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
4
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
4
