ECON1002 Introductory Macroeconomics Week 1: Introduction to Macroeconomics & Measuring macroeconomic performance: output Readings: BOF Ch. 1 and 2.1-2.4 Dr Jordi Vidal-Robert School of Economics, University of Sydney Semester 2, 2020 The University of Sydney Page 1 Roadmap for today 1. Introduction: content and structure 2. Introduction to macroeconomics 3. Gross domestic product 4. Real GDP 5. Discussion: Real GDP is not the same as economic wellbeing 6. Next week The University of Sydney Page 2 Who is your course coordinator/lecturer? The University of Sydney Page 3 Who is your course coordinator? The University of Sydney Page 4 Everything you need for this course is in Canvas! Location: https://canvas.sydney.edu.au/courses/26892 The University of Sydney Page 5 Questions and Email Etiquette – Questions? 1. Schedule or assessments: UoS outline 2. Second, ask in Ed (online discussion board) or tutor. All materials are in Canvas 3. Third, come to Q&A or e-mail. – If you e-mail: • Send your email from your university account • E-mail with ECON1002 in the subject • Please keep the email short and concise • Please refer to me as Jordi The University of Sydney Page 6 Communication (ideally) Weekly announcement: summarizing what we have done, any relevant information of the unit Ed Discussion board: questions about the unit and its content. E-mails: other circumstances The University of Sydney Page 7 Lectures Live streaming: use of Padlet and Canvas chat Why? They get recorded anyway. Some students need a fix scheduled time Organization: lectures will be organized in blocks, flagged in Echo360 so you can have a rest while listening to it. The University of Sydney Page 8 Tutorials Face-to-face and online Videos at the end of the week providing solutions. Access to solutions in pdf as well If you have questions, Ed discussion board, office hours with tutors or myself The University of Sydney Page 9 Attendance It does not affect your final grade Either in online tutorials, face-toface tutorials or watching the video tutorial Attendance will be used to inform you of your progress in the unit The University of Sydney Page 10 How to do well in Econ1002? 1. Take the math diagnostic test: If you did not do well DON'T PANIC. You can join the math workshop or online materials and/or revise a high school calculus/algebra book. 2. Attend online lectures and tutorials &/or watch the recordings, read the book/s, do the problem sets. DO NOT CHECK ANSWER KEYS STRAIGHT AWAY WHEN YOU GET STUCK. 3. If you get stuck, take a breath, revise the book or lectures, ask in Ed discussion board, talk to your colleagues, your tutor and/or your lecturer. Start from the beginning, then attempt again, then check the answer. The University of Sydney Page 11 Readings & Materials • Lecture notes/slides are the roadmap of the course. • They will be recorded & slides/scribbles/problem sets/assignments are posted on Canvas • The main textbook is Bernanke Olekalns and Frank (BOF) 5th edition. The University of Sydney Page 12 Week 1: Introduction to macroeconomics (BOF Chapter 1) What is Macroeconomics? Go to menti.com code 25 23 01 8 The University of Sydney Page 13 What does macroeconomics study? • Concerned with broad themes: GDP, inflation, unemployment • What happens to the economy in the short run: one to four years (i.e. the business cycle) • What happens to the economy in the long run? • What is the interaction between economies? • https://theconversation.com/us/topics/macroeconomics-1628 • https://www.smh.com.au/business The University of Sydney Page 14 ECON1002 at a glance Measuring macro performance: Output, Prices, Savings and wealth, Unemployment Short-run macro: the business cycle Policy issues: Fiscal policy, Monetary policy & the RBA, Aggregate demand and supply Economic growth Open Economies: Exchange rates & the balance of payments The University of Sydney Page 15 Week 1: Measuring macroeconomic performance (BOF Chapter 2.1-2.4) Gross Domestic Product (GDP) https://www.ted.com/talks/hans_rosling_the_magic_washing_machine#t-535642 The University of Sydney Page 16 Australia’s historical GDP experience The University of Sydney Page 17 Australia’s historical GDP experience In 2016 a typical Australian resident consumed around four times the quantity of goods and services available to a typical resident at the onset of the Great Depression The University of Sydney Page 18 Introduction The Lay of the Land 10 World regions historical GDP experience log gdp per c apita 7 8 9 