1. Chapter 1 A Tour of the World

2. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #2 Chapter Topics The United States The European Union Japan and East Asia Looking Ahead

3. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #3 Introduction  Chapter 1: A Macroeconomic Tour of the World The U.S. expansion of the 1990’s The Euro Recession in Japan Crisis in Asia The Issues and Approach of Macroeconomics

4. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #4 Introduction Chapter 2: A Tour of the Course  Central Variables of Macroeconomics Output Unemployment Inflation The Issues and Approach of Macroeconomics

5. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #5 Introduction Introduction--The Issues and Approach of Macroeconomics Three time-frames of macroanalysis  Short-run  Medium-run  Long-run

6. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #6 Introduction Three measures of macroeconomic analysis  Output  Unemployment rate  Inflation rate First Stop: The United States

7. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #7 The United States Question for Discussion: How does the U.S. measure up?

8. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #8 Growth, Unemployment, and Inflation in the U.S., 1960-1999 1960199719981999 (in percent)(forecast) Output growth rate3.13.93.71.5 Unemployment rate6.04.94.65.0 Inflation rate4.01.91.01.2

9. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #9 The United States What do we observe?  The 1990’s began with a recession.  1991 ushered in an expansion.  The 1990’s began with a recession.  1991 ushered in an expansion.

10. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #10 The United States The 1998 growth (3.7%) was greater than the 1960-1998 average growth rate (3.1%). The Expansion

11. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #11 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%)

12. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #12 Low inflation rate  1998 inflation rate (1.0%) is 3 percentage points below the 1960-1998 average (4.0%) The United States – The Expansion

13. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #13 The United States When will the U.S. business cycle shift from expansion to recession? Signs of danger  Low unemployment  High stock market prices

14. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #14 The United States Is unemployment too low?  Maybe: Low unemployment causes inflation which leads to recession Recession danger!

15. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #15 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)

16. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #16 The United States A decrease in the average growth rate Increasing wage inequality Two Long-term Issues

17. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #17 U.S. Output Growth Since 1950

18. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #18 The United States Small changes in the growth rate mean big differences in per capita output Why has growth slowed down?

19. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #19 The United States-Why has growth slowed down? Average growth rate  4% from 1950 - 1973  2.6% from 1973 - 1998

20. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #20 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 The United States-Why has growth slowed down?

21. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #21 Some explanations  Research is less productive  Low investment in new capital  Output measures are underestimating the growth rate The United States-Why has growth slowed down?

22. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #22 The United States Two causes  Increasing international trade  The nature of technological progress Why is wage inequality increasing?

23. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #23 The United States For workers who did not complete high school fell 1% per year For workers with graduate degrees rose 1% per year Real average wage 1979-1998

24. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #24 The European Union

25. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #25 The European Union 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. Observations

26. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #26 Growth, Unemployment, and Inflation in the EU, 1960-1999 1960-1998199719981999 (in percent)(forecast) Output growth rate3.12.72.82.2 Unemployment rate6.411.210.610.3 Inflation rate5.71.81.81.8

27. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #27 The European Union Low growth rate (1998 -- 2.8%) High unemployment (1998 -- 10.6%) Low inflation (1998 -- 1.8%) The 1990’s

28. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #28 The European Union Reducing unemployment Transition to a common currency (Euro) Two challenges to the EU

29. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #29 Unemployment rates: Europe versus the United States, 1960 - 1998

30. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #30 The European Union Explaining the increase in EU unemployment  Labor market rigidities  Misguided macroeconomic policies How to reduce high unemployment?

31. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #31 The European Union Euro countries (11)  The EU countries minus Greece, Denmark, Sweden, and U.K. What will the Euro do for Europe?

32. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #32 The European Union-What will the Euro do for Europe? January 1, 1999  European countries fixed the parity of its currency to the Euro

33. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #33 January 1, 2002  Euro currency will start circulating together with national currencies The European Union-What will the Euro do for Europe?

34. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #34 July 1, 2002  The Euro will be the only currency in circulation (as in the U.S.) The European Union-What will the Euro do for Europe?

35. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #35 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 The European Union-What will the Euro do for Europe?

36. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #36 Disadvantages of the Euro  Common monetary policy (interest rates) cannot correct for differences in growth, inflation, and unemployment rates among countries The European Union-What will the Euro do for Europe?

37. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #37 East Asia

38. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #38 1960-1997199719981999 (in percent)(forecast) Output growth rate5.80.8-2.60.2 Unemployment rate1.93.44.24.6 Inflation rate4.80.60.7-0.4 Growth, Unemployment, and Inflation Japan, 1960-1999

39. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #39 The Good News  1960 - 1997 growth rates (5.8%) nearly double the U.S. rate (3.1%)  Japan’s output is one- half of the U.S. ($8,000 billion)  Japan’s output per capita ($33,000 is greater than the U.S. ($29,800) 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 Growth, Unemployment, and Inflation Japan, 1960-1999

40. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #40 Output Growth in East Asian Countries, 1990 - 1999 1970-1997199719981999 (in percent)(forecast) Hong Kong7.55.2-4.51.5 Singapore8.27.50.00.5 Korea8.45.5-6.50.5 Taiwan8.36.84.54.0 Indonesia6.84.7-15.5-3.0 Malaysia7.47.8-4.7-0.5 Philippines3.65.1-0.52.0 Thailand7.5-0.4-0.72.0 China9.18.87.67.7

41. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #41 Japan and East Asia 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. The Asian Miracle

42. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #42 Japan and East Asia-The Asian Miracle Remaining Asian countries  High growth rates 1970 - 1997  Per capita output was low but is rising rapidly

43. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #43 The Fall in East Asian Stock Prices and Currencies, January 1997 to April 1998

44. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #44 The Fall in East Asian Stock Prices and Currencies, January 1997 to April 1998

45. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #45 Japan and East Asia 1997 --- Thailand sell-off of stocks and bonds 1998 -- Spread to rest of Asia 1999 -- Negative growth The Asian Crisis

46. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #46 Japan and East Asia Speculative attacks against the currency Structural problems  Corruption  Poor regulation of financial institutions What was the cause of the Asian crisis?

47. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #47 Japan and East Asia Is the Asian crisis over? What do you think?

48. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #48 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?

49. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #49 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?

50. End of Chapter A Tour of the World