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ECON1002 Introductory Macroeconomics HD Notes

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Course
ECON1002 Introductory Macroeconomics (ECON1002)

Institution
University Of Sydney (USYD )

Notes cover content for entire semester Topics covered: * Introduction to macroeconomics * Measuring macroeconomic performance: output, the price level, savings, investment and wealth, wages, employment and the labour market * An introduction to short-term economic fluctuations * Macroeconom...

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Uploaded on September 27, 2021
Number of pages 73
Written in 2018/2019
Type Class notes
Professor(s) Aarti singh
Contains All classes

economics
macroeconomics
econ

Institution
University of Sydney (USYD )
Course
ECON1002 Introductory Macroeconomics (ECON1002)

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ECON1002 NOTES
WEEK 1 (CH 1.1-1.3): INTRO TO MACROECONOMICS AND MEASURING
MACROECONOMIC PERFORMANCE: OUTPUT

INTRODUCTION: CONTENT AND STRUCTURE

WHAT IS MACROECONOMICS?

• Unit designed to introduce "macroeconomics" and provide tools to analyse key "macroeconomic policy issues"
• UoS overview
• Structured essay

INTRODUCTION TO MACROECONOMICS

WHAT IS MACROECONOMICS?

• Concerned with broad themes: GDP, Inflation, Unemployment
• What happens to the economy in the short-run: one-four years?
o i.e. business cycles
• What happens to the economy in the long run?

GROSS DOMESTIC PRODUCT

GROSS DOMESTIC PRODUCT: MEASURING THE NATIONALS OUTPUT

• Definition: Gross domestic product (GDP) is the market value of the final goods and services produced in a country
during a given period
• Example: Bread production
o To make a loaf of bread, a farmer grows wheat and sells it to the miller for $0.50, the miller grinds the wheat
into four and sells to the baker for $1.20 and the baker makes the four into bread and sells it for $2.00
o The final good is $2.00
• Market value
o Price times quantity
§ !×#
o What about public goods and services?

AUSTRALIA’S HISTORICAL GDP EXPERIENCE

GDP OECD

1

, • Real GDP per capita – to understand average standard

FEMALE LABOUR PARTICIPATION RATE IN AUSTRALIA: IMPACT ON GDP?

HOW TO MEASURE GDP? THREE APPROACHES

• Three ways of measuring GDP
o Value-added method
o Expenditure method
o Income method

EXAMPLE

• Example: Steel-Car
• An economy with just two firms: Steel company and Car company

VALUE-ADDED METHOD FOR GDP

2

, • Value-added is what the firm adds to the value of the produced inputs it buys from other firms i.e. value of the firm’s
output less value of purchases of intermediate goods (i.e. produced inputs)
• "Bread" Example

• "Steel-Car" example

THE EXPENDITURE METHOD FOR MEASURING GDP

• All current production by firms must be either:
o Bought by households, other firms, government and foreigners; or
o Left unsold as inventories bought by the firm which makes it.
• Components of the expenditure method:
o C: Consumption expenditure
§ Spending by households on goods and services, not including spending on new houses (around 55% of
total GDP on average)
o I: Investment
§ Spending by firms on new buildings, machinery and inventories, plus spending by households on new
houses (23%)
o G: Government expenditure
§ Spending by federal, state and local governments on goods and services (22%)
o NX: Net exports
§ Expenditure on exports (X) minus expenditure on imports (M) (net 0%)
o $%! = ' = ( + * + $ + +,
o Examples: Bread and Steel-Car?

THE INCOME METHOD FOR MEASURING GDP

• When a good or service is sold, the revenues from the sale are distributed to the workers and the owners of the capital
involved in the production
• GDP also equals labour income (wages) plus capital income (profits/rent/interest) from the production
• Example: Steel-Car

WHY THE EXPENDITURE AND INCOME APPROACHES GIVE THE SAME ANSWER?
3

, • Circular flow of Income
o 2 sector economy: firms & households (no government)

NOMINAL VS REAL GDP

• Nominal GDP is current production at ‘current prices’
o Problem: It can mislead when comparing GDP over time

EXAMPLE: PRICES AND QUANTITIES IN 2007 AND 2013

REAL VS NOMINAL GDP: AUSTRALIA

REAL GDP IS NOT THE SAME AS ECONOMIC WELLBEING (BOF: 1.3)

REAL GDP IS NOT THE SAME AS ECONOMIC WELLBEING

• Leisure time is excluded
• Non-market economic activities are excluded
• Environmental quality and resource depletion are excluded
• Quality of life is excluded
• Poverty and economic inequality are excluded
• Real GDP is nevertheless closely related to economic wellbeing

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