Deck 21: Structural Stagnation and Globalization

Question 1

Explain graphically and with words the effect of expansionary fiscal policy in the globalized AS/AD model.

Answer 1

In the graph shown, the quantity of aggregate demand at P_W is Y₀.Domestic producers supply Y₁, creating a trade deficit of Y₀- Y₁.Expansionary fiscal policy shifts the AD curve out to the right to AD₁.Aggregate quantity demanded rises to Y₂ and the trade deficit rises to Y₂- Y₁.

Question 2

What is meant by import-led stagnation?

Answer 2

An import-led stagnation is slow growth caused by the structural problems accompanying globalization.According to the structural stagnation hypothesis, the U.S.trade deficit has a significant impact on employment-at $30,000 a job, a $550 billion trade deficit translates into more than 2 million fewer jobs for the United States than if there was no trade deficit and everything else was identical.Simply put, the trade deficit translates into higher unemployment and lower potential output until these displaced workers find new jobs in different fields that are competitive in the globalized economy.

Question 3

Explain how globalization can limit a country's potential output.

Answer 3

A world price for goods below the U.S.price of goods enables U.S.consumers to consume more than they had previously.But it also makes it harder for U.S.producers to sell their goods, which means that, due to structural reasons, international competitive forces put a limit on domestic potential output.If potential output were determined only by the physical existence of workers and factories, potential output would not have fallen.But according to the structural stagnation hypothesis, potential output depends on more than physical productive capacity; it depends on the wages, technology, and global competitive conditions, and when trade deficits are possible, globalization can reduce the amount a high-wage developed country can competitively produce.

Question 4

What would tariffs do to unemployment caused by globalization? Why do most economists not favor using tariffs?

Question 5

What does a fall in the exchange rate do to a country's potential output and long run aggregate supply?

Question 6

How does the world supply curve change if a country's inflation is lower than the world's inflation?

Question 7

Explain the role that globalization and technological change play in the structural stagnation hypothesis.

Question 8

Why does fiscal policy in the globalized AS/AD model have a different effect than fiscal policy in the standard AS/AD model?

Question 9

Why is it often empirically difficult to differentiate a structural stagnation from a standard recession?

Question 10

As India and China move up the value added chain, how will the effect of globalization likely change on US workers?

Question 11

How does the existence of a nontradable sector change the implications of the globalized AS/AD model?

Question 12

What adjustment forces would one have expected to resolve structural stagnation in the globalized AS/AD model? Why didn't they occur in the recent U.S.case?

Question 13

What do almost all the "solutions" to the structural stagnation problem have in common?

Question 14

According to the text, how does structural stagnation differ from secular stagnation?

Question 15

Why are deficits of less concern when used to fight a standard recession than when they are used to fight structural stagnation?

Question 16

State the structural stagnation hypothesis

Question 17

Distinguish between a normal business cycle and structural stagnation.

Question 18

What are three ways in which a country might deal with a structural stagnation?

Question 19

Would you be more likely to advise expansionary fiscal policy in a structural stagnation or in a standard recession? Why?

Question 20

Would a person in a developed country be better off in an industry producing commodities or an industry producing specialized goods when globalization is occurring?

Question 21

Explain using the AS/AD model how a positive resource shock can help solve a structural stagnation problem?

Question 22

Demonstrate what would happen to a country's trade deficit if the value of a country's exchange rate fell.Assume the economy begins with LAS, SAS and WAS₀.