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Protests in greece

This is a photo of young people marching through a street holding a sign with Greek writing on it.
The economic conditions in Greece have deteriorated from the Great Recession such that the government had to enact austerity measures, (strict rules) cutting wages and increasing taxes on its population. Massive protests are but one byproduct. (Credit: modification of work by Apostolos/Flickr Creative Commons)

Many nations are taking steps to reduce the risk that their economy will be injured if foreign financial capital takes flight, including having their central banks hold large reserves of foreign exchange and stepping up their regulation of domestic banks to avoid a wave of imprudent lending. The most controversial steps in this area involve whether countries should try to take steps to control or reduce the flows of foreign capital. If a country could discourage some of the inflow of speculative short-term capital, and instead only encourage investment capital that was committed for the medium term and the long term, then it could be at least somewhat less susceptible to swings in the sentiments of global investors.

If economies participate in the global trade of goods and services, they will also need to participate in international flows of financial payments and investments. These linkages can offer great benefits to an economy. However, any nation that is experiencing a substantial and sustained pattern of trade deficits, along with the corresponding net inflow of international financial capital, has some reason for concern. During the Asian Financial Crisis in the late 1990s, countries that grew dramatically in the years leading up to the crisis as international capital flowed in, saw their economies collapse when the capital very quickly flowed out.

Market-oriented economic reforms

The standard of living has increased dramatically for billions of people around the world in the last half century. Such increases have occurred not only in the technological leaders like the United States, Canada, the nations of Europe, and Japan, but also in the East Asian Tigers and in many nations of Latin America and Eastern Europe. The challenge for most of these countries is to maintain these growth rates. The economically-challenged regions of the world have stagnated and become stuck in poverty traps. These countries need to focus on the basics: health and education, or human capital development. As [link] illustrates, modern technology allows for the investment in education and human capital development in ways that would have not been possible just a few short years ago.

Solar-powered technology

This photograph shows several students gathered around a single laptop that has been powered with solar energy.
Modern technologies, such as solar-power and Wi-Fi, enable education to be delivered to students even in remote parts of a country without electricity. These students in Ghana are sharing a laptop provided by a van with solar-power. (Credit: EIFL/Flickr Creative Commons)

Other than the issue of economic growth, the other three main goals of macroeconomic policy—that is, low unemployment, low inflation, and a sustainable balance of trade—all involve situations in which, for some reason, the economy fails to coordinate the forces of supply and demand. In the case of cyclical unemployment, for example, the intersection of aggregate supply and aggregate demand occurs at a level of output below potential GDP. In the case of the natural rate of unemployment, government regulations create a situation where otherwise-willing employers become unwilling to hire otherwise-willing workers. Inflation is a situation in which aggregate demand outstrips aggregate supply, at least for a time, so that too much buying power is chasing too few goods. A trade imbalance is a situation where, because of a net inflow or outflow of foreign capital, domestic savings are not aligned with domestic investment. Each of these situations can create a range of easier or harder policy choices.

Youth unemployment: three cases

Spain and South Africa had the same high youth unemployment in 2011, but the reasons for this unemployment are different. Spain’s youth unemployment surged due to the Great Recession of 2008–2009 and heavy indebtedness on the part of its citizens and its government. Spain’s current account balance is negative, which means it is borrowing heavily. To cure cyclical unemployment during a recession, the Keynesian model suggests increases in government spending—fiscal expansion or monetary expansion. Neither option is open to Spain. It currently can borrow at only high interest rates, which will be a real problem in terms of debt service. In addition, the rest of the European Union (EU) has dragged its feet when it comes to debt forgiveness. Monetary expansion is not possible because Spain uses the euro and cannot devalue its currency unless it convinces all of the EU to do so. So what can be done? The Economist , summarizing some of the ideas of economists and policymakers, suggests that Spain’s only realistic (although painful) option is to reduce government-mandated wages, which would allow it to reduce government spending. As a result, the government would be able to lower tax rates on the working population. With a lower wage or lower tax environment, firms will hire more workers. This will lower unemployment and stimulate the economy. Spain can also encourage greater foreign investment and try to promote policies that encourage domestic savings.

South Africa has more of a natural rate of unemployment problem. It is an interesting case because its youth unemployment is mostly due to the fact that its young are not ready to work. This is commonly referred to as an employability problem. According to interviews of South African firms as reported in the Economist , the young are academically smart but lack practical skills for the workplace. Despite a big push to increase investment in human capital, the results have not yet borne fruit. Recently the government unveiled a plan to pay unemployed youth while they were “trained-up” or apprenticed in South African firms. The government has room to increase fiscal expenditure, encourage domestic savings, and continue to fund investment in education, vocational training, and apprentice programs. South Africa can also improve the climate for foreign investment from technology leaders, which would encourage economic growth.

