MONEY, EMPLOYMENT & GROWTH
Topic 1 – Review of Key Concepts;
The Australian and Global Economies
Dr. Raymond Li
Raymond.Li@Canberra.edu.au
Week
Topic
1
Introduction: Basic Economics Concepts
2
Measuring an Economy's Output
3
The Simple Keynesian Model
4
The Simple Keynesian Model
5
Fiscal Policy
6
The AD-AS Model
7
The AD-AS Model
8
CLASS FREE
9
***** Economic Theory and Practice Assessment *****
10
Economic Growth
11
Money and Banking
12
Monetary Policy
13
The Unemployment Inflation Trade-off
Teaching Staff
Dr. Raymond Li
Email: raymond.li@canberra.edu.au
Office: 11C16
Phone: 62015211
Resources
Lecture slides
Tutorial questions
Bolt on module on quantitative skills
Textbook:
https://www.pearson.com.au/products/Parkin-MichaelBade-Robin/Macroeconomics-Australia-in-the-GlobalEnvironment/9781488625596?R=9781488625596
Class Arrangements
Lecture: F2F + Virtual Room
Tutorial:
14:30-15:30: F2F only
15:30-16:30: F2F only
17:30-18:30: F2F + Virtual Room
1.1 DEFINITION AND QUESTIONS
What is Economics
Economics is the science which studies human
behaviour as a relationship between ends and scarce
means which have alternative uses
• “ENDS” - Society’s needs and wants (assumed to be
unlimited)
• “MEANS” - Society’s resources of land, labour, capital
goods, etc
1.1 DEFINITION AND QUESTIONS
Why Study Economics?
• Helps you understand the world in which we live
• Improves decision making
• Know the potential and limits of economic policy
• Lets you avoid being deceived by economists (Joan
Robinson)
1.1 DEFINITION AND QUESTIONS
Macroeconomics concerned with aggregative concepts:
• Total consumption spending by all consumers
• Total investment spending by all firms
• Total output / level of economic activity
• The overall price level
Macroeconomics is the summation of micro activity, but:
• Focus is often on different aspects of same variable
• Beware of the fallacy of composition
1.2 THE ECONOMIC WAY OF THINKING
Economics as a Social Science
Economists try to understand and predict the effects of
economic forces by using the scientific method first
developed by physicists.
1. Observation and Question
An economist begins with a question or a puzzle about
cause and effect arising from some observed facts.
1.2 THE ECONOMIC WAY OF THINKING
2. Economic Models
An economic model is a description of some feature of
the economic world that includes only those features
assumed necessary to explain the observed facts
• Abstraction
• Deduction
• Prediction
Economics often uses the language of mathematics
• The amount of apples bought depends on the price of apples
• QDA = f (PA)
11
1.2 THE ECONOMIC WAY OF THINKING
From Reality to Theory
• The real world is too complex to deal with
• Simplification by assumptions
• The reality is divided into two parts:
– Included (being considered by the theory)
– Excluded (being “assumed away”)
• The boundary is flexible
• The differences in the determination of the boundary
give rise to different schools of thought in Economics
12
1.2 THE ECONOMIC WAY OF THINKING
From Theory to Reality
• Theories and models are used to explain and predict
events in the real world
• “Applications”
• Theories and models cannot be applied directly to the
real world without qualifications (conditions)
– The effect of the excluded factors?
– Other things being equal?
13
1.2 THE ECONOMIC WAY OF THINKING
Essentials of a Model
• Exogenous and endogenous variables
• A set of relationships between the variables
• Equilibrium
– State of rest vs Market-clearing
– General vs Partial
• Equilibrium solutions available
• Comparative statics
1.2 THE ECONOMIC WAY OF THINKING
3. Check Models Against Facts
Natural experiments: A situation that arises in the
ordinary course of economic life in which the one factor
of interest is different and other things are equal.
A statistical investigation looks for a correlation.
• Correlation is the tendency for the values of two variables to
move together in a predictable and related way.
An economic experiment puts people in a decisionmaking situation and varies the influence of one factor at
a time to discover how they respond.
1.2 THE ECONOMIC WAY OF THINKING
Disagreement: Normative versus Positive
Economists sometimes disagree about assumptions and
models and also about what policy to use.
Some disagreements can be settled by appealing to
further facts, but others cannot.
Disagreements that can’t be settled by facts are
normative statements—statements about what ought to
be.
Disagreements that can be settled by facts are positive
statements—statements about what is.
1.2 THE ECONOMIC WAY OF THINKING
Normative or Positive?
“Tax rates for individuals with high income should be
made higher than those for individuals with low income
since higher income individuals can afford to pay more”
“An increase in the minimum wage will cause a decrease
in employment among the least skilled.”
“Higher federal budget deficits will cause interest rates to
increase.”
1.2 THE ECONOMIC WAY OF THINKING
Economics as Policy Tool
Economics provides a way of approaching problems in
all aspects of our lives:
• Personal
• Business
• Government
1.3 WHAT, HOW and FOR WHOM?
What Do We Produce?
We divide the vast array of goods and services produced
into:
Consumption goods and services - goods and
services that are bought by individuals and used to
provide personal enjoyment and contribute to a person’s
standard of living.
Capital goods - goods that are bought by businesses
to increase their productive resources.
