A Tour of the
World
Chapter 1
Chapter 1 Outline
A Tour of the World
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The Crisis
The United States
The Euro Area
China
Looking Ahead
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A Tour of the World
• What is macroeconomics? The best way to answer
this question is to take you on an economic tour of
the world.
• The goal of this chapter is to give you a sense of
these recent events and of some of the
macroeconomic issues confronting different
countries today.
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1-1 The Crisis
• From 2000 to 2007, the world economy had a
sustained expansion.
• In 2007, U.S. housing prices started declining,
leading to a major financial crisis.
• The financial crisis turned into a major economic
crisis with falling stock prices.
• In the third quarter of 2008, U.S. output growth
turned negative and remained so in 2009.
• Through the trade and financial channels, the U.S.
crisis quickly became a world crisis.
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1-1 The Crisis
Figure 1-1 Output Growth Rates for the World Economy, for
Advanced Economies, and for Emerging and Developing Economies,
2000–2014
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1-1 The Crisis
Figure 1-2 Stock prices in the United States, the Euro area, and
emerging economies, 2007–2010
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1-2 The United States
• The United States is big
– With an output of $17.4 trillion in 2014, it accounted or
23% of world output.
• The U.S. standard of living is high
– Output per capita is $54,000, close to the highest in the
world.
• Economists also look at:
– Output growth
– Unemployment rate
– Inflation rate
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1-2 The United States
Figure 1-3 The United States, 2014
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1-2 The United States
• The U.S. economy in 2015 was in decent shape, leaving
much of the effects of the 2008-2009 crisis behind.
Table 1-1 Growth, Unemployment, and Inflation in the United
States, 1990–2015
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1-2 The United States
• The federal funds rate—the interest rate the Fed controls—
went from 2.5% in July 2007 to nearly 0% in December
2008.
Figure 1-4 The U.S. Federal Funds Rate since 2000
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1-2 The United States
• Why did the Federal Funds rate stop at zero?
– This constraint is known as the zero lower bound.
– If it were negative, then everyone would hold cash rather
than bonds.
• Why are low interest rates a potential issue?
– Low interest rates limit the Fed’s ability to respond to
further negative shocks.
– Low interest rates may lead to excessive risk taking by
investors to increase their returns.
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1-2 The United States
• Productivity growth is important for a sustained increase in
income per person, but since 2010, it has been only about
half as it was in the 1990s.
• The slowdown in productivity growth is worrisome because
the standard of living especially for the poor may not
increase.
Table 1-2 Labor Productivity Growth, by Decade
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1-3 The Euro Area
• The European Union (EU) is a group of 28
European counties with a common market.
• In 1999, the EU formed a common currency area
called the Euro area, which replaced national
currencies in 2002 with the euro.
• The Euro area faces two main issues today:
– How to reduce unemployment?
– How to function efficiently as a common currency area?
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1-3 The Euro Area
• While the United States recovered from the 2008–2009
crisis, output growth in the Euro area remained close to zero
between 2010 and 2014.
• In 2015, output growth was below the pre-crisis average and
the unemployment rate was 11.1%.
Table 1-3 Growth, Unemployment, and Inflation in the Euro Area,
1990–2015
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1-3 The Euro Area
Figure 1-5
The Euro area, 2014
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1-3 The Euro Area
• While the average unemployment rate for the
Euro area was 11.1% in 2015, countries like
Spain had an unemployment rate of 23%.
• Much of the high unemployment rate was the
result of the crisis.
• Even when Spain had its lowest unemployment
rate of 9%, it was nearly twice that of the
United States.
• Some economists believe labor market rigidities
with too much protection for workers are the
main problem.
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1-3 The Euro Area
Figure 1-6
Unemployment in Spain since 1990
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1-3 The Euro Area
• Supporters of the euro argue:
– economic advantages due to no more changes in
exchange rates
– its contribution to the creation of a large economic
power
• Others argue:
– the drawback of a common monetary policy across
euro countries
– the loss of the exchange rate as an adjustment
instrument within the euro area
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1-4 China
• China is in the news every day.
• Its population is more than four times that of
the United States.
• But its output at $10.4 trillion is only about 60%
of the United States.
• Output per person is roughly 15% of that of the
United States.
• China has been growing very rapidly for more
than three decades.
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1-4 China
Figure 1-7 China, 2014
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1-4 China
• China’s rapid output growth has been driven by high
accumulation of capital and technological progress.
• The slowdown after the crisis is considered to be desirable
as more of output would go to consumption instead of
investment.
Table 1-4 Growth, unemployment and Inflation in China, 1990–2015
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1-5 Looking Ahead
• We could have also looked at other regions like
India, Japan, Latin America, Central and Eastern
Europe, and Africa.
• You could have also thought about the issues
triggered by the crisis, how monetary and fiscal
policies can be used to avoid recessions, and
why growth rates differ so much across
countries.
• The purpose of this book is to give you a way of
thinking about these issues.
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