A European recession and the U.S. economy
a. In 2010, European Union spending on U.S. goods accounted for 23% of U.S. exports (see Table 18-2), and U.S. exports amounted to 13% of U.S. GDP (see Table 18-1). 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 impact 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.
