When we move away from looking at individual economies and their dealings with the rest of the world to examining the operation of the world economy as a whole, the BP schedule introduced in previous chapters loses its relevance. The world economy does not trade with, lend to, or borrow from other economies. In essence we are back within the confines of the closed economy model which is conventionally represented by the IS-LM framework.
KeywordsExchange Rate Monetary Policy Aggregate Demand Flexible Exchange Rate International Reserve
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Notes and References
- 1.We do not, in this chapter, attempt to provide a theoretical explanation of the world’s macroeconomic performance over recent years. However, elements that enter into such an explanation are discussed. Readers interested in a fuller discussion of this topic may consult, for example, chapter 2 of Graham Bird’s, World Finance and Adjustment: An Agenda for Reform (London: Macmillan, 1985).CrossRefGoogle Scholar
- 2.Readers not familiar with the Phillips curve should consult an introductory text in macroeconomics. Basically, the curve shows the different combinations of inflation and unemployment that can be sustained by an economy; the general notion is that lower inflation can only be bought at the cost of higher unemployment and that governments therefore have to make a choice according to their policy priorities.Google Scholar
- 3.It was this kind of logic which underpinned the claim made in the Brandt Report that a massive transfer of resources from rich to poor countries would be in the mutual interests of both groups of countries, see Willy Brandt et al., North-South: A Programme for Survival; first report of the Brandt Commission (London: Pan Books, 1980).Google Scholar