© 2003 Prentice Hall Business PublishingMacroeconomics, 3/eOlivier Blanchard Prepared by: Fernando Quijano and Yvonn Quijano 1 C H A P T E R A Tour of the World

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The United States, 2000 The United States,

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The United States Table 1-1 Growth, Unemployment, and Inflation in the United States, (in percent) (average) (average) (forecast) Output growth rate Unemployment rate Inflation rate Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The United States Table 1-1 Growth, Unemployment, and Inflation in the United States, (in percent) (average) (average) (forecast) Output growth rate Unemployment rate Inflation rate Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.  From an economic point of view, the period was one of the best in recent memory.  Output growth was positive for nine years in a row.  Sustained growth was associated with a stead increase in employment and a steady decrease in the unemployment rate.  The inflation rate remained low throughout the period.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The United States Table 1-1 Growth, Unemployment, and Inflation in the United States, (in percent) (average) (average) (forecast) Output growth rate Unemployment rate Inflation rate Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.  The U.S. economy did poorly in 2001:  Output growth is projected to be 1.1%, a full 3% below the growth rate for  Lower output growth has led to lower employment growth, and a higher unemployment rate, from 4% in 2000 to 4.8% for  Economists worry about the sources of the slowdown, and whether or not the United States can replicate the high rates of output growth of the late 1990s.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Has the United States Entered a New Economy? The Federal Funds Rate, June 2000 to December 2001 Weekly Average In an attempt to counteract the economic slowdown, the Fed aggressively decreased the federal funds rate throughout 2001.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Has the United States Entered a New Economy?  Starting in the 1970s, there was a decrease in the average rate of growth of output per worker.  In the recent past, however, that rate appears to have increased again. This increase in the growth rate per worker has been emphasized by the New Economy proponents.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Has the United States Entered a New Economy? Rate of Growth of Output per Worker in the United States Since 1950 The average rate of growth of output per worker decreased in the mid-1970s. It appears to have increased again since the mid-1990s.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The European Union  Today, 15 European countries comprise the European Union, or EU.  Together, they form a formidable economic power, with a combined output close to the output of the United States.  The standard of living in many of these countries is also close to that of the United States. 1-2

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The European Union, 2000

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The European Union Table 1-2 Growth, Unemployment, and Inflation in the European Union, (in percent) (average) (average) (forecast) Output growth rate Unemployment rate Inflation rate Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The European Union Table 1-2 Growth, Unemployment, and Inflation in the European Union, (in percent) (average) (average) (forecast) Output growth rate Unemployment rate Inflation rate Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.  The economic performance of the European Union in the last decade was less impressive than that of the United States:  Average output growth from 1992 to 2000 was only 2.1%.  Low output growth was accompanied by persistent high unemployment—9.9% unemployment rate on average.  Low output growth and high unemployment are expected to remain in the near term.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard The European Union Table 1-2 Growth, Unemployment, and Inflation in the European Union, (in percent) (average) (average) (forecast) Output growth rate Unemployment rate Inflation rate Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.  Two issues dominate the agenda of macroeconomists in Europe: 1. High unemployment. What reforms and what macroeconomic policies are needed to reduce the unemployment rate? 2. A common currency. What macroeconomic changes will the introduction of the Euro bring to the economy, and how should policy be conducted in this new environment?

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard How Can European Unemployment Be Reduced? Unemployment Rates: Europe Versus the United States, The European unemployment rate has gone from being much lower than that of the United States to being much higher.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard How Can European Unemployment Be Reduced?  Although there is no agreement on the causes of unemployment, some of the concerns are:  Large market rigidities caused by generous unemployment benefits, too high a minimum wage, and too high a level of worker protection.  A wage explosion in the 1970s, which increased labor costs and led firms to decrease employment.  A decrease in unemployment will require some labor market reforms, wage moderation, and appropriate macroeconomic policies.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard What Will the Euro Do for Europe?  A common currency can:  Reduce uncertainties associated with the relative price of currencies.  Contribute to economic growth, especially when accompanied by the removal of other obstacles to trade between European countries.  Create difficulties for some countries associated with the move to a common monetary policy.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Japan,

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Japan Table 1-2 Growth, Unemployment, and Inflation in Japan, (in percent) (average) (average) (forecast) Output growth rate  0.7  1.0 Unemployment rate Inflation rate4.5  0.1  1.6  1.4 Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Japan Table 1-2 Growth, Unemployment, and Inflation in Japan, (in percent) (average) (average) (forecast) Output growth rate  0.7  1.0 Unemployment rate Inflation rate4.5  0.1  1.6  1.4 Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level.  In the Japanese economy, there are good news and bad news:  The average annual output growth rate since 1960 has been 5.5%. Japan’s output per capita is now higher than U.S. output per capita.  The growth rate of output from 1992 to 2000 was only 1.2%, and the forecast is for negative growth. A projected rate of unemployment of 5.5% would be the highest ever for Japan.  Japan is experiencing deflation—not necessarily good news.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard How Can European Unemployment Be Reduced? The Japanese Stock Market Index, The large increase in the index in the second half of the 1980s was followed by an equally sharp decline in the early 1990s.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard What Happened to Japan in the 1990s?  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. Higher expected profits lead to higher stock prices.  Speculative bubbles, or fads, where investors buy stocks at high prices hoping to resell them at even higher prices.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard How Can Japan Recover?  The Japanese central bank has decreased interest rates to very low levels. The government has also used fiscal policy to increase demand. But this has not been enough to take Japan out of its slump.  There is a long list of problems with the Japanese economy, including an inefficient retail distribution system, political corruption, and problems with the banking system. It is difficult to predict how growth will resume in Japan.

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Gathering Economic 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).

© 2003 Prentice Hall Business PublishingMacroeconomics, 3/e Olivier Blanchard Key Terms  European Union (EU), European Union (EU), European Union (EU),  Organization for Economic Cooperation and Development (OECD), Organization for Economic Cooperation and Development (OECD), Organization for Economic Cooperation and Development (OECD),  International Monetary Fund (IMF) International Monetary Fund (IMF) International Monetary Fund (IMF)