Self-Check Questions

substantial long-term costs if it distracts businesses from focusing on real productivity gains. However, smaller economies around the world may face more volatile inflation because their smaller economies can be unsettled by international movements of capital and goods.

19.5 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 benefits. There are two major issues involving trade imbalances. One is what will happen with the large U.S. trade deficits, 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 flows of international capital, in the hope that they will not be quite so susceptible to economic whiplash from international financial capital flowing in and out of their economies.

Self-Check Questions

1 . Using the data in Table 19.3, rank the seven regions of the world according to GDP and then according to GDP per capita. Population (in GDP Per GDP = Population × Per Capita GDP (in millions) Capita millions) East Asia and Pacific 2,006 $5,536 $10,450,032 South Asia 1,671 $1,482 $2,288,812 Sub-Saharan Africa 936.1 $1,657 $1,287,650 Latin America and Caribbean 588 $9,536 $5,339,390 Middle East and North Africa 345.4 $3,456 $1,541,900 Europe and Central Asia 272.2 $7,118 $1,862,384 TABLE 19.3GDP and Population of Seven Regions of the World 2 . What are the drawbacks to analyzing the global economy on a regional basis? 3 . Create a table that identifies the macroeconomic policies for a high-income country, a middle-income country, and a low-income country. 4 . Use the data in the text to contrast the policy prescriptions of the high-income, middle-income, and low- income countries. 5 . What are the different policy tools for dealing with cyclical unemployment? 6 . Explain how the natural rate of unemployment may be higher in low-income countries. 7 . How does indexing wage contracts to inflation help workers? 8 . Use the AD/AS model to show how increases in government spending can lead to more inflation. 9 . Show, using the AD/AS model, how governments can use monetary policy to decrease the price level. 10 . What do international flows of capital have to do with trade imbalances? 11 . Use the demand-and-supply of foreign currency graph to determine what would happen to a small, open economy that experienced capital outflows.

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 of unemployment problems? 18 . In low-income countries, does it make sense to argue that most of the people without long-term jobs are unemployed? 19 . Is inflation likely to be a severe problem for at least some high-income economies in the near future? 20 . Is inflation likely to be a problem for at least some low- and middle-income economies in the near future? 21 . What are the major issues with regard to trade imbalances for the U.S. economy? 22 . What are the major issues with regard to trade imbalances for low- and middle-income countries?

Critical Thinking Questions

23 . Demography can have important economic effects. The United States has an aging population. Explain one economic benefit 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 difficult for high-income countries to achieve high growth rates? 26 . Is it possible to protect workers from losing their jobs 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 fiscal policy. Draw one AD/AS diagram, based on the Keynesian model, for what the nation hopes will happen. Then draw a second AD/AS diagram, based on the neoclassical model, for what is more likely to happen. 28 . Why are inflationary dangers lower in the high-income economies than in low-income and middle- income economies? 29 . Explain why converging economies may present a strong argument for limiting flows of capital but not for limiting trade.

Problems

30 . Retrieve the following data from The World Bank database (http://databank.worldbank.org/data/ home.aspx) for India, Spain, and South Africa for the most recent year available:

• GDP in constant international dollars or PPP
• Population
• GDP per person in constant international dollars
• Mortality rate, infant (per 1,000 live births)
• Health expenditure per capita (current U.S. dollars)