1 / 27

A Tour of the World

A Tour of the World. Figure 1 - 1. The United States. 1-1 The United States. When macroeconomists study an economy, they first look at three variables: Output The unemployment rate The inflation rate. 1-1 The United States.

vernieg
Download Presentation

A Tour of the World

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. A Tour of the World Figure 1 - 1 The United States

  2. 1-1 The United States • When macroeconomists study an economy, they first look at three variables: • Output • The unemployment rate • The inflation rate

  3. 1-1 The United States • The period 1996-2006 was one of the best decades in recent memory: • The average rate of growth was 3.4% per year. • The average unemployment rate was 5.0%. • The average inflation rate was 2.0%.

  4. Has the United States Entered a New Economy? 1-1 The United States Figure 1 - 2 Rate of Growth of Output per Hour in the United States Since 1960. The average rate of growth of output per hour appears to have increased again since the mid-1990s.

  5. 1-1 The United States Figure 1 - 3 The U.S.Trade Deficit Since 1990 Should We Worry About the U.S. Trade Deficit? The trade deficit increased from about 1% of output in 1990 to about 6% of output in 2006.

  6. 1-2 The European Union Figure 1 - 4 The European Union

  7. 1-2 The European Union

  8. 1-2 The European Union The economic performance of the five countries in Table 1-2 has been far less impressive than that of the United States over the same period: • Average annual output growth from 1996 to 2006 was only 2.0%. • Low-output growth was accompanied by persistently high unemployment. • The only good news was about inflation. Average annual inflation for these countries was 1.8%, much lower than the 5.4% average over the period 1970 to 2006.

  9. 1-2 The European Union • Two issues dominate the agenda of European macroeconomists: • High unemployment • Common currency

  10. 1-2 The European Union Figure 1 - 5 Unemployment Rates: Continental Europe Versus the United States Since 1970 How Can European Unemployment Be Reduced? The unemployment rate in the four largest continental European countries has gone from being much lower than the U.S. unemployment rate to being much higher.

  11. 1-2 The European Union There is still disagreement about the causes of high European unemployment: • Politicians often blame macroeconomic policy. • Most economists believe, however, that the source of the problem is labor market institutions. • Some economists point to what they call labor market rigidities. • Other economists point to the fact that unemployment is not high everywhere in Europe. How Can European Unemployment Be Reduced?

  12. 1-2 The European Union • Supporters of the Euro point first to its enormous symbolic importance. • Others worry that the symbolism of the euro may come with some economic costs. What Will the Euro Do for Europe?

  13. 1-3Japan Figure 1 - 6 Japan 2003

  14. 1-3Japan Since 1960, Japan’s output has grown at an average annual growth rate of 47.%, 1.5% higher than the growth rate of the U.S. over the same time period. This is the good news.

  15. 1-3Japan • In the Japanese economy, the bad news is: • The average annual rate of growth of output from 1994 to 2000 was only 1.4%. • The unemployment rate steadily increased. • As a result of high unemployment, the inflation rate decreased and eventually turned negative.

  16. What Triggered the Slump? Figure 1 - 7 The Japanese Stock Market Index since 1980 The large increase in the index in the second half of the 1980s was followed by an equally sharp decline in the early 1990s.

  17. What Triggered the Slump? • The trigger for the slump of the 1990s can be found in the striking movements in Japanese stock prices from the mid-1980s to the early 1990s. In general, stock prices move for one of two reasons: • The fundamentals. Anticipation of higher expected profits lead investors to pay higher stock prices. • Speculative bubbles, or fads, where investors buy stocks at high prices hoping to resell them at even higher prices in the future.

  18. Both monetary and fiscal policy were used to increase demand and thereby increase output: The Japanese central bank decreased interest rates to very low levels. The Japanese government increased spending on public works and cut taxes to stimulate spending by consumers and firms. Crucial role of the banking system: cleaning up and consolidating bad loans took long How Will Japan Recover?

  19. 1-4 China Figure 1 - 6 China

  20. 1-4 China Since 1980, Chinese output has grown at close to 10% per year, and the forecasts are for more of the same. This is a truly astonishing number: Compare it to the 3.1% number achieved by the U.S. economy over the same period. At that rate, output doubles every 7 years.

  21. 1-5 Looking Ahead These are the questions to which you have been exposed in this chapter: • What determines expansions and recessions? Can monetary policy be used to prevent a recession in the United States? How will the Euro affect monetary policy in Europe? • Why is inflation so much lower today than it was in the past? Can Europe reduce its unemployment rate? Should the United States reduce its trade deficit? • Why do growth rates differ so much across countries, even over long periods? Has the United States entered a New Economy, in which growth will be much higher in the future? Can other countries emulate China and grow at the same rate?

  22. The global economy in 2008 • The „Great Moderation” between about 1984-2007 seems to have come to an end • A time of high growth and low inflation • Attributed to either better monetary policy, or smaller shocks, or both • Also, high growth in emerging markets (China) pushed down manufacturing prices • Today almost all macroeconomic problems are coming back, plus change • Dramatic growth slowdown • Inflation has shot up due to prices of primary products • The „subprime” problem: bursting housing bubble leading to a „credit crunch”

  23. What can policy do? • Monetary policy • Threat of recession: cut interest rate • Threat of inflation: increase interest rate • Credit crunch: provide liquidity • Fiscal policy • Increase spending • Cut taxes • Budget deficit, Ricardian households? • Problems • Relative price change: must run its course • Liquidity: trust, balance sheets have to be cleaned up

  24. Gathering Macro Data • International organizations, such as the Organization for Economic Cooperation and Development (OECD), gather data for the richest countries. • For countries that are not members of the OECD, one of the main sources of information is the International Financial Statistics (IFS), published by the International Monetary Fund (IMF). • The IMF also publishes, twice a year, the World Economic Outlook, an assessment of macroeconomic developments in various parts of the world. • In the United States, an extremely good annual resource is the Economic Report of the President, prepared by the Council of Economic Advisors.

  25. Key Terms • European Union (EU) • Organization for Economic Cooperation and Development (OECD) • International Monetary Fund (IMF)

More Related