Question

A case 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 toward surplus. Let's consider why this might be the case. a. If the world's poor nations offer better pro duction efficiency and legal protection, what would happen to the investment demand function in those countries? b. How would the change you describe in part (a) affect the demand for loanable funds in c. How would the change you describe in part d. How would the change in the world interest world financial markets? (b) affect the world interest rate? rate you describe in part (c) affect the trade balance in rich nations?

Answer 1

Step-by-step explanation:

a. If poor nations offered better production efficiency and legal protections, then the marginal product of capital would rise. To increase the amount of capital that they have, firms need to increase the amount of investment. Hence, their investment demand curve shifts out at any given interest rate, firms have a higher level of investment spending than they did previously.

b. Assuming that together, the poor nations account for a noticeable share of world demand for investment, the demand for loanable funds in world financial markets rises.

c. In global financial markets, the increase in demand for loanable funds raises the interest rate.

d. For rich countries, the increase in global interest rates reduces desired investment. Hence, S - I(r) rises, which means that the trade balance rises

Answer 2

A. If the world's poor nations offer better production efficiency and legal protection, then 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. the change in affect the world is Interest rates (the price of loanable funds) should increase if demand shifts to the right.

D. 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.

Step-by-step explanation: