A European recession and the U.S. economy

a. In 2014, European Union spending on U.S. goods accounted for \(18 \%\) of U.S. exports (see Table 17-2), and U.S. exports amounted to \(15 \%\) of U.S. GDP (see Table 17-1). What was the share of European Union spending on U.S. goods relative to U.S. 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 U.S. by 5\% (relative to its normal level). Given your answer to part (a), what is the impact on U.S. GDP of the European slump?

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 U.S. 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 U.S. GDP?

d. Comment on this statement. "Unless Europe can avoid a major slump following the problems with sovereign debt and the Euro, U.S. growth will grind to a halt."

Table 17-1

Table 17-2

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Table 17-1 Ratios of Exports to GDP for Selected OECD Countries, 2014 Country Export Ratio Country Export Ratio United States 13.5% Germany 45.7% Japan 17.7% Austria 53.2% United Kingdom 28.3% Switzerland 64.1% Chile 33.8% Netherlands 82.9%