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 production 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 world financial markets?
c. How would the change you describe in part (b) affect the world interest rate?
d. How would the change in the world interest rate you describe in part (c) affect the trade balance in rich nations?