A Tour of the World

1
Chapter 1

• A Tour of the World

2
Chapter Topics

• The United States
• The European Union
• Japan and East Asia
• Looking Ahead

3
Introduction
The Issues and Approach of Macroeconomics

• Chapter 1 A Macroeconomic Tour of the World
• The U.S. expansion of the 1990s
• The Euro
• Recession in Japan
• Crisis in Asia

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Introduction
The Issues and Approach of Macroeconomics

• Chapter 2 A Tour of the Course
• Central Variables of Macroeconomics
• Output
• Unemployment
• Inflation

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Introduction--The Issues and Approach of
Macroeconomics

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

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Introduction
First Stop The United States

• Three measures of macroeconomic analysis
• Output
• Unemployment rate
• Inflation rate

7
The United States
Question for Discussion
How does the U.S. measure up?
8
Growth, Unemployment, andInflation 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
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The United States
What do we observe?

• The 1990s began with a recession.
• 1991 ushered in an expansion.

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The United States
The Expansion

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

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The United States The Expansion

• The unemployment rate declined in the 1990s
• 1998 rate (4.6) was more than 1 percentage point
  less than the average rate 1960-1998 (6.0)

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The United States The Expansion

• Low inflation rate
• 1998 inflation rate (1.0) is 3 percentage points
  below the 1960-1998 average (4.0)

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The United States

• When will the U.S. business cycle shift from
  expansion to recession?
• Signs of danger
• Low unemployment
• High stock market prices

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The United States
Recession danger!

• Is unemployment too low?
• Maybe Low unemployment causes inflation which
  leads to recession

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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)

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The United States
Two Long-term Issues

• A decrease in the average growth rate
• Increasing wage inequality

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U.S. Output Growth Since 1950
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The United States
Why has growth slowed down?

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

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The United States-Why has growth slowed down?

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

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The United States-Why has growth slowed down?

• 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

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The United States-Why has growth slowed down?

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

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The United States
Why is wage inequality increasing?

• Two causes
• Increasing international trade
• The nature of technological progress

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The United States
Real average wage 1979-1998

• For workers who did not complete high school fell
  1 per year
• For workers with graduate degrees rose 1 per year

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The European Union
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The European Union
Observations

• The European Unions (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.

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Growth, Unemployment, andInflation in the EU,
1960-1999
1960-1998 1997 1998 1999 (in percent) (forecas
t)
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
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The European Union
The 1990s

• Low growth rate (1998 -- 2.8)
• High unemployment (1998 -- 10.6)
• Low inflation (1998 -- 1.8)

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The European Union
Two challenges to the EU

• Reducing unemployment
• Transition to a common currency (Euro)

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Unemployment rates Europeversus the United
States, 1960 - 1998
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The European Union
How to reduce high unemployment?

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

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The European Union
What will the Euro do for Europe?

• Euro countries (11)
• The EU countries minus Greece, Denmark, Sweden,
  and U.K.

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

• January 1, 1999
• European countries fixed the parity of its
  currency to the Euro

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

• January 1, 2002
• Euro currency will start circulating together
  with national currencies

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

• July 1, 2002
• The Euro will be the only currency in circulation
  (as in the U.S.)

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

• 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

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

• Disadvantages of the Euro
• Common monetary policy (interest rates) cannot
  correct for differences in growth, inflation, and
  unemployment rates among countries

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East Asia
38
Growth, Unemployment,and Inflation Japan,
1960-1999
1960-1997 1997 1998 1999 (in percent) (forecas
t)
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
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Growth, Unemployment,and Inflation Japan,
1960-1999

• The Good News
• 1960 - 1997 growth rates (5.8) nearly double the
  U.S. rate (3.1)
• Japans output is one-half of the U.S. (8,000
  billion)
• Japans 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

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Output Growth inEast Asian Countries, 1990 - 1999
1970-1997 1997 1998 1999 (in percent) (forecas
t)
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 I
ndonesia 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
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Japan and East Asia
The Asian Miracle

• 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.

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Japan and East Asia-The Asian Miracle

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

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

• 1997 --- Thailand sell-off of stocks and
  bonds
• 1998 -- Spread to rest of Asia
• 1999 -- Negative growth

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Japan and East Asia
What was the cause of the Asian crisis?

• Speculative attacks against the currency
• Structural problems
• Corruption
• Poor regulation of financial institutions

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Japan and East Asia
What do you think?

• Is the Asian crisis over?

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Looking 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?

49
Looking 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?

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End of Chapter

• A Tour of the World