Chapter 1
A Tour of the World
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•
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Output, Unemployment,
and Inflation
Macroeconomic tour of
the world.
The economic crisis and
its aftermath.
A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
From 2000 to 2007 the world economy had a
sustained expansion.
• Annual average world output growth was 4.0%,
Advanced economies growing at 2.6% per year;
Emerging (developing) economies: 6.6% per year.
In 2007: signs that the expansion was coming to
an end started to appear.
•
House prices decline – financial crisis.
•
On September 15, 2008, a major bank, Lehman
Brothers, went bankrupt.
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
• This financial crisis quickly turned into a major
economic crisis.
• Stock prices collapsed.
• Stock market prices in the rest of the world
decreased by as much as their U.S.
counterparts.
• Americans sharply cut their consumption.
• Auto sales plummeted.
• In the third quarter of 2008, U.S. output growth
turned negative and remained so in 2009.
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
The U.S. crisis quickly became a world crisis.
Two channels:
1. As U.S. consumers/firms cut spending, part of
the decrease fell on imports of foreign goods.
2. U.S. banks, badly needing funds in the United
States, repatriated funds from other countries
Not just a U.S. but a world recession.
• 2009: average growth in advanced economies
was –3.5% (the lowest annual growth rate
since the Great Depression).
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
Policy responses to the crisis
• Strong monetary and fiscal policies and slow
repair of the financial system:
• Canada ant the United States economies
have returned to positive (slow) growth.
• The euro area continues to struggle.
Monetary Policy: reduction in interest rates.
Fiscal Policy: increase government spending or
reduce taxes together.
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
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A Tour of the World
1-1 | The World Economic Crisis in 2008 and 2009
Crisis aftermath
1. High unemployment;
2. Low output growth;
3. Large budget deficits.
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A Tour of the World
1-2 | Canada
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A Tour of the World
1-2 | Canada
Three basic variables:
• Output growth: rate of change of output.
• The unemployment rate: proportion of
workers in the economy who are not
employed and are looking for a job.
• The inflation rate: rate at which the
average price of the goods in the economy
is increasing over time.
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A Tour of the World
1-2 | Canada
Canada is a tiny portion of the world economy
• 2.5% of world output.
The standard of living in Canada is very high
• $51,400 US per person per year of output
• Slightly higher than that in the United States.
Although Canada did not cause the crisis, it was
severely affected by it.
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A Tour of the World
1-2 | Canada
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A Tour of the World
1-3 | The United States
The recession in the United States was more
severe that the recession in Canada.
• Two years of negative output growth (2008-9)
• Unemployment peaked at 9.6% in 2009.
• Inflation was negative (2009).
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A Tour of the World
1-3 | The United States
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A Tour of the World
1-4 | The Euro Area
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A Tour of the World
1-4 | The Euro Area
• Pre-crisis period (from 2000 to 2007): the euro
area was not doing as well as the United States
or Canada.
• Output growth was lower.
• Unemployment was substantially higher.
• Inflation was low.
• Overall picture: slowly growing economy with
high unemployment.
• Crisis made things worse.
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A Tour of the World
1-4 | The Euro Area
The euro area faces two main issues:
1. How to reduce unemployment.
2. How to function efficiently as a
common currency area.
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A Tour of the World
1-4 | The Euro Area
How Can European Unemployment Be Reduced?
Source of the problem: labour market institutions.
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European states protect workers too much.
It is expensive for firms to lay off workers.
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This policy deters firms from hiring workers.
Governments
insurance.
•
provide
generous
unemployment
Decrease incentives for the unemployed to look for jobs.
A solution: government should be less protective, to
eliminate these labour market rigidities.
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A Tour of the World
1-4 | The Euro Area
What Has the Euro Done for Its Members?
Economic advantages of having a common currency:
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no more changes in the relative price of currencies
removal of other obstacles to trade among European
countries
creation of a large economic power in the world
Common monetary policy
•
same interest rate across the euro countries.
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A Tour of the World
1-4 | The Euro Area
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A Tour of the World
1-5 | China
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A Tour of the World
1-5 | China
Why is so much attention paid to China?
Three reasons.
1. The population of China is enormous, more than four
times that of the United States.
2. Output per person in China is estimated to be about
$7500, roughly one-sixth of the output per person in
the United States.
3. China has been growing rapidly for more than three
decades.
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A Tour of the World
1-5 | China
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A Tour of the World
1-5 | China
Where does the growth come from?
• High accumulation of capital.
• The investment rate in the United States is about
17%. In China, it is 40%.
• Rapid technological progress.
• By making Chinese firms work with and learn from
foreign firms, the productivity of the Chinese firms
has increased dramatically..
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A Tour of the World
1-6 | Looking Ahead
• India: another poor and large country, with a population
of 1.2 billion people, like China, could grow in output
per person very quickly in the future.
• Japan: since a stock market crash in the early 1990s,
Japan has been in a prolonged slump, with average
output growth under 1% per year. Inflation has often
been negative.
• Latin America: from very high inflation to low inflation
in the 1990s. Many countries, such as Chile and Brazil,
appear to be in good economic shape and have done
relatively well in the crisis.
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A Tour of the World
1-6 | Looking Ahead
• Central and Eastern Europe: shifted from central
planning to a market system in the early 1990s.
• Sharp decline in output at the start of
transition.
• Many of these countries are working
toward joining the euro area.
• Africa: decades of economic stagnation.
• Growth has been high since 2000,
averaging 5.5% per year.
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