Chapter 1 A Tour of the World. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #2 Chapter Topics The United States The European Union Japan

Chapter 1Chapter 1

A Tour of the WorldA Tour of the World

Chapter 1: A Tour of the World Slide #2Blanchard: Macroeconomics

Chapter TopicsChapter Topics

The United States

The European Union

Japan and East Asia

Looking Ahead


IntroductionIntroduction

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 MacroeconomicsThe Issues and Approach of Macroeconomics



Chapter 2: A Tour of the Course Central Variables of Macroeconomics

• Output

• Unemployment

• Inflation

The Issues and Approach of MacroeconomicsThe Issues and Approach of Macroeconomics


IntroductionIntroduction--The Issues and Approach of Macroeconomics

Three time-frames of macroanalysis Short-run Medium-run Long-run



Three measures of macroeconomic analysis Output Unemployment rate Inflation rate

First Stop: The United StatesFirst Stop: The United States


The United StatesThe United States

Question for Discussion:Question for Discussion:

How does the U.S. measure up?How does the U.S. measure up?


Growth, Unemployment, andGrowth, Unemployment, andInflation in the U.S., 1960-1999Inflation in the U.S., 1960-1999

1960 1997 1998 1999(in percent) (forecast)

Output growth rate 3.1 3.9 3.7 1.5

Unemployment rate 6.0 4.9 4.6 5.0

Inflation rate 4.0 1.9 1.0 1.2



What do we observe?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.



The 1998 growth (3.7%) was greater than the 1960-1998 average growth rate (3.1%).

The ExpansionThe Expansion


The United States – The ExpansionThe 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%)


Low inflation rate 1998 inflation rate (1.0%) is 3 percentage

points below the 1960-1998 average (4.0%)

The United States – The ExpansionThe United States – The Expansion



When will the U.S. business cycle shift from expansion to recession?

Signs of danger Low unemployment High stock market prices



Is unemployment too low? Maybe: Low unemployment causes

inflation which leads to recession

Recession danger!Recession danger!


The United States-Recession Danger!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)



A decrease in the average growth rate

Increasing wage inequality

Two Long-term IssuesTwo Long-term Issues


U.S. Output Growth Since 1950U.S. Output Growth Since 1950



Small changes in the growth rate mean big differences in per capita output

Why has growth slowed down?Why has growth slowed down?


The United States-Why has The United States-Why has growth slowed down?growth slowed down?

Average growth rate 4% from 1950 - 1973 2.6% from 1973 - 1998


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



Some explanations Research is less productive Low investment in new capital Output measures are underestimating the

growth rate




Two causes Increasing international trade The nature of technological progress

Why is wage inequality increasing?Why is wage inequality increasing?



For workers who did not complete high school fell 1% per year

For workers with graduate degrees rose 1% per year

Real average wage 1979-1998Real average wage 1979-1998


The European UnionThe 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.

ObservationsObservations


Growth, Unemployment, andGrowth, Unemployment, andInflation in the EU, 1960-1999Inflation in the EU, 1960-1999

1960-1998 1997 1998 1999(in percent) (forecast)

Output growth rate 3.1 2.7 2.8 2.2


Inflation rate 5.7 1.8 1.8 1.8



Low growth rate (1998 -- 2.8%)

High unemployment (1998 -- 10.6%)

Low inflation (1998 -- 1.8%)

The 1990’sThe 1990’s



Reducing unemployment

Transition to a common currency (Euro)

Two challenges to the EUTwo challenges to the EU


Unemployment rates: EuropeUnemployment rates: Europeversus the United States, 1960 - 1998versus the United States, 1960 - 1998



Explaining the increase in EU unemployment Labor market rigidities Misguided macroeconomic policies

How to reduce high unemployment?How to reduce high unemployment?



Euro countries (11) The EU countries minus Greece, Denmark,

Sweden, and U.K.

What will the Euro do for Europe?What will the Euro do for Europe?


The European Union-What will the The European Union-What will the Euro do for Europe?Euro do for Europe?

January 1, 1999 European countries fixed the parity of its

currency to the Euro


January 1, 2002 Euro currency will start circulating together

with national currencies



July 1, 2002 The Euro will be the only currency in

circulation (as in the U.S.)



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



Disadvantages of the Euro Common monetary policy (interest rates)

cannot correct for differences in growth, inflation, and unemployment rates among countries



East AsiaEast Asia



Output growth rate 5.8 0.8 -2.6 0.2


Inflation rate 4.8 0.6 0.7 -0.4

Growth, Unemployment,Growth, Unemployment,and Inflation Japan, 1960-1999and 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 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,Growth, Unemployment,and Inflation Japan, 1960-1999and Inflation Japan, 1960-1999


Output Growth inOutput Growth inEast Asian Countries, 1990 - 1999East Asian Countries, 1990 - 1999


Hong Kong 7.5 5.2 -4.5 1.5

Singapore 8.2 7.5 0.0 0.5

Korea 8.4 5.5 -6.5 0.5

Taiwan 8.3 6.8 4.5 4.0

Indonesia 6.8 4.7 -15.5 -3.0

Malaysia 7.4 7.8 -4.7 -0.5

Philippines 3.6 5.1 -0.5 2.0

Thailand 7.5 -0.4 -0.7 2.0

China 9.1 8.8 7.6 7.7


Japan and East AsiaJapan 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 MiracleThe Asian Miracle


Japan and East Asia-The Asian Japan and East Asia-The Asian MiracleMiracle

Remaining Asian countries High growth rates 1970 - 1997 Per capita output was low but is rising rapidly


The Fall in East Asian Stock Prices and The Fall in East Asian Stock Prices and Currencies, January 1997 to April 1998Currencies, January 1997 to April 1998


The Fall in East Asian Stock Prices and The Fall in East Asian Stock Prices and Currencies, January 1997 to April 1998Currencies, January 1997 to April 1998



1997 --- Thailand sell-off of stocks and bonds

1998 -- Spread to rest of Asia

1999 -- Negative growth

The Asian CrisisThe Asian Crisis



Speculative attacks against the currency

Structural problems Corruption Poor regulation of financial institutions

What was the cause of the Asian crisis?What was the cause of the Asian crisis?



Is the Asian crisis over?

What do you think?What do you think?


Looking AheadLooking 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?


Looking AheadLooking 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?

End of ChapterEnd of Chapter

A Tour of the WorldA Tour of the World

Documents

Chapter 1 A Tour of the World. Chapter 1: A Tour of the WorldBlanchard: Macroeconomics Slide #2 Chapter Topics The United States The European Union Japan