A Tour of The World. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) The United States

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1 A Tour of The World CHAPTER 1 CHAPTER 1 Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 1-1 The United States Figure 1-1 The United States, 2003 Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 2of 21 1

2 The United States When macroeconomists study an economy, they first look at three variables: Output The unemployment rate The inflation rate Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 3of 21 The United States Table 1-1 Output growth rate Unemployment rate Inflation rate Growth, Unemployment, and Inflation in the United States, 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). The period 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% Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 4of 21 2

3 Has the United States Entered a New Economy? Figure 1-2 Rate of Growth of Output per Worker in the United States since The average rate of growth of output per worker decreased in the mid 1970 s. It appears to have increased again since the mid 1990 s. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 5of 21 Should you worry about the U.S. Budget Deficit? Figure 1-3 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 Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 6of 21 3

4 The European Union Figure 1-4 The European Union, 2003 Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 7of The European Union Table 1-2 Growth, Unemployment, and Inflation in the European Union, (in percent) 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 European macroeconomists: High unemployment Common currency Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 8of 21 4

5 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 9of 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 10 of 21 5

6 How Can European Unemployment Be Reduced? Figure 1-5 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 11 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 12 of 21 6

7 1-3 Japan Figure 1-6 Japan 2003 Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 13 of 21 Japan Table 1-2 Growth, Unemployment, and Inflation in Japan, 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 (GDP deflator) Since 1960, Japan s output has grown at an average annual growth rate of 4.7%, 1.5% higher than the growth rate of the U.S. over the same time period. This is the good news Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 14 of 21 7

8 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 15 of 21 What Triggered the Slump? Figure 1-7 The Japanese Stock Market Index since 1980 The large increase in the index in the second half of the 1980s was followed by an equally sharp decline in the early 1990s. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 16 of 21 8

9 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 17 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. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 18 of 21 9

10 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), and the World Bank. Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 19 of 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? Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 20 of 21 10

11 Key Terms European Union (EU) Organization for Economic Cooperation and Development (OECD) International Monetary Fund (IMF) Applied Macroeconomics Delia Gramm (EURAC, Bozen), Stefan Gruber (Universität Bologna) 21 of 21 11