Topic 1 International Developments

Topic 1:
International Economic
Developments
Reference: Blanchard Chapter 1 A tour of the World
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
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.
1-1 The European Union
Slide
1.4
When macroeconomists study an economy, they first

look at three variables:
• Output
• The unemployment rate
• The inflation rate
Slide
1.5
Slide
1.6
Figure 1.2 The map provides 2006 data on various countries of Western Europe
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1 st Edition, © Pearson Education Limited 2010
Source: Eurostat
Slide
1.7
Figure 1.3 This map provides basic 2006 data on recent and prospective EU members
and some other countries for reference
Sources: Eurostat, IMF, World Bank
Table 1.1 Growth, unemployment and inflation in the EU since 1991
Slide
1.8
Malta 0.04 4.8 1.5 5.0 5.0ETC 6.9LFS 2.9 2.1
Source: Statistical Annex of European Economy, Spring 2009. Data for 2010 are forecasts
1-1 The European Union (Continued)
Slide
1.9
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.
Slide
1.10
Three issues dominate the agenda of European

macroeconomists:
• High unemployment
• Growth of income per person
• Common currency
Slide
1.11 How can European Unemployment be Reduced?
The unemployment rate in continental Europe and the USA since 1970
Figure 1.2
From 2008–2010 GDP growth declined all over the world. In advanced economies
it turned negative
Source: IMF, World Economic Outlook, Spring 2009, p. 1. (Data from 2010 onwards are forecasts.)
Slide
1.12 How can European Unemployment be Reduced?
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.
Slide
1.13 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/USA 14.1 29.6 31.6 39.3 36.9 37.4

Source:
2008 39
UNCTAD
Euro 74
Slide
1.14 What will The Euro do For Europe?
• 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).
$ per euro
Monthly Euro Exchange Rate £ per euro
1.7 0.95
Slide
1.15
1.6 0.90
1,5 0.85
1.4 0.80
$ per euro
1.3 0.75
1.2 0.70
£ per euro
1.1 0.65
1.0 0.60
0.9 0.55
0.8 0.50
Jan01 Jan 02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10
1-2 The United States
Slide
1.16
Table 1.3 Growth, unemployment and inflation in the USA since 1991
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.
Slide
1.17
1-2 The United States (Continued)
Slide
1.18 What are the Reasons for the Recent Slow Down?
Oil prices (in 2008 US dollars): January 1947– December 2008

Figure 1.3
The price of oil reached a historic high in 2008
Slide
1.19 What are the Reasons for the Recent Slow-Down?
US house prices at constant dollars: 1880–2020

Figure 1.4
House prices in the USA boomed after 2000
Slide
1.20 Should we Worry about the US Trade Deficit?
The US trade deficit since 1990

Figure 1.5
The US trade deficit has increased from about 1% of GDP in 1990 to 5% of GDP in
2008
1-3 BRIC Countries
Slide
1.21
Table 1.4 Output growth and inflation in the BRIC countries since 1991
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.
Slide
1.22
1-4 Looking Ahead
Slide
1.23
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?
Gathering Macro Data
Slide
1.24
• 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.
Key Terms
Slide
1.25
• European Union (EU)

• BRICs
• Organization for Economic Cooperation and
Development (OECD)
• International Monetary Fund (IMF)

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Topic 1:

Reference: Blanchard Chapter 1 A tour of the World

•How has the world economy been performing

•Can we identify different trends between the more

•To answer these questions, we need to take a

When macroeconomists study an economy, they first

• The unemployment rate

• The inflation rate

Malta 0.04 4.8 1.5 5.0 5.0ETC 6.9LFS 2.9 2.1

The economic performance of European countries after

• Average annual output growth reflected a significant

• Low output growth was accompanied by persistently

• The only good news is about inflation. Average

Three issues dominate the agenda of European

• Growth of income per person

There is still disagreement about the causes of high

• Some politicians blame too generous welfare systems.

• Most economists believe, however, that the source of

• Some economists point to what they call labour market

• Other economists point to the fact that unemployment

Malta/USA 14.1 29.6 31.6 39.3 36.9 37.4

• Others worry that the single currency may come

From an economic point of view, there is no question that the

Oil prices (in 2008 US dollars): January 1947– December 2008

US house prices at constant dollars: 1880–2020

The US trade deficit since 1990

• What determines expansions and recessions? Can monetary policy

• International organizations, such as the Organization for

• The IMF also publishes, twice a year, the World Economic

• In the United States, an extremely good annual resource is the

• European Union (EU)

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