Welcome to Macro 220
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Lecturer:
Office:
Contact:
Lectures:
Tutorials:
Consult:
Rod Duncan
C2-G20
rduncan@csu.edu.au
C2-G2 1pm to 2:50pm
C2-215 1pm to 1:50pm
10am-12am, 3pm-5pm Tues
2pm-5pm Thurs
Forms of economics
• Microeconomics- the
study of individual
decision-making
– “Should I go to college
or find a job?”
– “Should I rob this
bank?”
– “Why are there so
many brands of
margarine?”
• Macroeconomics- the
study of the behaviour
of large-scale
economic variables
– “What determines
output in an
economy?”
– “What happens when
the interest rate
rises?”
Economics as story-telling
• In a story, we have X happens, then Y
happens, then Z happens.
• In an economic story or model, we have X
happens which causes Y to happen which
causes Z to happen.
• There is still a sequence and a flow of
events, but the causation is stricter in the
economic story-telling.
Kobe, the naughty dog
Modelling Kobe
• Kobe likes to unmake the bed (Z).
• Kobe likes treats (X).
• We assume that more treats will lead to
fewer unmade beds.
(Not a very good) Model: X↑ → Z↓
• We can use this model to explain the past
or to predict the future.
Components of a model
• Variables- i.e. output of economy, inflation
rate, interest rates, or the unemployment
rate
• Relationships between the variables- i.e.
when interest rates rise, investment falls or
more complicated forms
Example: market for ice cream
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Variables: D is demand for ice cream, S is
supply of ice cream, P is price of ice cream, Y
is income of people who buy ice cream, T is
average temperature and I is prices of all
inputs to make ice cream.
Relationships: Then we say D is falling in P, S
rising in P, D rising in Y and in T and S falling in
I.
Equilibrium in ice cream market requires that
quantity of ice cream sold is equal to quantity
of ice cream bought.
Example: market for ice cream
• Equilibrium: D (P, Y, T) = S (P, I)
• Holding Y, T and I constant, we will then
have our standard demand-supply model.
• Important! Nothing about the behaviour of
the model depends on the meanings of the
variables- what D is or what T is.
• We are free to re-label our model, as long
as the relationships remain true.
Re-labelling
• We are free to re-label “D” and “S” as cars,
books, electricity, illicit drugs or even
marriage partners. We just have to also
re-label P, Y, T and I and be sure that the
relationships still hold true.
• Behaviour of the re-labelled model is
exactly the same as for the ice cream
market model.
Aggregate demand model
• Re-label D as demand for all goods and
services, S as supply of all goods and
services, P as the average price, T as net
exports and I as government red tape. Be
sure that the relationships still hold true!
• We now have a macro model! We will be
re-labelling P as interest rates later on in
this class and calling it the IS-LM model.
Questions to ask yourself?
• What are the variables in this model?
• What are the relationships between the
variables? (Often in the form of an
equation or a graph.)
Macroeconomic variables
• National output- gross domestic (or national) product
(GDP)
• Interest rates- usually a Treasury bond of some fixed
duration rate- there are lots of interest rates
• Unemployment rate
• Inflation rate
• Exports and imports
• Current account deficit/surplus
• Government budget deficit/surplus
• Household savings
• And many, many others.
Some Australian economic history
Australian GDP 1950-1995
600 000
500 000
Million A$
400 000
GDP
300 000
GDP Change
Real GDP
200 000
100 000
0
1950
1960
1970
1980
1990
2000
Australian Business Cycle
Aust Business Cycle
10
8
6
4
% Ch RGDP
2
0
1950
-2
-4
1960
1970
1980
1990
2000
Unemployment
Unemployment over the Business Cycle
12
10
Percent (%)
8
6
Unemployment
4
Change in GDP
2
0
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995
-2
-4
2.0
0.0
-2.0
Sep-04
Sep-02
Sep-00
Sep-98
Sep-96
Sep-94
Sep-92
Sep-90
Sep-88
Sep-86
Sep-84
Sep-82
Sep-80
Sep-78
Sep-76
Sep-74
Sep-72
Sep-70
Inflation
Consumer Price Inflation
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
Inflation
Interest Rates
18.00
16.00
14.00
12.00
10.00
Bank Interest Rates
8.00
6.00
4.00
2.00
Jan-03
Jan-00
Jan-97
Jan-94
Jan-91
Jan-88
Jan-85
Jan-82
Jan-79
Jan-76
Jan-73
Jan-70
0.00
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
Current Account Deficit
10
5
0
-5
-10
-15
-20
CAD % GDP