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1-1 The United States, 2000 © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard The United States Table 1-1 Growth, Unemployment, and Inflation in the United States, 1960-2002 (in percent) 1960-2000 (average) 1992-2000 (average) 2000 2001 2002 (forecast) Output growth rate 3.5 3.7 4.1 1.1 0.7 Unemployment rate 6.1 5.4 4.0 4.8 6.2 Inflation rate 5.1 1.7 2.3 2.1 1.2 Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard The United States 1992-2000 was one of the best in recent memory. Output growth was positive for nine years in a row. Sustained growth steady increase in employment & steady decrease in the unemployment rate. Inflation remained low throughout the period. The U.S. economy did poorly in 2001: Output growth was only 1.1%, a full 3% below the growth rate for 2000. Lower growth higher unemployment rate Can we replicate the high rates of output growth of the late 1990s? © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard Pumping Up: Low interest rates & tax cuts The Federal Funds Rate, June 2000 to December 2001 Weekly Average In an attempt to counteract the economic slowdown, the Fed aggressively decreased the federal funds rate throughout 2001. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard Has the United States Entered a New Economy? Rate of Growth of Output per Worker in the United States Since 1950 The average rate of growth of output per worker decreased in the mid-1970s. It appears to have increased again since the mid-1990s. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard The European Union, 2000 © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard The European Union Table 1-2 Growth, Unemployment, and Inflation in the European Union, 1960-2002 (in percent) 1960-2000 (average) 1992-2000 (average) 2000 2001 2002 (forecast) Output growth rate 3.1 2.1 3.3 1.7 1.5 Unemployment rate 6.5 9.9 8.1 7.8 8.1 Inflation rate 5.6 1.7 1.5 2.5 2.2 Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard 1-2 The European Union 15 European countries comprise the EU 10 additional countries are candidates for membership Combined output of the EU 15 is close to the output of the United States. EU performance less impressive than the US Average output growth, 1992 – 2000: only 2.1%. Persistent high unemployment: 9.9% average rate Low output growth and high unemployment are expected to remain in the near term. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard The European Union Reforms and macroeconomic policies needed to reduce unemployment • • • 1970s wage explosion increased labor costs and decreased employment Large market rigidities: generous unemployment benefits, too high a minimum wage, and too high a level of worker protection. A decrease in unemployment will require some labor market reforms, wage moderation, and appropriate macro policies. A common currency. • • What macroeconomic changes will the Euro bring? How should policy be conducted in this new environment? © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard How Can European Unemployment Be Reduced? Unemployment Rates: Europe Versus the United States, 19602000 The European unemployment rate has gone from being much lower than that of the United States to being much higher. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard What Will the Euro Do for Europe? A common currency can: Reduce uncertainties associated with the relative price of currencies. Contribute to economic growth, especially when accompanied by the removal of other obstacles to trade between European countries. Create difficulties for some countries associated with the move to a common monetary policy. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard 1-2 Japan, 2000 © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard The Bubble Economy The Japanese Stock Market Index, 19802000 The large increase in the index in the second half of the 1980s was followed by an equally sharp decline in the early 1990s. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard Japan Table 1-2 Growth, Unemployment, and Inflation in Japan, 1960-2002 (in percent) 1960-2000 (average) 1992-2000 (average) 2000 2001 2002 (forecast) Output growth rate 5.5 1.2 1.5 0.7 1.0 Unemployment rate 2.0 3.0 4.7 5.0 5.5 Inflation rate 4.5 0.1 1.6 1.6 1.4 Output growth rate: annual rate of growth of output. Unemployment rate: average over the year. Inflation rate: annual rate of change of the price level. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard How Can Japan Recover? The Japanese central bank has decreased interest rates to very low levels. The government has also used fiscal policy to increase demand. Problems with the Japanese economy inefficient retail distribution system political corruption problems with the banking system. © 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard