowly turn away from the U.S. economy toward
opportunities elsewhere. Perhaps U.S. savings rates, both personal and government savings, go up. The
U.S. trade deficit melts away.
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In a harsher scenario, capital starts fleeing the U.S. economy, which drives down the exchange rate
for the dollar. As the dollar weakens, speculators flock to sell it, driving it down still further. The weak
dollar threatens to bring on inflation, and the Fed clamps down on inflation by raising interest rates. A
recession results.

11. A trade balance is often quickly defined as the gap between exports and imports. This is roughly
accurate, although the current account balance includes more than just exports and imports, since it
also include flows of investment income and unilateral transfers. But the current account balance is also
the gap between domestic savings and domestic investment, as explained in detail in Ch. 21. Indeed,
given the high level of activity in international financial markets, it is typically believed that financial
flows across borders are the real reason for trade imbalances. Thus, the U.S. had an enormous trade
deficit in the late 1990s and early 2000s because it was attracting vast inflows of foreign capital.
Smaller countries that have attracted such inflows of international capital worry that if the inflows
suddenly turn to outflows, the resulting decline in their currency could collapse their banking system
and bring on a deep recession.