topic 1 international developments

Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010

Topic 1:International Economic Developments

Reference: Blanchard Chapter 1 A tour of the World


Some basic questions

•How has the world economy been performing over the recent past?

•Can we identify different trends between the more developed and less developed economies?

•To answer these questions, we need to take a closer look at some of the trends in data, more particularly at changes in real GDP growth.


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1-1 The European Union

When macroeconomists study an economy, they first look at three variables:

• Output

• The unemployment rate

• The inflation rate


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Figure 1.2 The map provides 2006 data on various countries of Western Europe Source: Eurostat


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Figure 1.3 This map provides basic 2006 data on recent and prospective EU membersand some other countries for referenceSources: Eurostat, IMF, World Bank


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Malta 0.04 4.8 1.5 5.0 5.0ETC 6.9LFS 2.9 2.1

Table 1.1 Growth, unemployment and inflation in the EU since 1991

Source: Statistical Annex of European Economy, Spring 2009. Data for 2010 are forecasts


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1-1 The European Union (Continued)

The economic performance of European countries after the turn of the millennium has not been as good as it was in the 1990s:

• Average annual output growth reflected a significant slowdown in all of the largest European economies since 2008, and a recession in 2009.

• Low output growth was accompanied by persistently high unemployment.

• The only good news is about inflation. Average annual inflation was 2.2% in the EU and 2% in the euro area.


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Three issues dominate the agenda of European macroeconomists:

• High unemployment

• Growth of income per person

• Common currency



Slide1.11 How can European Unemployment be Reduced?

Figure 1.2 The unemployment rate in continental Europe and the USA since 1970From 2008–2010 GDP growth declined all over the world. In advanced economiesit turned negativeSource: IMF, World Economic Outlook, Spring 2009, p. 1. (Data from 2010 onwards are forecasts.)



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There is still disagreement about the causes of high European unemployment:

• Some politicians blame too generous welfare systems.

• Most economists believe, however, that the source of the problem is labour market institutions.

• Some economists point to what they call labour market rigidities.

• Other economists point to the fact that unemployment is not high everywhere in Europe. Also, not enough R&D.

How can European Unemployment be Reduced?



Slide1.13 Why has Income Gap between EU & USA Started to Grow?

Table 1.2 Income per capita in Europe compared to the USA (USA = 100)


Malta/USASource:

UNCTAD

14.1 29.6 31.6 39.3 36.9 37.42008 39 Euro 74


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• Supporters of the Euro point first to its enormous symbolic importance. More importantly, for most members, there has been much greater stability of the Exchange Rate (ER) (with much reduced speculative threats on ER) and significantly lower transaction costs

• Others worry that the single currency may come with some economic costs, in particular, lack of flexibility (one interest rate and no devaluations possible of national currency – indeed at times euro was too high).

What will The Euro do For Europe?



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Monthly Euro Exchange Rate $ per euro

1.7

1.6

1,5

1.4

1.3

1.2

1.1

1.0

0.9

0.8

£ per euro

£ per euro

$ per euro

0.95

0.90

0.85

0.80

0.75

0.70

0.65

0.60

0.55

0.50

Jan01 Jan 02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10


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1-2 The United States

From an economic point of view, there is no question that the 1990s were amongst the best years in recent memory.

In the recent past, however, the economy has slowed down. Projections for 2010 indicate a slow and uncertain performance.

Table 1.3 Growth, unemployment and inflation in the USA since 1991


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1-2 The United States (Continued)What are the Reasons for the Recent Slow Down?

Figure 1.3 Oil prices (in 2008 US dollars): January 1947– December 2008The price of oil reached a historic high in 2008


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1-2 The United States (Continued)What are the Reasons for the Recent Slow-Down?

Figure 1.4 US house prices at constant dollars: 1880–2020House prices in the USA boomed after 2000


Slide1.20 Should we Worry about the US Trade Deficit?

Figure 1.5 The US trade deficit since 1990The US trade deficit has increased from about 1% of GDP in 1990 to 5% of GDP in 2008

1-2 The United States (Continued)


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1-3 BRIC Countries

Brazil, China, India and Russia (which are often called BRICs) have grown rapidly over the last decade and are now the largest economies outside of the group of advanced countries.Where does the growth come from? • High accumulation of capital.• Very fast technological progress.

Table 1.4 Output growth and inflation in the BRIC countries since 1991


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1-4 Looking Ahead

These are the questions to which you have been exposed in this chapter:

• What determines expansions and recessions? Can monetary policy be used to prevent a recession in the United States? How will the Euro affect monetary policy in Europe?

• Why is inflation so much lower today than it was in the past? Can Europe reduce its unemployment rate? Should the United States reduce its trade deficit?

• Why do growth rates differ so much across countries, even over long periods? Has the United States entered a New Economy, in which growth will be much higher in the future? Can other countries emulate China and grow at the same rate?


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Gathering Macro Data

• International organizations, such as the Organization for Economic Cooperation and Development (OECD), gather data for the richest countries.

• For countries that are not members of the OECD, one of the main sources of information is the International Financial Statistics (IFS), published by the International Monetary Fund (IMF).

• The IMF also publishes, twice a year, the World Economic Outlook, an assessment of macroeconomic developments in various parts of the world.

• In the United States, an extremely good annual resource is the Economic Report of the President, prepared by the Council of Economic Advisors.


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Key Terms

• European Union (EU)• BRICs• Organization for Economic Cooperation and

Development (OECD)• International Monetary Fund (IMF)

topic 1 international developments

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