Chapter 32
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 |
|---|---|---|
|
|
|
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.
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.