A European recession and the US economy (a) In 2017, European Union spending on US goods accounted for 19% of US exports (see Table 17-2), and US exports amounted to 12.3% of US GDP (Table 17-1). What was the share of European Union spending on US goods relative to US GDP? (b) Assume that the multiplier in the United States is 2 and that a major slump in Europe would reduce output and imports from the United States by 5% (relative to its normal level). Given your answer to part a, what is the impact of the European slump on US GDP? Page 2 (c) If the European slump also leads to a slowdown of the other economies that import goods from the United States, the effect could be larger. To put a bound to the size of the effect, assume that US exports decrease by 5% (as a result of changes in foreign output) in one year. What is the effect of a 5% drop in exports on US GDP? (d) Comment on this statement: "If Europe has a major slump, US growth will also grind to a halt." Table 17-2 Country Composition of US Exports and Imports, 2018 Percent of Exports to 18 Percent of Imports from 12 Canada Mexico 16 14 European Union 19 19 China 7 21 6 Japan Rest of Asia and Pacific 15 9 Others 21 19 Source: US Census, International Trade Data, FT900, exhibit 14. Table 17-1 Ratios of Exports to GDP for Selected OECD Countries, 2017 Country Export Ratio Export Ratio Country Germany United States 12.3% 47.2% Japan 16.1% Austria 53.9% Chile 28.7% Switzerland 65.0% United Kingdom 30.5% Netherlands 86.4% Source: World Bank database, exports A European recession and the US economy (a) In 2017, European Union spending on US goods accounted for 19% of US exports (see Table 17-2), and US exports amounted to 12.3% of US GDP (Table 17-1). What was the share of European Union spending on US goods relative to US GDP? (b) Assume that the multiplier in the United States is 2 and that a major slump in Europe would reduce output and imports from the United States by 5% (relative to its normal level). Given your answer to part a, what is the impact of the European slump on US GDP? Page 2 (c) If the European slump also leads to a slowdown of the other economies that import goods from the United States, the effect could be larger. To put a bound to the size of the effect, assume that US exports decrease by 5% (as a result of changes in foreign output) in one year. What is the effect of a 5% drop in exports on US GDP? (d) Comment on this statement: "If Europe has a major slump, US growth will also grind to a halt." Table 17-2 Country Composition of US Exports and Imports, 2018 Percent of Exports to 18 Percent of Imports from 12 Canada Mexico 16 14 European Union 19 19 China 7 21 6 Japan Rest of Asia and Pacific 15 9 Others 21 19 Source: US Census, International Trade Data, FT900, exhibit 14. Table 17-1 Ratios of Exports to GDP for Selected OECD Countries, 2017 Country Export Ratio Export Ratio Country Germany United States 12.3% 47.2% Japan 16.1% Austria 53.9% Chile 28.7% Switzerland 65.0% United Kingdom 30.5% Netherlands 86.4% Source: World Bank database, exports