Is Macroeconomics Different in Developing Countries?

Abstract

AbstractThough macroeconomics was developed for developed countries, developing countries often use this corpus of knowledge — with its competing schools of thought — without any significant modification. It is by no means clear that applying these theories to developing countries is either justified or appropriate. This chapter examines the differences in macroeconomic policy between developing and developed countries. The basic macroeconomic aggregates: output, employment, and inflation are, of course, the same for both developed and developing economies. So too are the basic identities and equilibrium conditions: savings must still equal investment, output must equal income, and aggregate demand is the sum of consumption, investment, government expenditures, and net exports. However, systematic differences between the economies of developed and developing countries and between developing countries themselves, such as the relative effectiveness of macroeconomic tools, give rise to large variation in economic outcomes and policy choices.