Econ1102_Week_1

8/12/2019 Econ1102_Week_1

1/56

Welcome to

ECON1102 Macroeconomics 1

1

8/12/2019 Econ1102_Week_1

2/56

ECON 1102: Key PeopleLecturers

Dr Geni Dechter, Room, 442C, ASBPhone No: 9385 7478

Email: [email protected]

Ms Louise Zieme: [email protected]: 9385 3336 ASB 464

Course Administrator

Mr Spiro Vlachos Room 454, ASB Email: [email protected]

2

8/12/2019 Econ1102_Week_1

3/56

Course Structure

Lectures: 2 hours of lectures per week Introduce important concepts, provide a structure for

each topic

Must be supplemented by reading of the text, tutorial

program and weekly review questionsTutorials: x hour tutorial per week

All students MUST be enrolled, commence Week 2

Tutorial program includes Tutorial Problems and

Discussion Questions- In class tutorial tests

STUDENTS MUST ATTEND THE TUTORIAL GROUPIN WHICH THEY ARE OFFICIALLY ENROLLED3

8/12/2019 Econ1102_Week_1

4/56

Assessment

Assessment:1. Submission Questions - 15% (weekly)

1. Tutorial Test 20% (week 8)

3. Final Exam during exam period, multiple

choice and written questions 65%

4

8/12/2019 Econ1102_Week_1

5/56

Resources

Textbook: Bernanke B.S., Olekalns, N. and H. R. Frank (2011),

Principles of Macroeconomics, (3rd edition.) McGraw-HillInternational Book Co., Sydney

Macroeconomics 1 website:

https://moodle.telt.unsw.edu.au/login/index.php

Lecture slides, Course Outline, Tutorial program

Answers to Tutorial Problems and Weekly Review Questions

Readings and Data required for Submission Questions

Topic Quizzes, Consultation hours, Discussion boards,ANNOUNCEMENTS

CONSULT WEBSITE AT LEAST ONCE PER WEEK

5

8/12/2019 Econ1102_Week_1

6/56

Welcome to Macroeconomics 1

Who do I see if I have a problem? Academic matters: Lecturers

Administrative matters: Course Administrator

Learning support Tutorials from Week 2 Consultation hoursfor your tutor/lecturer (posted on course

website)

Economics Exam PitStop (from Week 12)

READ THE COURSE OUTLINE THOROUGHLY

6

8/12/2019 Econ1102_Week_1

7/56

Studying ECON 1102

Download lecture slides before the lecture

Attend lecture

Read designated pages of textbook

Prepare for tutorial attempt tutorial problems and

discussion questions

Attend tutorial participate

Attempt weekly review questions

Do multiple choice quizzes

Follow up problems as they arise tutorial, consultation

hours (lecturer/tutor), Economics PitStop, PASS

NOT ALL EXAMINABLE MATERIAL CAN BECOVERED IN LECTURES7

8/12/2019 Econ1102_Week_1

8/56

Structure of the Course

Macroeconomic goals how do we know whenan economy is performing well?

Measuring the economy:

- Output and prices

- Labour market

-Balance of Payments

The economy in the short run:

- The Business Cycle, stabilisation policies (Fiscal,Monetary), inflation, exchange rates

The economy in the long run:

- How to achieve economic growth

What have we learnt about the theory and

practice of macroeconomics? 8

8/12/2019 Econ1102_Week_1

9/56

Microeconomics

and Macroeconomics Macroeconomicsdeals with the economy as

a whole, or with the basic subdivisions or

aggregates that make up the economy An aggregateis a collection of specific economic

units that are treated as if they were one unit

Microeconomicsis concerned with specificeconomic units and a detailed consideration

of the behaviour of these individuals units

9

8/12/2019 Econ1102_Week_1

10/56

Week 1

Measuring Macroeconomic Performance: Output and

Prices

Reference: Bernanke, Olekalns and Frank (BOF) -Chapter 1

Key Issues

Indicators of macroeconomic performanceMeasuring output (GDP)Measuring prices and inflation

8/12/2019 Econ1102_Week_1

11/56

2

Evaluating Macroeconomic Performance

1. Rising Living Standards economic growth

Tendency for the level of output (i.e. quantity and qualityof goods and services) to increase over time.

