1. CHAPTER 1 Prepared by: Fernando Quijano and Yvonn Quijano CHAPTER 1 A Tour of The World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard

2. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard2 of 21 1-1 The United States, 2003 Figure 1 - 1 The United States

3. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard3 of 21 The United States When macroeconomists study an economy, they first look at three variables:  Output  The unemployment rate  The inflation rate

4. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard4 of 21 The United States The period 1994-2000 was one of the best ones in recent memory  The average rate of growth was 1.9% per year.  The average unemployment rate was 4.9%.  The average inflation rate was 1.8%. Table 1-1 Growth, Unemployment, and Inflation in the United States, 1960-2004 1960-2000 (average) 1994-2000 (average) 2001200220032004 Output growth rate3.23.90.51.93.04.4 Unemployment rate6.14.94.85.86.05.5 Inflation rate3.91.82.41.71.82.0 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 (GDP deflator).

5. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard5 of 21 Has the United States Entered a New Economy? The average rate of growth of output per worker (labor productivity) decreased in the mid 1970’s. It appears to have increased again since the mid 1990’s. Rate of Growth of Output per Worker in the United States Since 1960. Figure 1 - 2

6. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard6 of 21 Should you worry about the U.S. Budget Deficit? The U.S. Budget Deficit, Since 1990 (Ratio to Output, in percent). The U.S. budget has gone from large deficits in the early 1990’s to surpluses in the late 1990’s, and back to increasing deficits since 2001. Figure 1 - 3

7. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard7 of 21 The European Union The European Union, 2003 Figure 1 - 4

8. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard8 of 21 The European Union 1-2 Table 1-2 Growth, Unemployment, and Inflation in the European Union, 1960-2002 (in percent) 1960-2000 (average) 1992-2000 (average) 2001200220032004 Output growth rate3.12.31.71.11.52.1 Unemployment rate5.89.07.37.88.1 Inflation rate5.42.02.32.62.21.9 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 European macroeconomists:  High unemployment  Common currency

9. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard9 of 21 The European Union The economic performance of the European Union has been less impressive than that of the United States over the last decade:  Average annual output growth from 1994 to 2000 in the European Union was only 2.3%.  Low output growth has been accompanied by persistently high unemployment.  The only good news is about inflation.

10. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard10 of 21 How Can European Unemployment Be Reduced? There is still disagreement about the causes of high European unemployment:  Some economists point to what they call labor market rigidities.  Other economists point out that many of these “labor market rigidities” were already in existence in the 1960s, when European unemployment was very low.

11. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard11 of 21 How Can European Unemployment Be Reduced? Unemployment Rates: Europe versus the United States since 1960 The European unemployment rate has gone from being much lower than that of the United States to being much higher. Figure 1 - 5

12. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard12 of 21 What Will the Euro Do for Europe?  Supporters of the Euro point first to its enormous symbolic importance.  Others worry that the symbolism of the euro may come with some economic costs.

13. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard13 of 21 Japan 1-3 Japan 2003 Figure 1 - 6

14. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard14 of 21 Japan Since 1960, Japan’s output has grown at an average annual growth rate of 47.%, 1.5% higher than the growth rate of the U.S. over the same time period. This is the good news. Table 1-2 Growth, Unemployment, and Inflation in Japan, 1960-2004 1960-2000 (average) 1994-2000 (average) 20012002 20032004 Output growth rate4.7 1.40.4  0.3 2.53.0 Unemployment rate2.0 3.7 5.0 5.4 5.34.8 Inflation rate5.1  0.1  1.5  1.2  2.5 -2.0 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 (GDP deflator.

15. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard15 of 21 Japan In the Japanese economy, the bad news is:  The average annual rate of growth of output from 1994 to 2000 was only 1.4%.  The unemployment rate steadily increased.  As a result of high unemployment, the inflation rate decreased and eventually turned negative.

16. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard16 of 21 What Triggered the Slump? The large increase in the index in the second half of the 1980s was followed by an equally sharp decline in the early 1990s. Figure 1 - 7 The Japanese Stock Market Index since 1980

17. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard17 of 21 What Triggered the Slump? 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. Anticipation of higher expected profits lead investors to pay higher stock prices.  Speculative bubbles, or fads, where investors buy stocks at high prices hoping to resell them at even higher prices in the future.

18. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard18 of 21 How Will Japan Recover? Both monetary and fiscal policy were used to increase demand and thereby increase output:  The Japanese central bank decreased interest rates to very low levels.  The Japanese government increased spending on public works and cut taxes to stimulate spending by consumers and firms.

19. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard19 of 21 Gathering Macro 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).

20. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard20 of 21 Looking Ahead These are the questions to which you have been exposed in this chapter:  What determines expansions and recessions?  What are the interactions between the stock market and economic activity?  Why was inflation in the United States so much lower in the 1990s than it was in previous decades?  Why is unemployment so high in Europe?  Why do growth rates differ so much across countries, even over long periods of time? 1-4

21. Chapter 1: A Tour of the World © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard21 of 21 Key Terms  European Union (EU)  Organization for Economic Cooperation and Development (OECD) Organization for Economic Cooperation and Development (OECD)  International Monetary Fund (IMF) International Monetary Fund (IMF)