K E i C tKey Economic Concepts for the Euro Challenge

Student Orientations,2013 Euro Challenge

1www.euro-challenge.org

Key economic concepts for the Euro Challenge

Describe the current season of your team

Imagine you had to describe the current season of your favorite football team

You can summarize their season by focusing on different indicators

• Games won, lost, tied

• Total yards, rushing, passingTotal yards, rushing, passing

• Touchdowns, sacks, field goals

These are all indicators

They help to explain the teams’ season

Will your team go to the Superbowl?

GDP growth: a key economic indicator

• Gross Domestic Product (GDP) is the total value of all the goods (e.g. cars, iPods) and services (e.g. haircuts, insurance policies) produced by an economy

GDP th t ll b h h GDP• GDP growth tells you by how much GDP has increased compared to the last year (or last quarter)

• GDP growth is expressed as a percentage

• When the economy is growing GDPGross Domestic Product measures When the economy is growing, GDP growth is a positive number

• In a recession, GDP growth is negative

Gross Domestic Product measures everything produced by an economy

(both goods and services)

, g g(GDP shrinks)

Euro area GDP growth is slowing sharply

The euro area economy as a whole Euro Area & US GDP with Forecasts

is forecast to contract (have negative growth) li htl thi d

2.0%

3.0%

4.0%

slightly this year and gradually move to positive growth next year

‐1.0%

0.0%

1.0%

year.

Countries affected directly by the debt

‐4.0%

‐3.0%

‐2.0%Euro area United States

directly by the debt crisis have been in recession (negative GDP growth)

‐5.0%2006 2007 2008 2009 2010 2011 2012 2013 2014

Source:  European Economic Forecast ‐ Autumn 2012 g )already for several years.Hint: For explanations and updates, see “Current Economic

Situation in the Euro Area” on the Resources page

Unemployment

• The basic definition of unemployment is the number of people that are actively looking for work and have not found it in a certain period.

Th l t t i th h f• The unemployment rate is the share of the working-age population that is looking for work but not employed.

• Unemployment normally rises in times of slow or declining GDP growth, and tends to fall in times of stronger GDPtends to fall in times of stronger GDP growth.

• As economic activity increases, firms

6

y ,hire more workers to produce the goods and services people are consuming.

Unemployment: on the rise again

The unemployment E A & US U l i h F

p yrate in the euro area was falling prior to the 2008-09 crisis but has risen

Euro Area & US Unemployment with Forecasts

12.0%

14.0%Euro area United States

crisis, but has risen since then and now stands at 11.6%.

6 0%

8.0%

10.0%

There are huge differences in unemployment rates among euro

2.0%

4.0%

6.0%

rates among euro area countries (4.4% in Austria, 25.8% in Spain).

0.0%

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Eurostat, IMF 7

Source:  European Economic Forecast ‐ Autumn 2012

Inflation

• Inflation is the general increase in the level of certain measured prices over a certain period. It is expressed as a percentage change.

A littl i fl ti i fi d i bl• A little inflation is fine, even desirable, but too much of it can be damaging, both to people’s livelihoods and to the economy as a wholeeconomy as a whole.

• High inflation usually occurs when an economy is over-heating (growing tooeconomy is over heating (growing too quickly). When growth is too weak, there may be a risk of deflation (falling prices) – which sounds great but can be very

HINT: For all you need to know about inflation/deflation

8

g ybad!and the ECB, go to

http://vimeo.com/12324309

Inflation: elevated but coming down

Inflation has edged up slightly due to increases in energy prices globally.

Euro Area & US Inflation with Forecasts

4.0%

5.0%

Euro area United States

But euro area inflation is expected to come down (to

2.0%

3.0%

4.0%

to come down (to below 2%, within the ECB’s “comfort zone”) due to slow

0.0%

1.0%

zone ) due to slow growth and high unemployment.

‐1.0%

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: European Economic Forecast ‐ Autumn 2012

Source: Eurostat, IMF 9

Source:  European Economic Forecast ‐ Autumn 2012

High debt and deficits

• The deficit is the difference between the amount of money a government y gtakes in (revenue) and what it spends (outlays) in a given year. If that number is positive, there is a surplus.

• The debt is the total amount of money the government owes. It is usually

d t f GDPexpressed as a percentage of GDP.

• A debt level that is too high can lead to ghigher borrowing costs and slower economic economic growth. And slower GDP growth makes it more difficult to reduce deficits and debt!difficult to reduce deficits and debt!

What is monetary policy?

• Monetary policy is the process by which a central bank controls the s ppl of mone for the p rpose

The euro area has a supply of money for the purpose of steering economic growth and limiting inflation.

single monetary policy run by the ECB

• By setting interest rates, central banks can influence borrowing and lending decisions by households and firms. Lowerhouseholds and firms. Lower interest rates generally spur economic activity, while higher interest rates slow inflation down.

• Monetary policy can be described as neutral, expansionary (“loose”), or contractionary (“tight”).

Mario Draghi,ECB President

What is fiscal policy?

… But fiscal and other• Fiscal policy is the use of government expenditure and

Good luck in the Euro Challenge 2013!… But fiscal and other

economic policies remain in national hands

revenue collection (taxation) in an effort to influence the economy.

u o C a e ge 0 3

• Fiscal stimulus is when the government increases spending and/or reduces taxes in order to increase economic activity.

• Fiscal contraction is when theFiscal contraction is when the government cuts spending and/or increases taxes in order to control deficits and debt

“The Euro ChallengeHigh School Competition”

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Part of Europe’s response to the crisis has been to strengthen coordination of national economic and fiscal policies

deficits and debt.delicioussocial bookmarking

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