The cdase study in this chapter concludes that if poor nations offered better pr

Question

The cdase study in this chapter concludes that if poor nations offered better production efficiency and legal protections, the trade balance in rich nations such as the United States would move towards surplus.

A. If the world's poor nations offer better production efficiency and legal protection, what would happen to the investment demand function of those countries?

B. How would the change you describe in part (a) affect the demand for loanable funds in world financial markets?

C. How would the change you describe in (b) affect the world interest rate?

D. How would the change you describe in part (c) affect the trade balance in rich nations?

Explanation / Answer

A. Reduction in risk should increase investment demand. B. Increased production efficiency should increase the demand for loanable funds as developing nations borrow capital in order to grow. C. Interest rates (the price of loanable funds) should increase if demand shifts to the right. D. On the one hand, firms that are engaged in more development will need to purchase more input goods. And these input goods may be used to produce more output goods domestically because legal protection has increased and created a safer market. On the other hand, most firms in developing countries are heavy exporters. So, more production may just lead to more exporting. It is not possible to distinguish which of these influences will be stronger.

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