A Tour of the World Chapter 1 Chapter 1 Outline A Tour of the World 1-1 1-2 1-3 1-4 1-5 The Crisis The United States The Euro Area China Looking Ahead Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-2 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. Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-3 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. Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-4 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-5 1-1 The Crisis Figure 1-2 Stock prices in the United States, the Euro area, and emerging economies, 2007–2010 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-6 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-7 1-2 The United States Figure 1-3 The United States, 2014 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-8 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-9 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-10 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. Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-11 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-12 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? Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-13 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-14 1-3 The Euro Area Figure 1-5 The Euro area, 2014 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-15 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. Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-16 1-3 The Euro Area Figure 1-6 Unemployment in Spain since 1990 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-17 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-18 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. Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-19 1-4 China Figure 1-7 China, 2014 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-20 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 Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-21 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. Copyright ©2017 Pearson Education, Ltd. All rights reserved. 1-22