David Stone's Entry For The 2004 Moffatt Prize in Economics
OBJECTIVE
There are many interesting and complex components that make up the economies of the United States, the European Union, and Japan, as there would be in any developed economic system. The building blocks that form the foundation of our understanding of these economies is to look at each regions in the broader context of three very important macroeconomic themes: output, unemployment and inflation.The goal of this paper is to summarize the current and unique macroeconomic pictures we now see in each regions; highlight any changes noticed in their macroeconomic conditions since the turn of the 21st century and now; and make a forecast of the anticipated macroeconomic conditions in each of the three regions for the near future based on empirical evidence.
THE UNITED STATES
In late 2001, the initial fears of a recession in the world economy faded, as a modest turnaround the following year had been anticipated. The world economy has been increasingly dependent on growth in the U.S. economy because it is the source of nearly one third of global demand. Unfortunately, these hopes of a turnaround in the economy became quickly overshadowed by the many stumbling blocks that consequentially brought about lackluster growth throughout the U.S. and beyond. Concerns over the real financial position of corporate America sent shockwaves through the U.S. economy after the controversial bankruptcy filing in December 2001 of energy trader and market leader, Enron Corporation. This is the second largest corporate bankruptcy to date in U.S. history, and harbored justifiable fear in investors over the real financial position of corporate America. Like a house of cards, WorldCom also came crashing down in July 2002 as it made the largest filing for bankruptcy protection ever in the U.S. after buckling under the pressure of a massive scandal involving a nearly $4 billion accounting fraud which made the company look profitable when it was not. Other giant firms under investigation for accounting irregularities include Xerox Corp., Arthur Andersen, Bristol-Meyers, and Johnson & Johnson.These events exasperated an already serious problem concerning sluggish employment and business investments. Corporate America slashed nearly 250,000 jobs between September 2002 and January 2003, as the global economy failed to show signs of a strong recovery from the onset of recession in March 2001. The unemployment rate increased from 4.8% in 2001 to 5.9% the following year due to the lackluster aggregate demand for U.S. goods and services by the rest of the world. Pricing powers of financially weak U.S. corporations has also been limited as deflationary pressures in roughly one third of the world economies has sent prices and wages on a downward spiral. The labor market also appeared to be soft and lackluster, preventing the robust external demand from the U.S. needed to boost growth. Further evidence of global stagnation is reflected in data collected by the United Nations citing a scant 1.7% expansion in the world economy since 2002, which many economists consider to be very close to bordering a recession. Also, the economy-wide GDP implicit price deflator increased by less than one percent for the four quarters through the third quarter of 2002. The annual GDP deflator has not been at this level since 1949, which is at telltale sign of global deflation.
Be Sure to Continue to Page 2 of "Recent Developments in the Global Economy: Survey of the United States, Japan and European Union".
