Chapter 19 Macroeconomics

Standard of Living (Gross National Income GNI) can be Used to Quantify the Diversity of the National Economies that Comprise the Global Economy

Low income country

Middle income country

High income country

Low-Income Country

Per capita income of less than $1,085

Middle-Income Country

Per capita income between $1,086 and $13,205 and that has shown some ability, even if not always sustained, to catch up to the technology leaders in high-income countries

High-Income Countries

Per capita income of more than $13,205; typically has high levels of human and physical capital

Other Factors can Reveal Wide Differences in the Standard of Living Across Regions of the World

Health, education, human rights, crime and personal safety, and environmental quality

Four Determinants Significant in Capturing the Reasons for the Enormous Economic Differences Between Countries

Geographic

Demographic (young vs. old)

Industry Structure (agriculture vs. urbanization)

Economic Institutions

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 (Savings/Investment)

East Asian Tigers

The economies of Taiwan, Singapore, Hong Kong, and South Korea, which maintained high growth rates and rapid export-led industrialization between the early 1960s and 1990 allowing them to converge with technological leaders in high-income countries

Public Policies

Fiscal Polies focused on investment (in human capital, technology, and physical plant and equipment)

Monetary Policy to keep inflation low and stable, and to minimize the risk of exchange rate fluctuations, while also encouraging domestic and international competition

-Recognizes that economic growth works best in a stable and market-oriented economic climate

Causes of Rapid Growth Rates

Among the highest savers in the world - used for domestic investment to build physical capital

Policies that supported heavy investments in human capital (education)

Sought out applicable and efficient technology

Policies to support companies that could take advantage of abundant and inexpensive human capital

Allowed far greater freedom for market forces (especially China and India)

Challenges

Legacy of government economic controls that can be dismantled only slowly over time (political barriers)

In many, the government heavily regulates the banking and financial sector

Low-Income Countries Are…

At a disadvantage because any incomes that people receive are spent immediately on necessities such as food

Lack of saving means a lack of capital accumulation and a lack of loanable funds for investment in physical and human capital

European Economies have a Higher Natural Rate of Unemployment

They have a greater number of rules and restrictions that discourage firms from hiring and unemployed workers from taking jobs

Low-Income and Middle-Income Countries Face Employment Issues that Go Beyond Unemployment

Provide many of their own needs by farming, fishing, or hunting

Barter and trade with others

Are not “unemployed” (in the U.S. sense) but neither are they employed in a regular wage-paying job

Are often not eligible for social benefits like unemployment insurance or old-age payments

Are not connected to a labor market so are often unable to specialize very much (no division of labor)

For High-Income Economies:

Can use monetary policy to prevent inflation from becoming entrenched in the economy in the medium and long term

Know there is no long-run gain to letting inflation become established

In a Number of Middle and Low-Income Economies Around the World, Inflation is Still a Problem

Generally rises from huge budget deficits, which the government finances by printing its domestic currency

-”Too much money chasing too few goods”

Some have managed to sustain solid levels of economic growth for sustained periods of time with high inflation levels

-These governments index most contracts, wage levels, and interest rates to inflation

Converging Economy

Economy of a country that has demonstrated the ability to catch up to the technology leaders by investing in both physical and human capital

The Expected Pattern of Trade Imbalances in the World Economy has been:

High-income economies will run trade surpluses;

-They will experience a net outflow of capital to foreign destinations

-Export more than they import

Low and middle-income economies will run trade deficits;

-They will experience a net inflow of foreign capital

Two Issues with This:

For the last couple of decades there has been a large trade and current account deficits in the U.S. economy

The possibility of sudden foreign financial capital inflows and outflows in the smaller world economies

-Recently experienced by Ireland, Iceland, and Greece