Output divided by population = output per capita

May also care about the distribution of living standards

8/12/2019 Econ1102_Week_1

12/56

3

Real Quarterly GDP per-capita Australia (1973-2012)

0

2000

4000

6000

8000

10000

12000

14000

16000

Sep-1

973

Oct-1974

Nov-1

975

Dec-1

976

Jan-1

978

Feb-1

979

Mar-1980

Apr-1981

May-1

982

Jun-1

983

Jul-1984

Aug-1

985

Sep-1

986

Oct-1987

Nov-1

988

Dec-1

989

Jan-1

991

Feb-1

992

Mar-1993

Apr-1994

May-1

995

Jun-1

996

Jul-1997

Aug-1

998

Sep-1

999

Oct-2000

Nov-2

001

Dec-2

002

Jan-2

004

Feb-2

005

Mar-2006

Apr-2007

May-2

008

Jun-2

009

Jul-2010

Aug-2

011

$perquarte

r

8/12/2019 Econ1102_Week_1

13/56

4

2. Stable Business Cycle low volatility in fluctuations

of actual output around its trendorpotentialoutput.

Australias Real Quarterly GDP Growth Rates DecadeAverages

1960s 1970s 1980s 1990s 2000sMean 1.26 0.78 0.82 0.83 0.75StandardDeviation

1.50 1.49 0.97 0.77 0.52

Ratio 0.84 0.53 0.85 1.08 1.44

8/12/2019 Econ1102_Week_1

14/56

5

3. Relatively Stable Price Level low (positive) rate of

inflation

Inflation has been concern for most developed countriesover the last 40 years.

Japan is an exception and has experienced deflation overthe last decade.

8/12/2019 Econ1102_Week_1

15/56

6

Australian Inflation - Consumer Price Index Measure

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Sep-1

970

Nov-1

971

Jan-1

973

Mar-1974

May-1

975

Jul-1976

Sep-1

977

Nov-1

978

Jan-1

980

Mar-1981

May-1

982

Jul-1983

Sep-1

984

Nov-1

985

Jan-1

987

Mar-1988

May-1

989

Jul-1990

Sep-1

991

Nov-1

992

Jan-1

994

Mar-1995

May-1

996

Jul-1997

Sep-1

998

Nov-1

999

Jan-2

001

Mar-2002

May-2

003

Jul-2004

Sep-2

005

Nov-2

006

Jan-2

008

Mar-2009

May-2

010

Jul-2011

Year-endedpercentagechange

8/12/2019 Econ1102_Week_1

16/56

7

8/12/2019 Econ1102_Week_1

17/56

8

8/12/2019 Econ1102_Week_1

18/56

9

4. Sustainable Levels of Public and National Debt

Public debt borrowing by public sector from privatesector

Influenced by government budget deficits/surpluses

Foreign debt borrowing by domestic residents fromforeign countries

Influenced by an economys current accountdeficits/surpluses

8/12/2019 Econ1102_Week_1

19/56

10

Budget Balance and Net Government Debt for Australia

-6

-4

-2

0

2

4

6

8

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2013-15

Budget Balance Net Debt

8/12/2019 Econ1102_Week_1

20/56

11

Australias Net External Liabilities

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Ju

n-88

Ju

n-90

Ju

n-92

Ju

n-94

Ju

n-96

Ju

n-98

Ju

n-00

Ju

n-02

Ju

n-04

Ju

n-06

Ju

n-08

Pe

rcent

Net Debt/GDP Net Equity/GDP Net External Liabilities/GDP

8/12/2019 Econ1102_Week_1

21/56

12

8/12/2019 Econ1102_Week_1

22/56

13

5. Balance between Current and Future Consumption

How much should an economy save/invest?

