19.1The Diversity of Countries and Economies across the World

at home waiting, waiting for something to come up,” he said in a BBC interview. In South Africa over 60% of young adults are unemployed. In fact, the problem is not limited to South Africa. Seventy-three million of the world’s youth aged 15 to 24 are currently unemployed, according to the International Labour Organization. This chapter will look at macroeconomic 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 macroeconomic policy? Can we apply the same macroeconomic framework that we developed in this text to understand the performance of these countries? Let’s 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 “technology.” 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 1950s. 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 frameworks: Many economies that have performed well in terms of per capita income have—for better or worse—been 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 inflation), and the ability to trade. These seem to be universal macroeconomic goals as we discussed in The Macroeconomic Perspective. No country would argue against them. To study macroeconomic policy around the world, we begin by comparing standards of living. In keeping with these goals, we also look at indicators such as unemployment, inflation, 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 macroeconomic policies tailored to its circumstances. LINK IT UP For more reading on the topic of youth unemployment, visit this website (https://openstax.org/l/genjobless) to read “Generation Jobless” in the Economist.

19.1 The Diversity of Countries and Economies across the World

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Analyze GDP and GNI per capita as a measure of the diversity of international standards of living
• Identify what classifies a country as low income, lower-middle income, upper-middle income, or high income
• Explain how geography, demographics, industry structure, and economic institutions influence 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, GDP per capita, to quantify this diversity. You will quickly see that quantifying this diversity is fraught with challenges and limitations. As we explained in The Macroeconomic Perspective, we must consider using purchasing power parity or “international dollars” to convert average incomes into comparable units. Purchasing power parity, as we formally defined in Exchange Rates and International Capital Flows, takes into account that prices of the same good are different across countries. The Macroeconomic Perspective explained how to measure GDP, the challenges of using GDP to compare standards of living, and the difficulty of confusing economic size with distribution. In China’s 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’s GDP of $9.2 trillion and divide it by its population of 1.4 billion, then the per capita GDP is only $6,900, which is significantly lower than that of Japan, at $38,500, and that of the United States, at $52,800. Measurement issues aside, it’s worth repeating that the goal, then, is to not only increase GDP, but to strive toward increased GDP 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 (GNI) per capita also allows us to rank countries into high-, upper- middle-, lower-middle-, or low-income groups. The World Bank updates the classifications each year. Low- income countries are those with $1,085 per capita GNI per year; lower-middle-income countries have a per capita GNI between $1,086 and $4,255; upper-middle-income countries have a per capita GDP between $4,265 and $13,205; while high-income countries have over $13,206 per year per capita income. According to the 2022 classifications, there are 27 low-income nations and 80 high-income nations. The other 110 measured nations occupy the two tiers of middle-income nations, and are comprised of the vast majority—75%, of the world’s population. Despite the population and quantitative majority, these nations only produce one third of global GNI and have nearly two-thirds of the world’s people living in poverty. Income Group GDP (in billions) % of Global Population % of Global GDP (millions) Population Low income ($1,085 or less) $457.6 0.5% 665.1 8.6% Lower- and upper-middle income ($1,086–$13,205) $30,535 36.5% 5,853 75.7% High income (more than $13,205) $53,396 63% 1,215 15.7% World Total income $84,388 7,773.1 TABLE 19.1World Income versus Global PopulationNote that while the income categories are determined by GNI, many other economic measures use GDP. (Source: World Bank, https://data.worldbank.org/indicator/ NY.GDP.PCAP.CD)

FIGURE 19.2Percent of Global GDP and Percent of PopulationThe two pie charts show that low-income countries represent less than 1% of global income and make up 8.6% of global population. The combined middle-income countries represent 36.5% of income and make up 75.7% of global population. And the high-income countries have 63% of the world’s income and make up 15.7% of the population. (Source: https://data.worldbank.org/indicator/ NY.GDP.MKTP.CD) An overview of the regional averages of GDP per person for developing countries, measured in comparable international dollars as well as population in 2018 (Figure 19.3), shows that the differences across these regions are stark. As Table 19.2 shows, nominal GDP 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 $6,799, which far exceeds that of South Asia and sub-Saharan Africa. In turn, people in the world’s high-income nations, such as those who live in the European Union nations or North America, have a per capita GDP 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’s population, but they produce and consume about 44% of the world’s GDP.