India has a smaller youth employment problem in terms of percentages. However, bear in mind that since this is a populous country, it turns out to be a significant problem in raw numbers. According to Kaushik Basu, writing for the BBC, “there are 45 national laws governing the hiring and firing decisions of firms and close to four times that amount at the state level”. These laws make it difficult for companies to fire workers. To stay nimble and responsive to markets, Indian companies respond to these laws by hiring fewer workers. The Indian government can do much to solve this problem by adjusting its labor laws. Essentially, the government has to remove itself from firms’ hiring and firing decisions, so that growing Indian firms can freely employ more workers. Indian workers, like those in South Africa, do not have workforce skills. Again, the government can increase its spending on education, vocational training, and workforce readiness programs.

Finally, India has a significant current account deficit. This deficit is mainly a result of short- and long-term capital flows. To solve this deficit, India has experimented by lifting the limitation on domestic savers from investing abroad. This is a step in the right direction that may dampen the growth in the current account deficit. A final policy possibility is to improve domestic capital markets so many self-employed Indians can get access to capital to realize their business ideas. If more Indians can get access to capital to start businesses, employment might increase.

Key concepts and summary

There are many legitimate concerns over possible negative consequences of free trade. Perhaps the single strongest response to these concerns is that there are good ways to address them without restricting trade and thus losing its benefits. There are two major issues involving trade imbalances. One is what will happen with the large U.S. trade deficits, and whether they will come down gradually or with a rush. The other is whether smaller countries around the world should take some steps to limit flows of international capital, in the hope that they will not be quite so susceptible to economic whiplash from international financial capital flowing in and out of their economies.


Edwards, S. (n.d.). “America’s Unsustainable Current Account Deficit.” National Bureau of Economic Research Digest . http://www.nber.org/digest/mar06/w11541.html. http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta.

New Country Classifications | Data. (n.d.). Accessed January 14, 2014. http://data.worldbank.org/news/new-country-classifications.

Office of the United States Trade Representative: Executive Office of the President. “North American Free Trade Agreement (NAFTA).”

Why India’s Labour Laws are a Problem. (2006, May 18). BBC . May 18, 2006. http://news.bbc.co.uk/2/hi/south_asia/4984256.stm.

Questions & Answers

give the characteristics of good money?
Chok Reply
suppose that there is a positive aggregate demand shock. what graph most accurately show how this would affect the aggregate demand-aggregate supply model?
Shielyn Reply
ppf and ad/as
if there is advance technology in the fishing industry, how will this change in supply and demand
El Reply
increase Supply, since technology in fishing will increase the efficiency of fishing , higher productivity and thus lower per unit cost of production, which incentive producers to increase their supply. demand wise, not so sure. depends on what exactly is the advancement in tech.
how many types of natural rate of unemployment
Trina Reply
what is macro economic
muniira Reply
in the year 1933, Ragnar Frisch used the term macro
factors that determine the country material standard ?
Serena Reply
population divide by gdp in currency analysis
what is the important of studying economics
Akurugu Reply
economics teaches you how to think not what think
in order to know how our country operates and corporate with other countries based on the international marketing and to know how our economy is doing regarding incomes going in and out through exchange of goods and services,we have to study more about economics to gain more and better understanding
important studying economic is make a choice under the condition of scarcity
is labour a intermediate good or final good
umer Reply
what is economics
Mahamed Reply
Economic is science, which Studies human behaviour and who they are earn and spend
economics is the science which shows how can use scare resources among society
economic is a science which study human behavior as a result relationship between ends at scarce means which have more than one use
simply, economics is a science which studies human wants,
Economy is knowledge of choice
how to derive the equation for the equilibrium level of national income in an open economy with no taxes
loise Reply
what is inflation?
Herry Reply
when price goes up with some shottime
Give me 5 example for Macro economics
Neha Reply
1. Markets 2. Market Failure 3. Competition 4. Price Stability 5. Efficiency
please can you explain markets and markets failure ?
When we talk about Markets as an example of macroeconomics, we look at demand and supply in labor market.
Then for market failures, we focus on market inefficiencies and failures such as the destruction of common goods due to economic systems that provide no incentive for their preservation
Who is a discourage worker.?
a discourage worker is simply a worker who stop looking for a job because he/she believe no job is available for them..
sloping curve normal
Mirasol Reply
A normal sloping curve
State what happen to the aggregate supply curve for beef. The price of beef decrease
i think there is positive relationship between price n supply so as the price decreases the supply curve so decreases and vice versa
quantity supply will decrease,less.profit for firms in a perfectly competitive market i guess
A normal sloping curve
what are varriable of macro economics
maryam Reply

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