22.3.19: Chapter 19

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The answers are shown in the following two tables.

Region	GDP (in millions)
East Asia	$10,450,032
Latin America	$5,339,390
South Asia	$2,288,812
Europe and Central Asia	$1,862,384
Middle East and North Africa	$1,541,900
Sub-Saharan Africa	$1,287,650

Region	GDP Per Capita (in millions)
East Asia	$5,246
Latin America	$1,388
South Asia	$1,415
Europe and Central Asia	$9,190
Middle East and North Africa	$4,535
Sub-Saharan Africa	$6,847

East Asia appears to be the largest economy on GDP basis, but on a per capita basis it drops to third, after Europe and Central Asia and Sub-Saharan Africa.

A region can have some of high-income countries and some of the low-income countries. Aggregating per capita real GDP will vary widely across countries within a region, so aggregating data for a region has little meaning. For example, if you were to compare per capital real GDP for the United States, Canada, Haiti, and Honduras, it looks much different than if you looked at the same data for North America as a whole. Thus, regional comparisons are broad-based and may not adequately capture an individual country’s economic attributes.

The following table provides a summary of possible answers.

High-Income Countries	Middle-Income Countries	Low-Income Countries
Foster a more educated workforce Create, invest in, and apply new technologies Adopt fiscal policies focused on investment, including investment in human capital, in technology, and in physical plant and equipment Create stable and market-oriented economic climate Use monetary policy to keep inflation low and stable Minimize the risk of exchange rate fluctuations, while also encouraging domestic and international competition	Invest in technology, human capital, and physical capital Provide incentives of a market- oriented economic context Work to reduce government economic controls on market activities Deregulate the banking and financial sector Reduce protectionist policies	Eradicate poverty and extreme hunger Achieve universal primary education Promote gender equality Reduce child mortality rates Improve maternal health Combat HIV/AIDS, malaria, and other diseases Ensure environmental sustainability Develop global partnerships for development

Low-income countries must adopt government policies that are market-oriented and that educate the workforce and population. After this is done, low-income countries should focus on eradicating other social ills that inhibit their growth. The economically challenged are stuck in poverty traps. They need to focus more on health and education and create a stable macroeconomic and political environment. This will attract foreign aid and foreign investment. Middle-income countries strive for increases in physical capital and innovation, while higher-income countries must work to maintain their economies through innovation and technology.

If there is a recession and unemployment increases, we can call on an expansionary fiscal policy (lower taxes or increased government spending) or an expansionary monetary policy (increase the money supply and lower interest rates). Both policies stimulate output and decrease unemployment.

Aside from a high natural rate of unemployment due to government regulations, subsistence households may be counted as not working.

Indexing wage contracts means wages rise when prices rise. This means what you can buy with your wages, your standard of living, remains the same. When wages are not indexed, or rise with inflation, your standard of living falls.

An increase in government spending shifts the AD curve to the right, raising both income and price levels.

A decrease in the money supply will shift the AD curve leftward and reduce income and price levels. Banks will have less money to lend. Interest rates will increase, affecting consumption and investment, which are both key determinants of aggregate demand.

10.

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. For example, the United States 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.

11.

The demand for the country’s currency would decrease, lowering the exchange rate.

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