ECN102 Problem Set 1 Solutions (2024) PDF

ECN102 Problem Set 1 - Solutions Q1. What are the World’s five richest countries? It depends on which measure you use. GDP (current US$) GDP, PPP (current GDP per capita GDP per capita, PPP international $) (current US$)...

ECN102 Problem Set 1 - Solutions Q1. What are the World’s five richest countries? It depends on which measure you use. GDP (current US$) GDP, PPP (current GDP per capita GDP per capita, PPP international $) (current US$) (current int. $) 2022 2022 2022 2022 United States China Monaco Luxembourg China United States Liechtenstein Singapore Japan India Luxembourg Ireland Germany Russia Bermuda Norway India Japan Norway Qatar World Bank WDI (2024) To think about – how do you define “rich”? GDP measures total output, but GDP per capita looks at this in proportion to population size, so gives a better measure of welfare. Why PPP? PPP stands for purchasing power parity. Takes into account the relative cost of living and inflation rates of the countries to compare living standards. (In week 2 we will look at how we measure GDP and how we convert that data to make international comparisons.) Q2. Do countries with large populations tend to be rich? Again, it depends on which measure you use. In terms of total GDP, yes countries with large populations tend to be rich. However, using GDP per capita (a better measure of welfare than total GDP) then, with the exception of the US, countries with large populations do not tend to be rich. For example: Population, total GDP, PPP GDP per capita, PPP (current international $) (current international $) 2022 2022 2022 India 1,417,173,173 13,037,380,602,507 9,199.6 China 1,412,175,000 31,773,150,449,262 22,499.4 United States 333,271,411 25,744,108,000,000 77,246.7 Indonesia 275,501,339 3,979,794,032,137 14,445.6 Pakistan 235,824,862 1,441,438,133,673 6,112.3 Singapore 5,637,022 799,307,746,480 141,796.1 Norway 5,457,127 678,063,487,580 124,252.8 Ireland 5,127,170 686,132,033,843 133,822.8 Qatar 2,695,122 326,445,745,195 121,124.7 Luxembourg 653,103 95,651,519,488 146,457.0 World Bank WDI (2024) Q3. Differences between Rich and Poor Countries: Look at Table 1 and answer the following questions. a. What percentage of the world’s population lives in a High-Income Country? (1395.9 ÷ 7951.6) x 100 = 17.6%  ECN102 Problem Set 1 - Solutions b. How much greater is the GNI per capita of the high-income countries compared to the low- income countries? GNI per capita in the high- income countries is 60.4 times (6,036%) greater than the GNI per capita of the low-income countries: 40690.6 /674.1 = 60.36 Taking differences in purchasing power between the countries into account by using GNI per capita (PPP, current international $), the difference is reduced (but still significant): 48166.8 / 1900.4 = 25.35 (See Week 2 materials for how to convert to a PPP rate) c. Which group of countries appear to be the least developed? Why? It is possible to make a case for both the Low-income economies group and the Sub-Saharan Africa group. Low-income economies: Lowest GNI per capita of all the groups (and this, or GDP per capita, is usually the benchmark for determining the welfare of an economy). Highest poverty rates (% of population) at both $2.15 and $3.65. Smallest urban population (%), and highest growth rate of rural population. Lowest consumption growth rate. Lowest literacy rates and % female participation in education, alongside low education expenditure (as a % of GDP) Lowest provision of domestic credit Lowest provision of broadband and mobile phones Lowest exports as a % of GDP, and lowest % of high-technology exports Sub-Saharan Africa: The main case for sub-Saharan Africa is based on health and mortality rates, including: lowest life expectancy (for males and females), lowest % of births attended by skilled health staff, highest under-5 mortality rate, highest prevalence of HIV in the working population. When making these comparisons, it is important to consider which countries are within the groups. For the low-income group, 23 countries are in sub-Saharan Africa, with only 5 countries falling outside of this region (Afghanistan - South Asia; Haiti - Latin America & Caribbean; Democratic People’s Republic of Korea (North Korea) - East Asia & Pacific; Syrian Arab Republic (Syria) - Middle East & North Africa; and Yemen - Middle East & North Africa) ECN102 Problem Set 1 - Solutions Q4. Globalisation and International Financial Institutions. a. Define globalisation and list some reasons why it has occurred. The process through which the world economy is becoming increasingly interconnected. Some reasons why it has occurred include: Reduction in transportation costs Decline in trade tariffs Move towards flexible exchange rates (enabling greater capital mobility) Increasing numbers of emerging markets adopting trade orientated policies b. The advantages and disadvantages of globalisation: Is globalisation a good or a bad thing? Why? What are the trade-offs that countries face in a globalising world? (Not sure? Watch the Core-Econ video: Dani Rodrik “Globalisation – the trade-offs”.) Advantages: Beneficial effects on long term growth – countries with high trade tariffs tend to have lower GDP per capita – trade