A Tour of the

World

Chapter 1
 Chapter Highlights

• This chapter aims to provide an overview of

– The financial crisis of 2008
– The 3 major economic powers of the world
 The crisis
 US mortgage crisis: was caused by 2 main
reasons: Poor quality housing loans (unworthy
customers and inflated mortgages).
 Issuing banks packaged those mortgages into
new securities which were then sold to other
banks. These were often re-packged and resold
in newer securities, very complex securities. (The
big short film).
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 The crisis - Continued

 The complexity of these securities made people

unsure about their true value caused a housing
price decline. This resulted into many defaults on
loans.
 The default on loans caused many banks holding
such securities to be in trouble, and some banks
declared bankruptcy.
 Bank failures affected the stock markets, major
stocks indices fell not only in the us, but world wide
(the effect of the news and globalization)

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 The crisis - Continued

 Financial crisis (bank failures and stock

market declines (lower wealth) affected
investment and consumption, hence
unemployment.
 Lower US consumption and investment
(lower imports from foreign countries), also
cash strapped US banks called their
balances abroad constrained investment
abroad, so unemployment rose abroad.

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 The crisis - Continued

• Central Banks reaction, expansionary

monetary policy and expansionary fiscal
policy, this means deficits.
 Next slides document these changes in
figurs

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 1-1 The Crisis
Table 1-1 World Output Growth since 2000

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

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 1-1 The Crisis
Figure 1-2 Unemployment rates in the United States
and the Euro area, 2000–2012

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 World’s Largest Economies
• United States
• European Union
• China
– Main Indicators
– GDP
– Population
– GDP/Capita
– Share of World Output
– Growth
– Unemployment
– Inflation

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 Comparative Table
Indicator USA EU China

GDP (2010) 14.7 tril. $ 12.2 tril $ 5.8 tril. $

Population (2010) 308.7 mil 331.3 mil 1,340 mil

GDP/Capita (2010) 47,300 $ 36,800 $ 4,300 $

Share of World output 23% 19.6% 9.3%

(2010)

Growth (2012) 1.8% 1.1% 9%

Unemployment (2012) 9% 9.9% 4%

Inflation (2012) 1.2% 1.5% 3.3%

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 Issues

• US Budget deficit
– Agreement on the need to reduce it
– Disagreement on the speed of reduction
• EU
– High Unemployment rates
– Labor market institutions
• China
– High growth rates
• Capital Accumulation
• Technological growth

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 1-2 The United States
Figure 1-3 The United States

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 1-2 The United States
Table 1-2 Growth, Unemployment, and Inflation in
the United States, 1980–2012

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 1-2 The United States
Figure 1-4 U.S. Federal Budget surpluses as a
percent of GDP since 1990

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 1-3 The Euro Area
Table 1-3 Growth, Unemployment, and Inflation in
the Euro Area, 1980–2012

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 1-3 The Euro Area
Figure 1-5
The Euro area

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 1-4 China
Figure 1-6 China

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 1-4 China
Table 1-4 Growth and Inflation in China, 1980–2012

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