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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
Chapter 1: A Tour of the World Slide #3Blanchard: Macroeconomics
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 1: A Tour of the World Slide #4Blanchard: Macroeconomics
IntroductionIntroduction
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
Chapter 1: A Tour of the World Slide #5Blanchard: Macroeconomics
IntroductionIntroduction--The Issues and Approach of Macroeconomics
Three time-frames of macroanalysis Short-run Medium-run Long-run
Chapter 1: A Tour of the World Slide #6Blanchard: Macroeconomics
IntroductionIntroduction
Three measures of macroeconomic analysis Output Unemployment rate Inflation rate
First Stop: The United StatesFirst Stop: The United States
Chapter 1: A Tour of the World Slide #7Blanchard: Macroeconomics
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?
Chapter 1: A Tour of the World Slide #8Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #9Blanchard: Macroeconomics
The United StatesThe United States
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.
Chapter 1: A Tour of the World Slide #10Blanchard: Macroeconomics
The United StatesThe United States
The 1998 growth (3.7%) was greater than the 1960-1998 average growth rate (3.1%).
The ExpansionThe Expansion
Chapter 1: A Tour of the World Slide #11Blanchard: Macroeconomics
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%)
Chapter 1: A Tour of the World Slide #12Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #13Blanchard: Macroeconomics
The United StatesThe United States
When will the U.S. business cycle shift from expansion to recession?
Signs of danger Low unemployment High stock market prices
Chapter 1: A Tour of the World Slide #14Blanchard: Macroeconomics
The United StatesThe United States
Is unemployment too low? Maybe: Low unemployment causes
inflation which leads to recession
Recession danger!Recession danger!
Chapter 1: A Tour of the World Slide #15Blanchard: Macroeconomics
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)
Chapter 1: A Tour of the World Slide #16Blanchard: Macroeconomics
The United StatesThe United States
A decrease in the average growth rate
Increasing wage inequality
Two Long-term IssuesTwo Long-term Issues
Chapter 1: A Tour of the World Slide #17Blanchard: Macroeconomics
U.S. Output Growth Since 1950U.S. Output Growth Since 1950
Chapter 1: A Tour of the World Slide #18Blanchard: Macroeconomics
The United StatesThe United States
Small changes in the growth rate mean big differences in per capita output
Why has growth slowed down?Why has growth slowed down?
Chapter 1: A Tour of the World Slide #19Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #20Blanchard: Macroeconomics
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 The United States-Why has growth slowed down?growth slowed down?
Chapter 1: A Tour of the World Slide #21Blanchard: Macroeconomics
Some explanations Research is less productive Low investment in new capital Output measures are underestimating the
growth rate
The United States-Why has The United States-Why has growth slowed down?growth slowed down?
Chapter 1: A Tour of the World Slide #22Blanchard: Macroeconomics
The United StatesThe United States
Two causes Increasing international trade The nature of technological progress
Why is wage inequality increasing?Why is wage inequality increasing?
Chapter 1: A Tour of the World Slide #23Blanchard: Macroeconomics
The United StatesThe 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 1979-1998Real average wage 1979-1998
Chapter 1: A Tour of the World Slide #24Blanchard: Macroeconomics
The European UnionThe European Union
Chapter 1: A Tour of the World Slide #25Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #26Blanchard: Macroeconomics
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
Unemployment rate 6.4 11.2 10.6 10.3
Inflation rate 5.7 1.8 1.8 1.8
Chapter 1: A Tour of the World Slide #27Blanchard: Macroeconomics
The European UnionThe European Union
Low growth rate (1998 -- 2.8%)
High unemployment (1998 -- 10.6%)
Low inflation (1998 -- 1.8%)
The 1990’sThe 1990’s
Chapter 1: A Tour of the World Slide #28Blanchard: Macroeconomics
The European UnionThe European Union
Reducing unemployment
Transition to a common currency (Euro)
Two challenges to the EUTwo challenges to the EU
Chapter 1: A Tour of the World Slide #29Blanchard: Macroeconomics
Unemployment rates: EuropeUnemployment rates: Europeversus the United States, 1960 - 1998versus the United States, 1960 - 1998
Chapter 1: A Tour of the World Slide #30Blanchard: Macroeconomics
The European UnionThe European Union
Explaining the increase in EU unemployment Labor market rigidities Misguided macroeconomic policies
How to reduce high unemployment?How to reduce high unemployment?
Chapter 1: A Tour of the World Slide #31Blanchard: Macroeconomics
The European UnionThe European Union
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?
Chapter 1: A Tour of the World Slide #32Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #33Blanchard: Macroeconomics
January 1, 2002 Euro currency will start circulating together
with national currencies
The European Union-What will the The European Union-What will the Euro do for Europe?Euro do for Europe?
Chapter 1: A Tour of the World Slide #34Blanchard: Macroeconomics
July 1, 2002 The Euro will be the only currency in
circulation (as in the U.S.)
The European Union-What will the The European Union-What will the Euro do for Europe?Euro do for Europe?
Chapter 1: A Tour of the World Slide #35Blanchard: Macroeconomics
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 The European Union-What will the Euro do for Europe?Euro do for Europe?
Chapter 1: A Tour of the World Slide #36Blanchard: Macroeconomics
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 The European Union-What will the Euro do for Europe?Euro do for Europe?
Chapter 1: A Tour of the World Slide #37Blanchard: Macroeconomics
East AsiaEast Asia
Chapter 1: A Tour of the World Slide #38Blanchard: Macroeconomics
1960-1997 1997 1998 1999(in percent) (forecast)
Output growth rate 5.8 0.8 -2.6 0.2
Unemployment rate 1.9 3.4 4.2 4.6
Inflation rate 4.8 0.6 0.7 -0.4
Growth, Unemployment,Growth, Unemployment,and Inflation Japan, 1960-1999and Inflation Japan, 1960-1999
Chapter 1: A Tour of the World Slide #39Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #40Blanchard: Macroeconomics
Output Growth inOutput Growth inEast Asian Countries, 1990 - 1999East Asian Countries, 1990 - 1999
1970-1997 1997 1998 1999(in percent) (forecast)
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
Chapter 1: A Tour of the World Slide #41Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #42Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #43Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #44Blanchard: Macroeconomics
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
Chapter 1: A Tour of the World Slide #45Blanchard: Macroeconomics
Japan and East AsiaJapan and East Asia
1997 --- Thailand sell-off of stocks and bonds
1998 -- Spread to rest of Asia
1999 -- Negative growth
The Asian CrisisThe Asian Crisis
Chapter 1: A Tour of the World Slide #46Blanchard: Macroeconomics
Japan and East AsiaJapan and East Asia
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?
Chapter 1: A Tour of the World Slide #47Blanchard: Macroeconomics
Japan and East AsiaJapan and East Asia
Is the Asian crisis over?
What do you think?What do you think?
Chapter 1: A Tour of the World Slide #48Blanchard: Macroeconomics
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?
Chapter 1: A Tour of the World Slide #49Blanchard: Macroeconomics
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
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