liberalisation tends to boost GDP growth (and does not systematically affect inequality) Comparative advantage – all countries can benefit from trade, even if they are less productive in every industry than other nations. (Through specialisation in what they are least bad at) Broader access to a range of foreign products for consumers and companies. Increased liquidity of capital allowing investors in developed nations to invest in developing nations (and vice versa). Improved access to financial markets and external borrowing. FDI (and hence MNCs) may also ease the transfer of technological and business know how to poorer countries. Disadvantages: Countries are affected by the economic health of other countries. Potential loss of national sovereignty and cultural diversity International Trade: The more open an economy the more vulnerable it will be to changes in the level of economic activity in the rest of the world. This is a particular problem when a nation is heavily dependent on trade with one other nation (e.g. Canada on the US) or one other region (e.g. Switzerland on the EU). International Finance: Changes in interest rates in one country will affect financial flows to and from other countries, and hence their exchange rates, interest rates and national income. The larger the financial flows, the more will interest rate changes in one country affect the economies of other countries. There is a trade-off between national sovereignty, democracy, and hyperglobalisation. Rodrik (2012) defines this as the ‘fundamental political trilemma of the world economy’. It is not possible to simultaneously have frictionless movement of goods, services, capital and labour, democracy, and national sovereignty; one of these three must be given up. For example, the benefits of frictionless trade and frictionless movement of capital and labour as part of the EU, requires member states to adopt EU-wide legislation, which restricts the ability for countries to have nationally differentiated policies. ECN102 Problem Set 1 - Solutions Overall, in an economic sense, globalisation is positive as it has a positive effect on economic growth. But international institutions, such as the World Bank, IMF and WTO, are essential to co-ordinate national policies and to ensure that globalisation works efficiently. c. What are the roles of the World Bank, International Monetary Fund and World Trade Organisation? Why are these institutions important? (Hint: look at www.imf.org; www.worldbank.org; www.wto.org) World Bank – Main focus is the reduction of world poverty. Two goals for the world to achieve by 2030: 1) End extreme poverty by decreasing the % of the population living on less than $2.15 per day to less than 3%. 2) Promote shared prosperity by fostering the income growth of the bottom 40% for every country. Provide financial and technical assistance to developing countries. Policies aimed at helping poorest parts of society in the poorest nations. Provides long-term loans at low interest rates to developing countries. Lends funds for specific projects relating to poverty reduction. Provides grants/interest-free loans to very poorest countries. http://www.worldbank.org/en/about/what-we-do https://www.imf.org/external/np/exr/facts/imfwb.htm IMF – Main focus is achieving stability in the international monetary and financial system. 3 main functions: surveillance, technical assistance and lending assistance. Provides short-term loans to countries facing a balance of payments crisis (i.e. when a country has run out of foreign currency). Also provides loans to help fight poverty in developing countries. Provides policy advice to governments and central banks and provides a forum for cooperation on international monetary problems. Note that borrowing countries must accept stringent conditions on their future economic and financial policies. http://www.imf.org/external/about/whatwedo.htm World Trade Organisation – To administer existing WTO (and GATT) agreements To provide a forum for further trade negotiations To deal with trade disputes To monitor national trade policies To provide technical assistance and training to developing countries in trade related matters. Encourages Fair (not free) Trade – member countries must give each other the lowest level of trade tariffs they offer. http://www.wto.org/english/thewto_e/whatis_e/what_we_do_e.htm International institutions, such as the World Bank, IMF and WTO, are essential to co-ordinate national policies and to ensure that globalisation works efficiently. ECN102 Problem Set 1 - Solutions d. Are all countries members of the World Bank, International Monetary Fund and World Trade Organisation? No. There are 193 UN member states, compared with: IMF – 190 countries. Newest members – Nauru (April 2016) and Andorra (October 2020). World Bank – 189 countries (International Bank for Reconstruction and Development, IBRD) (a country must first join the IMF before becoming a member of the World Bank). Newest member – Nauru (April 2016). WTO – 164 countries (25 additional countries are currently observers; note that observers must start accession negotiations within five years of becoming observers 1.) Newest member – Afghanistan (July 2016) 1 With the exception of the Holy See (Vatican).