8/12/2019 Econ1102_Week_1

23/56

14

Australian Private Investment and National Saving

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Sep-1

969

Nov-1

970

Jan-1

972

Mar-1973

May-1

974

Jul-1975

Sep-1

976

Nov-1

977

Jan-1

979

Mar-1980

May-1

981

Jul-1982

Sep-1

983

Nov-1

984

Jan-1

986

Mar-1987

May-1

988

Jul-1989

Sep-1

990

Nov-1

991

Jan-1

993

Mar-1994

May-1

995

Jul-1996

Sep-1

997

Nov-1

998

Jan-2

000

Mar-2001

May-2

002

Jul-2003

Sep-2

004

Nov-2

005

Jan-2

007

Mar-2008

May-2

009

Jul-2010

Sep-2

011

%of

GDP

National Saving/GDP Private Investment/GDP

8/12/2019 Econ1102_Week_1

24/56

15

6. Full Employment

Provision of employment for all individuals seeking work

8/12/2019 Econ1102_Week_1

25/56

16

Australian Unemployment Rate Monthly

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Feb-1

978

Jan-1

979

Dec-1

979

Nov-1

980

Oct-1981

Sep-1

982

Aug-1

983

Jul-1984

Jun-1

985

May-1

986

Apr-1987

Mar-1988

Feb-1

989

Jan-1

990

Dec-1

990

Nov-1

991

Oct-1992

Sep-1

993

Aug-1

994

Jul-1995

Jun-1

996

May-1

997

Apr-1998

Mar-1999

Feb-2

000

Jan-2

001

Dec-2

001

Nov-2

002

Oct-2003

Sep-2

004

Aug-2

005

Jul-2006

Jun-2

007

May-2

008

Apr-2009

Mar-2010

Feb-2

011

Jan-2

012

Percent

8/12/2019 Econ1102_Week_1

26/56

17

Measuring National or Aggregate Output

GDP Gross Domestic Product

Definition:The market value of final goods and services produced ina country during a given period.

8/12/2019 Econ1102_Week_1

27/56

18

The market value of final goods and servicesproduced in

a country during a given period.

GDP is aflowvariable measured over a period of time.

Quarter March, June, September, DecemberAustralian GDP in March 2012 = $368.4 billionAustralian GDP in March 2013 = $379.6 billion

Year just add-up GDP over 4 quarters

Calendar Mar-12 + Jun-12 + Sep-12 + Dec-12Financial Sep-12 + Dec-12 + Mar-13 + Jun-13

Australian GDP in 2012 (Calendar) = $1,488.4 billion

8/12/2019 Econ1102_Week_1

28/56

19

The market valueof final goods and services produced ina country during a given period.

GDP is measure of aggregate production or output

Use market prices to value (or weight) quantities ofvarious goods and services

Example: Quantity Market Price

10 cars $20,000 per car100 apples $1 per apple

8/12/2019 Econ1102_Week_1

29/56

20

GDP = $200,000 + $100 = $200,100

What about goods and services with no observedmarket price?

Some are included in GDP:

National defense use costsof provision (costs ofbuying equipment, wages of soldiers, etc.)

Some are excluded from GDP

Unpaid housework

8/12/2019 Econ1102_Week_1

30/56

21

The market value of final goods and servicesproduced ina country during a given period.

GDP excludes intermediategoods and services. Thesegoods are used-up in the production process.

Example: In the production of a loaf of bread, the flourused is an intermediate input and is not counted in GDP.

Concept of Value Added: The market value of a firmsproduction less the cost of inputs purchased from otherfirms

8/12/2019 Econ1102_Week_1

31/56

22

Problem 1.2

Intelligence Incorporated produces 100 computer chips and sellsthem for $200 each to Bell Computers.

Using the chips and other labour and materials, Bell produces

100 personal computers.

Bell sells the computers, bundled with software that Bell

licenses from Macrosoft at $50 per computer, to PC Charlies for$800 each.

PC Charlies sells the computers to the public for $1000 each.

Calculate the total contribution to GDP using the value-added

method. Do you get the same answer by summing up the market

values of final goods and services?

