Econ CH 1

Macroeconomics 2nd: Global and Southern African Perspectives © 2020 1
A Tour of the World
Chapter 1
Macroeconomics 2nd : Global and Southern African Perspectives © 2020 2

Outline
A Tour of the World
1-1 The Crisis

1-2 South Africa
1-3 The United States
1-4 The Euro Area
1-5 China
1-6 Looking Ahead

A Tour of the World
• What is macroeconomics? The best way to answer this question is to take you on an
economic tour of the world.
• The goal of this chapter is to give you a sense of these recent events and of some of
the macroeconomic issues confronting different countries today.

1-1 The Crisis
• From 2000 to 2007, the world economy had a sustained expansion.
• In 2007, U.S. housing prices started declining, leading to a major financial crisis.
• The financial crisis turned into a major economic crisis with falling stock prices.
• In the third quarter of 2008, U.S. output growth turned negative and remained so in
2009.
• Through the trade and financial channels, the U.S. crisis quickly became a world
crisis.

1-1 The Crisis
Figure 1-1 Output Growth Rates for the World Economy, for Advanced Economies, and
for Emerging and Developing Economies, 2000–2014

1-1 The Crisis
Figure 1-2 Stock prices in the United States, the Euro area, and emerging economies,
2007–2010

1-2 South Africa
• South Africa is the biggest economy in Africa, but relatively small compared to the
United States and China
o With an output of $349.3 billion in 2017, it is classified as an upper-middle
income country by the World Bank.
o Output per capita is $6,179.9
o Accounts for 0.56% of world output
• Economists also look at:
o Output growth
o Unemployment rate
o Inflation rate

1-2 South Africa
Figure 1-3 South Africa, 2017

1-2 South Africa
• Looking at the three basic variables…
Table 1-2 Growth, Unemployment, and Inflation in the United States, 1990–2015

1-2 South Africa
• South Africa faces two main challenges
o Chronic high unemployment, with a rate of around 25% since 2000.
o The educational system and its difficulty to deliver sufficiently skilled labour for a
changing, modernising economy, making job creation even more difficult
• The National Development Plan (NDP) aims the following objectives by 2030:
o Reducing poor households with monthly income of R419 or less (constant 2009
prices) from 39% to zero
o Decreasing inequality from 69% to 60%

• The United States is big
o With an output of $17.4 trillion in 2014, it accounted or 23% of world output.
• The U.S. standard of living is high
o Output per capita is $54,000, close to the highest in the world.
• The U.S. economy in 2015 was in decent shape, leaving much of the effects of the
2008-2009 crisis behind.

Figure 1-4 The United States, 2014

• Looking at the three basic variables…
Table 1-2 Growth, Unemployment, and Inflation in the United States, 1990–2015

• The federal funds rate—the interest rate the Fed controls— went from 2.5% in July
2007 to nearly 0% in December 2008.
Figure 1-5 The U.S. Federal Funds Rate since 2000

• Why did the Federal Funds rate stop at zero?
o This constraint is known as the zero lower bound.
o If it were negative, then everyone would hold cash rather than bonds.
• Why are low interest rates a potential issue?
o Low interest rates limit the Fed’s ability to respond to further negative shocks.
o Low interest rates may lead to excessive risk taking by investors to increase their
returns.

• Productivity growth is important for a sustained increase in income per person, but
since 2010, it has been only about half as it was in the 1990s.
• The slowdown in productivity growth is worrisome because the standard of living
especially for the poor may not increase.
Table 1-3 Labor Productivity Growth, by Decade

1-4 The Euro Area
• The European Union (EU) is a group of 28 European counties with a common
market.
• In 1999, the EU formed a common currency area called the Euro area, which
replaced national currencies in 2002 with the euro.
• The Euro area faces two main issues today:
o How to reduce unemployment?
o How to function efficiently as a common currency area?

1-4 The Euro Area
• While the United States recovered from the 2008–2009 crisis, output growth in the
Euro area remained close to zero between 2010 and 2014.
• In 2015, output growth was below the pre-crisis average and the unemployment rate
was 11.1%.
Table 1-4 Growth, Unemployment, and Inflation in the Euro Area, 1990–2015

1-4 The Euro Area
Figure 1-5 The Euro area, 2014

1-4 The Euro Area
• While the average unemployment rate for the Euro area was 11.1% in 2015,
countries like Spain had an unemployment rate of 23%.
• Much of the high unemployment rate was the result of the crisis.
• Even when Spain had its lowest unemployment rate of 9%, it was nearly twice that of
the United States.
• Some economists believe labor market rigidities with too much protection for workers
are the main problem.

1-4 The Euro Area
Figure 1-7 Unemployment in Spain since 1990

1-4 The Euro Area
• Supporters of the euro argue:
o economic advantages due to no more changes in exchange rates
o its contribution to the creation of a large economic power
• Others argue:
o the drawback of a common monetary policy across euro countries
o the loss of the exchange rate as an adjustment instrument within the euro area

1-5 China
• China is in the news every day.
• Its population is more than four times that of the United States.
• But its output at $10.4 trillion is only about 60% of the United States.
• Output per person is roughly 15% of that of the United States.
• China has been growing very rapidly for more than three decades.

1-5 China
Figure 1-8 China, 2014

1-5 China
• China’s rapid output growth has been driven by high accumulation of capital and
technological progress.
• The slowdown after the crisis is considered to be desirable as more of output would
go to consumption instead of investment.
Table 1-5 Growth, unemployment and Inflation in China, 1990–2015

1-5 Looking Ahead
• We could have also looked at other regions like India, Japan, Latin America, Central
and Eastern Europe, and Africa.
• You could have also thought about the issues triggered by the crisis, how monetary
and fiscal policies can be used to avoid recessions, and why growth rates differ so
much across countries.
• The purpose of this book is to give you a way of thinking about these issues.

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Macroeconomics 2nd: Global and Southern African Perspectives © 2020 1

A Tour of the World

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 2

1-1 The Crisis

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 3

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 4

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 5

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 6

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 7

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 8

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 9

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 10

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Macroeconomics 2nd : Global and Southern African Perspectives © 2020 13

Macroeconomics 2nd : Global and Southern African Perspectives © 2020 14

Figure 1-5 The U.S. Federal Funds Rate since 2000

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Macroeconomics 2nd : Global and Southern African Perspectives © 2020 16

Table 1-3 Labor Productivity Growth, by Decade

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Table 1-5 Growth, unemployment and Inflation in China, 1990–2015

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