FIGURE 19.3GDP Per Capita in U.S. DollarsThere is a clear imbalance in the GDP across the world. North America, Australia, and Western Europe have the highest GDPs while large areas of the world have dramatically lower GDPs. Russia and other former Soviet nations, as well as Argentina, Botswana, Brazil, Chile, Gabon, and Mexico, have a mid-tier per capita GDP of about $6,000–10,000. China, though a major economic engine for the world, is about $10,500. Egypt, India, Indonesia, Mongolia, and Sudan are lower at about $920–3,500. (Credit: modification of work by Bsrboy/Wikimedia Commons) Population (in millions) GDP Per Capita East Asia and Pacific 2,361 $8,254 South Asia 1,857 $1,823.7 Sub-Saharan Africa 1,136.7 $1,499.4 Latin America and Caribbean 652 $6,799.2 Middle East and North Africa 465 $3,018.4 Europe and Central Asia 923 $7,688.5 TABLE 19.2Regional Comparisons of Nominal GDP per Capita and Population in 2020GDP per capita excludes high income countries in each region. (Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD) Such comparisons between regions are admittedly rough. After all, per capita GDP cannot 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 low-income regions approximates those who are more affluent. 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 high-income countries may have very little time due to heavy workloads and may feel disconnected from their community. Lower-income 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 Co-Operation and Development has developed the “OECD Better Life Index.” Visit this website (https://openstax.org/l/ standofliving) to see how countries measure up to your expected standard of living. The differences in economic statistics and other measures of well-being, substantial though they are, do not fully capture the reasons for the enormous differences between countries. Aside from the neoclassical determinants of growth, four additional determinants are significant 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 high-income nations are approaching a situation by 2020 or so in which the elderly will form a much larger share of the population. Most low-income countries still have a higher proportion of youth and young adults, but by about 2050, the elderly populations in these low-income 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 world’s high-income economies, only about 2% of GDP comes from agriculture; the average for the rest of the world is 12%. Countries have strong differences in degree of urbanization. Countries also have strong differences in economic institutions: some nations have economies that are extremely market-oriented, 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 long-standing armed conflicts; 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 inflation, or an unsustainable trade imbalance. However, nations will differ in their priorities and in the situations in which they find 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 macroeconomic goals of economic growth, low unemployment, low inflation, and a sustainable balance of trade.

19.2 Improving Countries’ Standards of Living

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Analyze the growth policies of low-income countries seeking to improve standards of living
• Analyze the growth policies of middle-income countries, particularly the East Asian Tigers with their focus on technology and market-oriented incentives
• Analyze the struggles facing economically-challenged countries wishing to enact growth policies
• Evaluate the success of sending aid to low-income 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 foundation of productivity improvements. In turn, productivity increases are the result of greater human and physical capital and technology, all interacting in a market-driven economy. In the pursuit of economic growth, however, some countries and regions start from different levels, as the differences in per capita GDP presented earlier in Table 19.2 illustrate.

Growth Policies for the High-Income Countries

For the high-income 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 growth-oriented public policy is to shift their aggregate supply curves to the right (refer to The Aggregate Demand/Aggregate Supply Model). The main public policies targeted at achieving this goal are fiscal 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 market-oriented economic climate. For this reason, they use monetary policy to keep inflation low and stable, and to minimize the risk of exchange rate fluctuations, while also encouraging domestic and international competition. However, early in the second decade of the 2000s, many high-income countries found themselves more focused on the short term than on the long term. The United States, Western Europe, and Japan all experienced a combination of financial crisis and deep recession, and the after-effects of the recession—like