A Tour ofThe World

2 of 21

OBJECTIVE:

We want to introduce informally the topics that are usually dealt with in macroeconomics.

Motivate the study of more theoretical chapters that will be developed during the lessons.

Review some data from developed countries.

When macroeconomists study an economy, they pay attention to three important variables: Output Unemployment rate Inflation rate

We will now analyze these three variables for the European Union, USA and Spain.

The European Union

The European Union, 2003

Figure 1 - 4

The European Union1-2

Table 1-2 Growth, Unemployment, and Inflation in the European Union, 1960-2002 (in percent)

1960-2000(average)

1992-2000(average) 2001 2002 2003 2004

Output growth rate 3.1 2.3 1.7 1.1 1.5 2.1

Unemployment rate 5.8 9.0 7.3 7.8 8.1 8.1

Inflation rate 5.4 2.0 2.3 2.6 2.2 1.9

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.

Two issues dominate the agenda of European macroeconomists: High unemployment Common currency

The European Union

The economic performance of the European Union has been less impressive than that of the United States over the last decade: Average annual output growth from 1994 to

2000 in the European Union was only 2.3%. Low output growth has been accompanied by

persistently high unemployment. The only good news is about inflation.

How Can EuropeanUnemployment Be Reduced?

There is still disagreement about the causes of high European unemployment: Some economists point to what they call labor

market rigidities. Other economists point out that many of

these “labor market rigidities” were already in existence in the 1960s, when European unemployment was very low.

How Can European Unemployment Be Reduced?

Unemployment Rates: Europe versus the United States since 1960

The European unemployment rate has gone from being much lower than that of the United States to being much higher.

Figure 1 - 5

1-1

The United States, 2003

Figure 1 - 1

The United States

The United States

The period 1994-2000 was one of the best ones in recent memory The average rate of growth was 1.9% per

year. The average unemployment rate was 4.9%. The average inflation rate was 1.8%.

Table 1-1 Growth, Unemployment, and Inflation in the United States, 1960-2004

1960-2000(average)

1994-2000(average) 2001 2002 2003 2004

Output growth rate 3.2 3.9 0.5 1.9 3.0 4.4

Unemployment rate 6.1 4.9 4.8 5.8 6.0 5.5

Inflation rate 3.9 1.8 2.4 1.7 1.8 2.0

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 (GDP deflator).

Has the United StatesEntered a New Economy?

The average rate of growth of output per worker decreased in the mid 1970’s. It appears to have increased again since the mid 1990’s.

Rate of Growth of Output per Worker in the United States Since 1960.

Figure 1 - 2

Should you worry about the U.S. Budget Deficit?

The U.S. Budget Deficit, Since 1990 (Ratio to Output, in percent).

The U.S. budget has gone from large deficits in the early 1990’s to surpluses in the late 1990’s, and back to increasing deficits since 2001.

Figure 1 - 3

Spain

Source: INE

Projections show that during the last year (2007) Spanish nominal output reached a highly symbolic value for first time in history: €1,000 billion.

Nominal GDP

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

GD

P (

mil

l. o

f €

)

Nominal GDP

Spain

Output growth (%)

1970-2006(average) 1970-1980 1980-1985 1985-1990 1990-1995 1995-2006

Output growth rate

3.1 3.1 1.4 4.4 1.5 3.6

Source: OCDE

There are important cycles: Recessions between 1980 and 1985 (when oil crisis arrived to

Spain) and between 1990 and 1995 (EMS crisis). High output growth from 1985 to 1990 and since 1995.

Spain

Inflation rate (%)

1977-2006(average)

1994-2006(average) 2003 2004 2005 2006

Inflation rate 8.0 3.0 3.5 3.0 3.4 3.5

Fuente: INE Base

Spain

Source: EUROSTAT

Although it has decreased sharply during the 1990’s, inflation is still among the most important macroeconomic problems in Spain.

When compared with other European inflation rates, we observe a large gap.

16 of 21

Spain

Spain

Unemployment

1972-2006(average)

1980-1999(average) 2003 2004 2005 2006

Unemployment rate 13.8 18.9 11.3 11 9.2 3.5

Source: OCDE

Sky-high unemployment rates along the period, especially during the 1980’s and 1990’s.

In the last years situation has improved; there have been, however, important methodological reviews that contributed to diminish these rates artificially. We observe a convergence with Europe.

Spain

Output per worker (%)

1971-2006(average)

1994-2006(average) 2003 2004 2005 2006

Output per worker growth rate

2.5 0.78 0.9 0.7 1 1.3

Spanish economy, until middle 1980’s, had a healthy productivity growth.

Since then growth has been less impressive, especially during the last decade, in which Spain has lost competitiveness with the other developed countries.

¿Why isn’t productivity increasing?Employment variation: Output growth – Productivity growth

Discussion topics: Work productivity in Spain

Source: OCDE

Discussion topics: The high Spanish trade deficit

Source: Banco de España

Unidades: millones de euros

Spain has a large deficit in the balance of payments. Trade deficit is the main cause; it represents about 9,5% of total GDP.

It is the second largest deficit in the world.

1999 2000 2001 2002 2003 2004 2005 2006

SALDOS SALDOS SALDOS SALDOS SALDOS SALDOS SALDOS SALDOS

CURRENT ACCOUNT -13.112,30 -20.992,10 -18.346,00 -16.881,40 -27.909,90 -44.163,70 -66.859,70 -84.736,30

Balance of trade -28.585,00 -37.777,80 -36.396,40 -34.601,60 -39.838,80 -53.660,20 -68.603,20 -80.142,20

Services 21.523,80 24.243,30 27.130,50 26.581,80 23.300,90 21.753,00 22.239,70 22.142,60

Net factor income -8.903,80 -8.985,30 -10.878,00 -11.275,80 -11.603,60 -12.139,50 -17.103,30 -20.983,10

Net transfers 2.852,70 1.527,60 1.797,90 2.414,30 231,7 -117,1 -3.392,90 -5.753,50

CAPITAL ACCOUNT 6.551,50 5.180,60 5.566,20 7.740,70 8.165,30 8.427,90 8.180,40 6.174,60

CURRENT ACCOUNT + CAPITAL ACCOUNT -6.560,70 -15.811,50 -12.779,80 -9.140,70 -19.744,50 -35.735,80 -58.679,30 -78.561,70

Discussion topics: Spanish budget superavit

Source: INE

The government has shown superavits in the last three fiscal years (2% in 2007, estimated).

Discussion topics: Has Spain surpassed Italy?

Recently, EUROSTAT published data about GDP in PPP across the EU. Spain surpassed Italy in 2006 (last available year in this data).

IMF estimated GDP per capita for both countries in 2005: for Spain it was $27250, and for Italy $27750. As Spain grew at 3.9% in 2006 while Italy grew at 1.9% in the same year(and population growth was similar, around 1%), Spain is thought to have become richer than Italy in per capita terms.

However, there is still a huge gap when Spain is compared with the average GDP per capita of the Euro Area. This gap is remarkably large if we take countries such as Holland and Ireland as a reference.

Fuente: EUROSTAT

Discussion topics: Has Spain surpassed Italy?

24 of 21

Looking Ahead

These are the questions to which you have been exposed in this chapter: What determines expansions and

recessions? What are the interactions between the stock

market and economic activity? Why was inflation in the United States so

much lower in the 1990s than it was in previous decades?

Why is unemployment so high in Europe? Why do growth rates differ so much across

countries, even over long periods of time?

1-4