8/12/2019 Econ1102_Week_1

32/56

23

Value Added in Computer Sales: Chapter 1, Problem 2

(Textbook)

Firm Sales Cost of inputs Value Added

Intel Incorp 20,000 0 20,000Macro Soft 5,000 0 5,000Bell 80,000 25,000 55,000PC Charlies 100,000 80,000 20,000

PC Charlies final sales = $100,000

Sum of Value Added = $100,000

8/12/2019 Econ1102_Week_1

33/56

24

3 Ways to Measure GDP

1. Production Method

2. Expenditure Method

3. Income Method

8/12/2019 Econ1102_Week_1

34/56

25

Expenditure Method

Accounting IdentityExpenditure on goods and services by final users mustequal the value of their production.

Components of Expenditure

Consumption (C) purchases by HouseholdsInvestment (I) purchases by FirmsGovernment (G) Government purchasesNet Exports (NX ) net purchases by foreign sectorNX = Exports Imports

8/12/2019 Econ1102_Week_1

35/56

26

National Income Accounting Identity

GDP=Expenditure

Y = C + I + G + NX

8/12/2019 Econ1102_Week_1

36/56

27

Australian GDP March Quarter 2013

Expenditure Approach

$ billionHousehold Consumption 210.0Private Investment 86.8Government (Public) Spending 85.7Change in Inventories -0.5Exports 76.4LessImports 76.0

Total 382.3Statistical discrepancy -0.3GDP 379.6

8/12/2019 Econ1102_Week_1

37/56

28

Income Method

GDP also equals the aggregate incomes paid to

Labour (L)Capital (K)

in the production of goods and services.

GDP = Labour Income + Capital Income

8/12/2019 Econ1102_Week_1

38/56

29

Australian GDP March Quarter 2013

Income Approach

$ BillionCompensation of Employees 184.0Gross Operating Surplus 126.7Gross Mixed Income 30.1GDP (at factor cost) 340.8

Taxes Subsidies 37.5

GDP (Market Prices) 378.3Statistical discrepancy 1.3GDP 379.6

8/12/2019 Econ1102_Week_1

39/56

30

Nominal vs. Real GDP

Nominal

values quantities of goods and services produced atcurrent yearprices (current price GDP)

Real

values quantities of goods and services produced atbase yearprices measure of the actual physical

volume of production (constant price GDP)

8/12/2019 Econ1102_Week_1

40/56

31

Example

2007 2008 % ChangeNo. of Cars 10 10 0Price of Cars $20,000 $40,000 100

No. of Apples 100 100 0Price of Apples $1 $2 100

Nominal GDP $200,100 $400,200 100

Real GDP2007 prices $200,100 $200,100 02008 prices $400,200 $400,200 0

8/12/2019 Econ1102_Week_1

41/56

32

Choice of Base Year (Bit Technical)

In the above example whether we use 2007 or 2008 asbase year prices gives the same answer for the growthrate of real GDP

This is not the case in general, particularly if you arecomparing real GDP over a 5-10 year period.

Using initial prices (i.e. 2007) is known as aLaspeyresindexUsing final prices (i.e. 2008) is known as a Paasche

index

8/12/2019 Econ1102_Week_1

42/56

33

Chain Weighting

For any two consecutive years compute the growth ratesof real GDP implied by both theLaspeyresand thePaascheindexes.

Then take the average of the two growth rates and this isthe chain-weighted growth rate. This can be used tocompute a real chained-weighted GDP.

Finally to compute a change index over a long period, theabove approach is applied on a year-by-year basis.

8/12/2019 Econ1102_Week_1

43/56

34

Example

2007 2008 % ChangeNo. of Cars 10 10 0Price of Cars $20,000 $40,000 100

No. of Apples 100 1000 900Price of Apples $10 $25 150

Nominal GDP $201,000 $425,000 111

Real GDP2007 prices $201,000 $210,000 4.52008 prices $402,500 $425,000 5.6

8/12/2019 Econ1102_Week_1

44/56

35

Chain-weighted measure of Real GDP

Take average of growth rates implied by 2007 and 2008prices.

5.05 %= (4.5% + 5.6%)/2

Choose either 2007 or 2008 as the base-year(nominal=real GDP). Lets pick 2007

2007 2008

Nominal GDP 201,000 425,000Real GDP 201,000 211,151(=201,0001.0505)

8/12/2019 Econ1102_Week_1

45/56

36

Is GDP A Good Measure of Economic Wellbeing?

