Chapter 1
A Tour of the World
Chapter Topics
 The United States
 The European Union
 Japan and East Asia
 Looking Ahead
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #2
Introduction
The Issues and Approach of Macroeconomics
 Chapter
1: A Macroeconomic Tour of the
World
• The U.S. expansion of the 1990’s
• The Euro
• Recession in Japan
• Crisis in Asia
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #3
Introduction
The Issues and Approach of Macroeconomics
 Chapter 2: A Tour of the Course
 Central
Variables of Macroeconomics
• Output
• Unemployment
• Inflation
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #4
Introduction--The Issues and
Approach of Macroeconomics
 Three time-frames of macroanalysis
 Short-run
 Medium-run
 Long-run
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #5
Introduction
First Stop: The United States
 Three measures of macroeconomic
analysis
 Output
 Unemployment
 Inflation
Blanchard: Macroeconomics
rate
rate
Chapter 1: A Tour of the World
Slide #6
The United States
Question for Discussion:
How does the U.S. measure up?
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #7
Growth, Unemployment, and
Inflation in the U.S., 1960-1999
1960
1997
1998
1999
(forecast)
3.1
3.9
3.7
1.5
Unemployment rate 6.0
4.9
4.6
5.0
Inflation rate
1.9
1.0
1.2
(in percent)
Output growth rate
Blanchard: Macroeconomics
4.0
Chapter 1: A Tour of the World
Slide #8
The United States
What do we observe?
The
1990’s began with a recession.
1991
ushered in an expansion.
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #9
The United States
The Expansion
 The 1998 growth (3.7%) was greater
than the 1960-1998 average growth rate
(3.1%).
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #10
The United States – The Expansion
 The unemployment rate declined in the
1990’s
 1998
rate (4.6%) was more than 1
percentage point less than the average
rate 1960-1998 (6.0%)
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #11
The United States – The Expansion
 Low inflation rate
 1998
inflation rate (1.0%) is 3 percentage
points below the 1960-1998 average
(4.0%)
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #12
The United States
 When will the U.S. business cycle shift
from expansion to recession?
 Signs of danger
 Low
 High
unemployment
stock market prices
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #13
The United States
Recession danger!
 Is unemployment too low?
 Maybe:
Low unemployment causes
inflation which leads to recession
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #14
The United States-Recession Danger!
 Is unemployment too low?
 Maybe
not: 1998 low unemployment
without a rise in inflation
 Changes
in the labor market (e.g. decline
in union power)
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #15
The United States
Two Long-term Issues
 A decrease in the average growth rate
 Increasing wage inequality
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #16
U.S. Output Growth Since 1950
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #17
The United States
Why has growth slowed down?
 Small changes in the growth rate mean
big differences in per capita output
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #18
The United States-Why has
growth slowed down?
 Average growth rate
 4%
from 1950 - 1973
 2.6%
from 1973 - 1998
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #19
The United States-Why has
growth slowed down?
 If we assume average growth rate for
1973 - 1998 was 4%.
 1998
output would be 38% higher
 1998
per capita output would be $41,000
instead of $29,800
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #20
The United States-Why has
growth slowed down?
 Some explanations
 Research
 Low
is less productive
investment in new capital
 Output
measures are underestimating the
growth rate
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #21
The United States
Why is wage inequality increasing?
 Two causes
 Increasing
 The
international trade
nature of technological progress
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #22
The United States
Real average wage 1979-1998
 For workers who did not complete high
school fell 1% per year
 For workers with graduate degrees rose
1% per year
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #23
The European Union
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #24
The European Union
Observations
 The European Union’s (EU) combined
output is about equal to the U.S.
 Per capita output of many EU countries
is equal to or higher than the U.S.
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #25
Growth, Unemployment, and
Inflation in the EU, 1960-1999
1960-1998
1997
1998
1999
(forecast)
3.1
2.7
2.8
2.2
Unemployment rate 6.4
11.2
10.6
10.3
1.8
1.8
1.8
(in percent)
Output growth rate
Inflation rate
Blanchard: Macroeconomics
5.7
Chapter 1: A Tour of the World
Slide #26
The European Union
The 1990’s
 Low growth rate (1998 -- 2.8%)
 High unemployment (1998 -- 10.6%)
 Low inflation (1998 -- 1.8%)
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #27
The European Union
Two challenges to the EU
 Reducing unemployment
 Transition to a common currency (Euro)
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #28
Unemployment rates: Europe
versus the United States, 1960 - 1998
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #29
The European Union
How to reduce high unemployment?
 Explaining the increase in EU
unemployment
 Labor
market rigidities
 Misguided
Blanchard: Macroeconomics
macroeconomic policies
Chapter 1: A Tour of the World
Slide #30
The European Union
What will the Euro do for Europe?
 Euro countries (11)
 The
EU countries minus Greece, Denmark,
Sweden, and U.K.
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #31
The European Union-What will the
Euro do for Europe?
 January 1, 1999
 European
countries fixed the parity of its
currency to the Euro
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #32
The European Union-What will the
Euro do for Europe?
 January 1, 2002
 Euro
currency will start circulating together
with national currencies
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #33
The European Union-What will the
Euro do for Europe?
 July 1, 2002
 The
Euro will be the only currency in
circulation (as in the U.S.)
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #34
The European Union-What will the
Euro do for Europe?
 Advantages of the Euro
 Symbolic
of a unified Europe
 Common
currency
• No exchange rates
• No need to exchange currency
• Create a world class economic power
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #35
The European Union-What will the
Euro do for Europe?
 Disadvantages of the Euro
 Common
monetary policy (interest rates)
cannot correct for differences in growth,
inflation, and unemployment rates among
countries
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #36
East Asia
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #37
Growth, Unemployment,
and Inflation Japan, 1960-1999
1960-1997
1997
1998
1999
(forecast)
5.8
0.8
-2.6
0.2
Unemployment rate 1.9
3.4
4.2
4.6
Inflation rate
0.6
0.7
-0.4
(in percent)
Output growth rate
Blanchard: Macroeconomics
4.8
Chapter 1: A Tour of the World
Slide #38
Growth, Unemployment,
and Inflation Japan, 1960-1999
 The Good News



