Macroeconomic Policy around the World

Introduction to Macroeconomic Policy around the World

 

Figure 19.1 Looking for Work Job fairs and job centers are often available to help match people to jobs. This fair took place at a college in the United States, a high-income country with policies to keep unemployment levels in check. Unemployment is an issue that has different causes in different countries and is especially severe in low- and middle-income economies around the world. 

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 levels 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.

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Source: Rice University, https://openstax.org/books/principles-macroeconomics-3e/pages/19-introduction-to-macroeconomic-policy-around-the-world
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The Diversity of Countries and Economies Across the World

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 is worth repeating that the goal, then, is not only to 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 of 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 a $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 GDP	Population (millions)	% of the Global 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 19.1 World Income versus Global Population. Note that while GNI determines the income categories, many other economic measures use GDP.

Figure 19.2 Percent of Global GDP and Percent of Population The two pie charts show that low-income countries represent less than 1% of global income and comprise 8.6% of the global population. The combined middle-income countries represent 36.5% of income and comprise 75.7% of the global population. The high-income countries have 63% of the world's income and comprise 15.7% of the population.

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, the 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 19.3 GDP Per Capita in U.S. Dollars There 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.

	Population (in millions)	GDP Per Capita
East Asia and the Pacific	2,361	$8,254
South Asia	1,857	$1,823.7
Sub-Saharan Africa	1,136.7	$1,499.4
Latin America and the Caribbean	652	$6,799.2
Middle East and North Africa	465	$3,018.4
Europe and Central Asia	923	$7,688.5

Table 19.2 Regional Comparisons of Nominal GDP per Capita and Population in 2020 GDP per capita excludes high-income countries in each region.

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.

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, and 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 rainforests. 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 a 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 the 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. Long-standing armed conflicts tear some nations; 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.