Some OmissionsLeisure Time (eg. Weekend cricket games)Household production (non-market activities)Environmental Degradation (eg. Pollution)

Quality of Life (eg. Crime rate, traffic congestion)Economic Inequality

It is likely that GDP is positively related (correlated) witheconomic wellbeing

Variety of goods and servicesHealth and Education (link)

8/12/2019 Econ1102_Week_1

46/56

37

Measures of the Price Level

Want to measure the averagelevel of prices in theeconomy.

Main Measures

Consumer Price Index (CPI)GDP Deflator/Price Index, Producer Price Index (PPI)

CPI For a given period, measures the cost in that periodof a given basket of goods and services relative to theircost in a fixed year called a base year.

8/12/2019 Econ1102_Week_1

47/56

38

Construct a CPI

Choose a basket of goods and servicesBasket 2000 (base) 2008Rent (2 bedroom flat) $500 $630Hamburgers (60) $150 $150CDs (2) $30 $70Total Expenditure $680 $850

CPI =Cost of base-year basket of goods and services in current

yearCost of base-year basket of goods and services in baseyear

8/12/2019 Econ1102_Week_1

48/56

39

CPI = $850/$680 = 1.25

Cost of living is 25 percent higher in 2008 than it wasin 2000

Average prices are 25 percent higher in 2008 than in2000

Australian CPI

Published quarterly by ABSHousehold Expenditure Surveyused to determine

typical basket

Base year changes every 5 years

8/12/2019 Econ1102_Week_1

49/56

40

Inflation (and Deflation)

Inflation is measured by the percentage change in the CPIover a given period.

Inflation rate = 100*])1()1(

[

CPI

CPICPI

Inflation rate = 0 implies prices are constant

Inflation rate > 0 implies prices are rising

Inflation rate < 0 implies prices are falling Deflation

8/12/2019 Econ1102_Week_1

50/56

41

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.020.0

Sep-1970

May-1972

Jan-1974

Sep-1975

May-1977

Jan-1979

Sep-1980

May-1982

Jan-1984

Sep-1985

May-1987

Jan-1989

Sep-1990

May-1992

Jan-1994

Sep-1995

May-1997

Jan-1999

Sep-2000

May-2002

Jan-2004

Sep-2005

May-2007

Jan-2009

Sep-2010

%

Australian CPI (Year-ended % change)

8/12/2019 Econ1102_Week_1

51/56

42

Limitations with CPI

Quality Adjustment and New Goods Bias

Quality improvements may show up as higher pricesfor goods and services

New goods are often not included until CPI is re-based

Substitution Bias

Use of a fixed basket means that no allowance ismade for consumers substitution toward relatively

less expensive goods.

CPI tends to overstate the rate of inflation.

8/12/2019 Econ1102_Week_1

52/56

43

Costs of Inflation

Important to distinguish between relativeprice changeand a change in the generalprice level

Shoe-leather costs inflation reduces the realpurchasing power of a given amount of money

Menu costs real costs of changing pricesIntroduces noise into the price mechanismDistorts tax systems (if not indexed to inflation)Unexpected re-distributions of wealth

8/12/2019 Econ1102_Week_1

53/56

44

Inflation and Interest Rates

Nominal Interest Rates percentage increase in thenominal (or dollar) value of a financial asset.

Real Interest Rate percentage increase in the realpurchasing power of a financial asset.

= ir r = real interest ratei = nominal interest rate= inflation rate

8/12/2019 Econ1102_Week_1

54/56

45

8/12/2019 Econ1102_Week_1

55/56

46

Fisher Effect

Nominal interest rate = real rate + (expected) inflationrate

e

ri +=

8/12/2019 Econ1102_Week_1

56/56

47

Inflation and Nominal Interest Rate

-2.0

0.0

2.0

4.0

6.08.0

10.0

12.0

14.0

16.0

Mar-86

Mar-88

Mar-90

Mar-92

Mar-94

Mar-96

Mar-98

Mar-00

Mar-02

Mar-04

Mar-06

Mar-08

%peran

num

Inflation (year-ended) 10 Year Bond Rate