1960 - 1997 growth
rates (5.8%) nearly
double the U.S. rate
(3.1%)
Japan’s output is onehalf of the U.S. ($8,000
billion)
Japan’s output per
capita ($33,000 is
greater than the U.S.
($29,800)
Blanchard: Macroeconomics
 The Bad News

Average growth since
1992 is less than 1.0%

Growth in 1998 was
-2.6%

1999 growth forecast is
0.2%

1998 unemployment
rate (4.2%) is a record
high
Chapter 1: A Tour of the World
Slide #39
Output Growth in
East Asian Countries, 1990 - 1999
1970-1997
1997
1998
5.2
7.5
5.5
6.8
4.7
7.8
5.1
-0.4
8.8
-4.5
0.0
-6.5
4.5
-15.5
-4.7
-0.5
-0.7
7.6
(in percent)
Hong Kong
Singapore
Korea
Taiwan
Indonesia
Malaysia
Philippines
Thailand
China
Blanchard: Macroeconomics
7.5
8.2
8.4
8.3
6.8
7.4
3.6
7.5
9.1
Chapter 1: A Tour of the World
1999
(forecast)
1.5
0.5
0.5
4.0
-3.0
-0.5
2.0
2.0
7.7
Slide #40
Japan and East Asia
The Asian Miracle
 The four tigers: Hong Kong, Singapore,
Korea, Taiwan
 1970
- 1997 growth rates of 8%
 Hong
Kong and Singapore per capita
output about equal to U.S.
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #41
Japan and East Asia-The Asian
Miracle
 Remaining Asian countries
 High growth rates 1970 - 1997
 Per capita output was low but is rising rapidly
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #42
The Fall in East Asian Stock Prices and
Currencies, January 1997 to April 1998
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #43
The Fall in East Asian Stock Prices and
Currencies, January 1997 to April 1998
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #44
Japan and East Asia
The Asian Crisis
 1997 --- Thailand sell-off of stocks and
bonds
 1998 -- Spread to rest of Asia
 1999 -- Negative growth
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #45
Japan and East Asia
What was the cause of the Asian crisis?
 Speculative attacks against the currency
 Structural problems
 Corruption
 Poor regulation of financial institutions
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #46
Japan and East Asia
What do you think?
 Is the Asian crisis over?
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #47
Looking Ahead
 We will develop tools to address the
macroeconomic questions.
 What
determines expansions and
recessions?
 What
are the interactions between the
stock market, foreign exchange market,
and economic activity?
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #48
Looking Ahead
 Why is inflation so much lower in the
1990s?
 Can the unemployment rate be too low?
 What causes unemployment
 Why do growth rates differ?
Blanchard: Macroeconomics
Chapter 1: A Tour of the World
Slide #49
End of Chapter
A Tour of the World