Deck 22: Macro Policies in Developing Countries

Question 1

Briefly describe the three types of currency convertibility.Does lack of current convertibility,completely prevent international trade?

Answer 1

Full convertibility is typically enjoyed in developed economies,where people are free to convert their own currency into other currencies for any legal purpose.Convertibility on the current account allows one to convert domestic currency into foreign currency to purchase goods and services,but not capital assets.Limited capital account convertibility lies between these two,allowing some convertibility to purchase foreign assets,but imposing restrictions on types of assets,amounts,and so on.Nonconvertibility does not completely halt international trade,but it does complicate trade since it adds another layer of uncertainty and bureaucracy to the process.(LO7)

Question 2

The immediate cause of inflations in most developing countries is that the central bank is issuing too much money.What is the underlying cause of those inflations?

Answer 2

Central banks in developing countries generally are far less independent than central banks in developed countries.Political pressures force Third World governments to spend more and tax less; so they must borrow from their central banks.The central banks know that if they create more money to buy the government bonds,they will cause inflation; but the central banks have no choice because the political consequences of not creating the money are even worse.Faced with the prospect of the collapse of their governments,the central banks in Third World countries choose to keep those governments operating (at least for a little while longer).(LO6)

Question 3

The economic problems of developing countries may seem impossible to solve through the application of standard monetary and fiscal policy; but they sometimes can be solved by "regime change".How is regime change different from a policy change? Give an example where regime change was successful in turning around the economy of a developing country.

Answer 3

A regime change is a change in the entire atmosphere within which the government and the economy interrelate,whereas a policy change is a change in one aspect of a government's actions,such as monetary policy or fiscal policy.When Carlos Salinas imposed a program of fiscal austerity and economic liberalization it significantly lowered inflation in Mexico.(LO5)

Question 4

How does the existence of a dual economy affect a country's strategy of converting a developing economy to a market economy?

Question 5

What is the balance of payments constraint? What international financial institutions can countries turn to when facing this constraint?

Question 6

What is a dual economy?

Question 7

Since even the most advanced economies of the world are constantly evolving,or restructuring,what really differentiates the so-called "developed" economies from those that are considered "developing"?

Question 8

What is an inflation tax,and who receives the revenues from such a tax?

Question 9

What three ways do developed countries differ from developing countries? Briefly

Question 10

Seven problems facing developing countries that make their path to development difficult are: (a)Political instability, (b)Corruption, (c)Lack of appropriate institutions, (d)Lack of investment, (e)Inappropriate education, (f)Overpopulation, (g)Poor health and diseases.Briefly explain two of these problems,indicating how they make development difficult.

Question 11

What is the purchasing power parity method of comparing income in different countries? What are the results of using this method?

Question 12

What are some of the institutional barriers facing developing countries in terms of implementing fiscal policy?

Question 13

How are the economic institutions of developed economies different from those of developing countries? How does this affect the implementation of fiscal and monetary policy?

Question 14

Many developing countries have "dual economies".What is a dual economy and how does it affect a country's strategy of converting a developing economy to a market economy?

Question 15

List five problems facing developing countries that make their path to development difficult.

Question 16

Central banks in developing countries have far less independence than do central banks in developed countries.Explain why this is a problem in developing countries.

Question 17

Developed and developing countries have very different normative goals.What are these goals?

Question 18

Because of the structure of government in many developing countries,many economists who,in Western developed countries,favor activist government policies may well favor Classical laissez-faire policies for the same reasons that early Classical economists did-because they have a profound distrust of the governments.Why do these economists often distrust government officials in countries with developing and transitional economies?

Question 19

On the basis of exchange rates,per capita income in developing countries is around $500 per year; in the United States per capita income is about $46,000.Why does this overstate the difference in living standards? How does the purchasing power parity method of comparing income in different countries deal with that problem?

Question 20

Distinguish between growth and development.

Question 21

Explain how the competition among countries for foreign investment can result in focal points and economic takeoff.

Question 22

What are the three potential sources of investment for development,and what sorts of difficulties are there with each?

Question 23

Consider two hypothetical developing countries,both with very low incomes at similar levels.Country A has a very even distribution of income.Nearly everyone in country A has a similar income.Country B has great variation in income.A small percentage of persons in country B would be classed as middle class,and a smaller number as wealthy,by the standards of developed nations.All other things equal,which of these countries has more potential for development?