1.3 WHAT, HOW and FOR WHOM?
Australian Industries (2022 Value Added, $bn)
Mining
Health care and social assistance
Professional, scientific and technical services
Financial and insurance services
Construction
Manufacturing
Public administration and safety
Education and training
Transport, postal and warehousing
Retail trade
Wholesale trade
Administrative and support services
Rental, hiring and real estate services
Agriculture, forestry and fishing
Information media and telecommunications
Electricity, gas, water and waste services
Accommodation and food services
Other services
Arts and recreation services
0
Source: ABS (5206.0)
50
100
150
200
250
1.3 WHAT, HOW and FOR WHOM?
How Do We Produce?
Factors of production are the productive resources
used to produce goods and services.
Factors of production are grouped into four categories:
• Land
• Labour
• Capital
• Entrepreneurship
1.3 WHAT, HOW and FOR WHOM?
Land
Land includes all the “gifts of nature” that we use to
produce goods and services.
Land includes all the things we call natural resources.
Land includes minerals, water, air, wild plants, animals,
birds and fish as well as farmland and forests.
1.3 WHAT, HOW, AND FOR WHOM?
Labour
Labour is the work time and work effort that people
devote to producing goods and services.
The quality of labour depends on how skilled people
are—what economists call human capital.
Human capital is the knowledge and skill that people
obtain from education, on-the-job training, and work
experience.
1.3 WHAT, HOW, AND FOR WHOM?
1.3 WHAT, HOW, AND FOR WHOM?
1.3 WHAT, HOW, AND FOR WHOM?
Capital
Capital consists of tools, instruments, machines,
buildings, and other items that have been produced in
the past and that businesses now use to produce goods
and services.
Capital includes, office buildings, equipment, and so on.
Capital does not include money, stocks, and bonds.
They are financial resources.
1.3 WHAT, HOW, AND FOR WHOM?
Entrepreneurship
Entrepreneurship is the human resource that
organizes labour, land and capital.
Entrepreneurs come up with new ideas about what and
how to produce, make business decisions and bear the
risks that arise from these decisions.
1.3 WHAT, HOW and FOR WHOM?
For Whom Do We Produce?
In market economies, it depends on the income of
people
Factors of production are paid incomes:
Rent - Income paid for the use of land.
Wages - Income paid for the services of labour.
Interest - Income paid for the use of capital.
Profit - Income earned by an entrepreneur for running a
business.
1.3 WHAT, HOW and FOR WHOM?
Functional distribution of income is the distribution of
income among the factors of production.
Personal distribution of income is the distribution of
income among households.
1.4 THE GLOBAL ECONOMY
The People
Australia’s population (2022): 25,978,935
World population (2022): 7,951,149,546
The Economies
Advanced Economies – the most developed economies
in the world (GDP; industrialization; infrastructure; HDI).
Emerging and Developing Economies – those who are
catching up and becoming more engaged with the global
economy.
1.4 THE GLOBAL ECONOMY
What in the Global Economy?
2019 World output ≈ US$80 trillion
1.4 THE GLOBAL ECONOMY
Some Differences in What Is Produced
Developing economies have large and growing
manufacturing industries, which produce textiles,
footwear, sports gear, toys, electronic goods, furniture,
steel and even cars and aeroplanes.
Food production is a small part of the advanced
economies and a large part of the developing economies
such as Brazil, China and India.
But the advanced economies produce about one-third of
the world’s food.
1.4 THE GLOBAL ECONOMY
Some Similarities in What Is Produced
Retail industries in advanced economies are similar, but
so are the structure of what they produce.
Agriculture and manufacturing are smaller percentages
of total production and are shrinking whereas services
are a larger percentage and growing.
1.4 THE GLOBAL ECONOMY
How in the Global Economy?
Human Capital Differences
The quality of labour depends on human capital.
The differences in human capital between the advanced
economies and the developing economies is enormous
and it arises from:
• Education, on-the-job training and experience
• Physical ability and state of health
1.4 THE GLOBAL ECONOMY
Physical Capital Differences
The physical capital available for producing goods and
services differentiates an advanced economy from a
developing economy:
• Transportation system—advanced economies are
more developed
• Technologies used on farms and in factories—
advanced economies use more capital-intensive
technologies
1.4 THE2.3
GLOBAL
MACROECONOMIC
ECONOMY PERFORMANCE
For Whom in the Global Economy?
Who gets the world’s goods and services depends on
the incomes that people earn.
1.5 PRODUCTION POSSIBILITIES
Production Possibilities Frontier
The boundary between the combinations of goods and
services that can be produced and the combinations that
cannot be produced, given the available factors of
production and the state of technology.
The PPF puts three features of production possibilities in
sharp focus:
• Attainable and unattainable combinations
• Efficient and inefficient production
• Tradeoffs and free lunches
1.5 PRODUCTION POSSIBILITIES
This figure shows the PPF
for mobile phones and
DVDs.
Each point on the graph
represents a column of
the table.
The line through the
points is the PPF.
1.5 PRODUCTION POSSIBILITIES
Attainable and Unattainable Combinations
Because the PPF shows
the limits to production, it
separates attainable
combinations from
unattainable ones.
1.5 PRODUCTION POSSIBILITIES
Efficient and Inefficient Production
Production efficiency is
attained when we cannot
produce more of one good
or service without producing
less of something else.
1.5 PRODUCTION POSSIBILITIES
Tradeoffs and Free Lunches
A tradeoff is an exchange
- giving up one thing to get
something else.
A free lunch is a gift getting something without
giving up something else.
1.5 PRODUCTION POSSIBILITIES
Economic growth is the sustained expansion of
production possibilities.
An economy grows when it develops better technology,
improves the quality of labour, or increases the quantity
of capital.
When an economy’s resources increase, its production
possibilities expand and its PPF shifts outward.
1.5 PRODUCTION POSSIBILITIES