ke ic tkey economic concepts for the euro challenge€¦ · euro area gdp growth is slowing sharply...
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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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