University of New South Wales ECON 1102 Macroeconomics Summarynotes

ECON1102 Macroeconomics Summary otes What is Macroeconomics? Macroeconomics is concerned either with the economy as a whole or with the basic subdivisions or aggregates that make up the economy. Microeconomics is the study of individual choices and group behaviour in individual markets, analysing how choices inform market forces and price signals. LN1 Measuring Macroeconomic Performance: Output and Prices Ch3: The main indicators of macroeconomic performance include: Rising living standards • Measured by GDP o GDP= the market value of final G&S produced in a country during a given period. o GDP is a measure of aggregate production or output. o GDP uses market prices to value the quantities of G&S produced. • GDP is measured in 3 ways: o Production method→ Y= O o Expenditure method→ GDP= Expenditure: Y= C + I + G + (X-M) o Income method→ GDP= Labour Income + Capital Income : GDP= L+K • The level of output (i.e. quantity and quality of G&S) tends to ↑over time. Stable business cycle • Aim is for low volatility in fluctuations of actual output around its trend or potential output. Relatively stable price level • Measured by CPI o For a given period measures the cost in that period of a given basket of G&S relative to their cost in the base year. o The base yr changes every 5yrs. o = o An inflation rate of 0→ implies prices are constant so no inflation o Inflation rate 0 → implies prices are falling i.e. deflation. o o CPI tends to overstate the level of inflation. • Stable price level is technically 0, BUT such a rate is highly unlikely so the objective is instead to target a low (positive) rate of inflation. The RBA currently sets inflation targeting at between 2-3%. Sustainable levels of public and national debt • Public debt→ influenced by gov. borrowing requirements→ borrowing by gov. from the private sector. Public debt went from $96bn in 1996 to net debt in 2002. • National debt→ influenced by our CAD or CAS→ borrowing requirements of domestic residents from foreign countries. Inflation = Current CPI – Previous CPI x 100 Previous CPI Disclaimer- The ASB Economics Faculty accepts no responsibility for the content of these pages. These notes were created by a past student for their personal revision purposes and as such may contain errors, typos, outdated statistics etc. Students are advised to read all material critically and for best results, to make their own notes based on official ECON lecture slides and notes and the BOF textbook. Nithilla 2 ECON1102 PASS Notes Balance between current and future consumption • Excess consumption at present results in low levels of savings, thus ↓levels of capital for investment→ ↓levels of investment→ ↓opportunities for consumption in the future. Full employment • Provision of employment for all individuals seeking work. 1. What does gross domestic product (GDP) mean? • Two of the criteria used to gauge a country’s macroeconomic performance include the measurement of: o Aggregate output o Average level of prices • Output is measured using the concept of gross domestic product (GDP). • GDP refers to the market value of the final goods and services produced in a country during a given period. • GDP= the market value of final G&S produced in a country during a given period. • Flow variable→ measured over a period of time, usually quarters, March, June, September and December. • For yearly GDP, add up the GDP over the 4 quarters. • GDP is a measure of aggregate production or output. • GDP uses market prices to value the quantities of G&S produced. • GDP is measured in 3 ways: o Production method→ Y= O o Expenditure method→ GDP= Expenditure: Y= C + I + G + (X-M) o Income method→ GDP= Labour Income + Capital Income : GDP= L+K • National income accounting identity is a mathematical relation showing how GDP is equal to the sum of expenditure on consumption, investment, government purchases and net exports. • GDP is not the best measure of economic wellbeing as it fails to account for changes in factors which significantly affect our economic wellbeing but cannot be measured in terms of their contribution to GDP. Such factors include leisure time, non-market economic activities, health and education levels, the availability of goods and services, income inequality and environmental quality. • However, GDP tends to be positively related to these omitted factors, and thus monitoring GDP does give some measure of a peoples’ general economic wellbeing. • Real GDP per person tends to be positively associated with many things people value, including a high material standard of living, better health and life expectancies, and better education. • Goods and services that are omitted from GDP include: o The value of unpaid housework and household duties such as cooking, cleaning, laundry that is performed. o The underground economy e.g. proceeds from drug sales. o Non-market economic activities e.g. volunteer fire-fighting, surf life-saving, • Given its setbacks, in failing to measure all the factors that contribute to peoples’ quality of life, GDP is a relatively good measure of economic welfare, though other measures such as the human development index provide a more comprehensive measure of economic welfare. • GDP omits those unpriced and non-market traded factors which affect economic welfare such as leisure time, non-market economic activities, environmental quality and resource depletion, quality of life, and economic inequality and poverty. Disclaimer- The ASB Economics Faculty accepts no responsibility for the content of these pages. These notes were created by a past student for their personal revision purposes and as such may contain errors, typos, outdated statistics etc. Students are advised to read all material critically and for best results, to make their own notes based on official ECON lecture slides and notes and the BOF textbook. Nithilla 3 ECON1102 PASS Notes • Increased leisure times available to workers in industrialised countries are not priced, and thus not reflected in GDP, nor are non-market activities such as unpaid housework, voluntary services or transactions in the underground economy. • GDP also omits the costs of economic activity such as resource exploitation and declining environmental quality e.g. deforestation, overfishing and increasing pollution. • GDP also conveys no information about the distribution of income and wealth across the population. While two economies may have the same GDP, income inequality may be high in one economy, with most of the wealth controlled by a small elite, but more equitable in another. • Despite these impediments, real GDP per capita tends to be positively associated with many aspects of economic welfare such as high material standards of living, since high GDPs correlate to a greater variety and quantity of G&S. • Higher GDP per capita, by increasing the incomes available to spend on health and education, can also indicate better health and life expectancies and better education in economies. • While GDP doesn’t provide the most comprehensive measure of economy welfare, it is positively related to factors that contribute to peoples’ quality of life, hence providing a relatively good measure of general economic wellbeing. 2. What are the three ways of measuring a country's GDP?