Western Offshoots Western Europe Latin America Asia 6 Africa 1000 1200 1400 1600 1800 2000 y ear The University of Sydney Page 19 Figure: The evolution of average GDP per capita in Western O§shoots, Western Australia’s historical GDP experience The University of Sydney Page 20 Gross domestic product: measuring the nation’s output • Definition: Gross domestic product (GDP) is the market value of the final goods and services produced in a country during a given period. • Market value • Price times quantity. • What about public goods and services? • As per this definition, what goods and services are not part of GDP and why? • Example: Bread production • 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 flour and sells to the baker for $1.20 and the baker makes the flour into bread and sells it for $2.00. The University of Sydney Page 21 Why is GDP growing? We are using more inputs The University of Sydney Page 22 Why is GDP growing? Output per hour worked or average labour productivity The University of Sydney Page 23 Why is GDP growing? Female labour force participation The University of Sydney Page 24 Week 1: Introduction to macroeconomics (BOF Chapter 2) Approaches to calculate GDP The University of Sydney Page 25 How to measure GDP? Three approaches Value added method Expenditure method Income method The University of Sydney Page 26 Example I Bread production: 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 flour and sells to the baker for $1.20 and the baker makes the flour into bread and sells it for $2.00. The University of Sydney Page 27 Value added method for GDP Example I Value added: what the firm adds to the value of the produced inputs it buys from other firms i.e. value of the firms output less value of purchases of intermediate goods (i.e. produced inputs). The University of Sydney Page 28 Example II Steel-Car: An economy with just two firms: Steel company and Car company The University of Sydney Page 29 The expenditure method for measuring GDP • All current production by firms must be either: • bought by households, other firms, government and foreigners; • left unsold as inventories bought by the firm which makes it. The University of Sydney Page 30 The expenditure method for measuring GDP • Components of the expenditure method: • C: Consumption expenditure. Spending by households on goods and services, not including spending on new houses (around 55% of total GDP on average) • I: Investment. Spending by firms on new buildings, machinery and inventories, plus spending by households on new houses (23%) • G: Government expenditure. Spending by federal, state and local governments on goods and services (22%) • NX: Net exports. Expenditure on exports (X) minus expenditure on imports (M) (net 0%) πΊπ·π = π = πΆ + πΌ + πΊ + ππ The University of Sydney Page 31 Expenditure Components of GDP The University of Sydney Page 32 Expenditure Components of GDP The University of Sydney Page 33 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 The University of Sydney Page 34 Why the expenditure and income approaches give the same answer? • Circular flow of income The University of Sydney Page 35 Since output is being evaluated at market prices, we need to be careful about Nominal vs real GDP • Nominal GDP is current production at “current prices”. • Problem: It can mislead when comparing GDP over time. • Why? • Real GDP is is current production at “base year” prices. Example: Prices and quantities in 2013 and 2018 The University of Sydney Page 36 Real vs Nominal GDP: Australia The University of Sydney Page 37 Week 1: Introduction to macroeconomics (BOF Chapter 2) Discussion on GDP https://www.gapminder.org/tools/?from=world#$state$time$value=2019;;&c hart-type=bubbles The University of Sydney Page 38 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 is excluded. Real GDP is nevertheless closely related to economic wellbeing. The University of Sydney Page 39 GDP and life expectancy The University of Sydney Page 40 GDP and life satisfaction The University of Sydney Page 41 Today’s videos & Extras • https://theconversation.com/us/topics/macroeconomics-1628 • https://www.gapminder.org/tools/?from=world#$state$time$value= 2019;;&chart-type=bubbles • https://voxeu.org/article/gdp-and-life-satisfaction-new-evidence • https://tracktherecovery.org • https://www.ted.com/talks/hans_rosling_the_magic_washing_machin e#t-535642 • https://www.ted.com/talks/hans_rosling_global_population_growth_ box_by_box#t-533238 The University of Sydney Page 42