Intermediate Macroeconomics
Semester 1, 2024
Faculty of Arts and Social Sciences
University of Sydney
Associate Professor Stella Huangfu (Unit Coordinator)
& Syed Atif
Assessment Structure
1.
Midterm Exam (20%)
•
Friday, April 12, 6 pm. Online.
•
Multiple-choice questions.
•
Covers topics 1 – 3.
•
Sample questions will be posted on Canvas before the
exam.
Assessment Structure
2.
Online Quizzes (20%)
•
5 online quizzes. Each quiz 1 hour.
•
Each quiz has 20 multiple-choice questions, randomly
selected and ordered for you from a large set.
•
Refer to the following schedule for key dates.
Online Quizzes Schedule
Quiz
Starts online
Friday at 5pm
Ends online
Friday at 5pm
Topic Coverage
1
February 23
March 15
1, 2
2
March 15
April 5
3, 4
3
April 19
May 10
5, 6
4
May 3
May 17
7, 8
5
May 17
May 31
9, 10
Assessment Structure
3. Econ & Me Assessment (10%)
•
Work in a team of 4-5 members to submit a short video of 4-5 minutes on the
following 3 topics:
1.
Reserve Bank of Australia Press Conference: Groups will take on the role of economic experts
and produce a simulated "Reserve Bank of Australia Press Conference" video.
2. Economic Insights Unveiled: RBA Governor Interview: In this multimedia assessment, student
groups are assigned the role of a news team tasked with conducting an interview with the
central bank governor.
3. Budget Clash: Mini-Debate Showdown on Australian Federal Budget 2024: In this condensed
format, students will participate in a brief simulated live debate on the Federal Budget 2024,
representing different political perspectives.
•
This assessment has two parts:
Part I: Team agreement with the project proposal (2%) due in Week 5 Friday March 22
Part II: Final video submission (8%) due in Week 11 Friday May 10
5
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Assessment Structure
4. Final Exam (50%)
•
Cumulative. Covers topics 1 - 10.
•
Multiple-choice questions + short-answer questions.
•
Sample questions will be posted on Canvas before the
exam.
Textbook
Olivier Blanchard and Jeffrey Sheen,
Macroeconomics, 4th Australasian Edition,
Pearson.
Topic 1
(Chapters 1- 2)
Introduction: A brief look at global
conditions with a focus on Australia’s
recent performance. Output, inflation
and unemployment; definitions of GDP.
Chapter 1
A Tour of the World
:
1-2
Australia, 2011
Output: $1.44 trillion
(US$1.48 trillion
using exchange
rate, US$0.91
trillion using PPP)
Population: 22.7 million
Output per capita:
$63,400
(US$65,500 using
exchange rate,
US$40,200 using
PPP)
10
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Australia
Latest Data (source: World Economic Outlook Database, Oct 2023)
Australia
11
(forecast)
2017
2018
2019
2020
2021
2022
2023
Output growth
2.4
2.8
1.9
-1.8
5.2
3.7
1.8
Unemployment
5.6
5.3
5.2
6.5
5.1
3.7
3.7
Inflation
2.0
2.0
1.6
0.9
2.8
6.6
5.8
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Australia
From an economic point of view, the period 2000–2007
was one of the best in recent memory.
• Output growth averaged 3.3%, a little higher than
1980–1999.
• Sustained growth was associated with a steady
increase in employment and a steady decrease in the
unemployment rate: average 5.6% compared to 8.2%
in 1980–1999.
• The inflation rate remained low throughout the period
(2% lower than 1980–1999).
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Australia
The Australian economy had a mild slowdown in 2001:
• Output growth halved to 1.9% in 2001. Recovered to 4.1% in
2002. Slowdown was smaller and shorter than in all other OECD
countries.
The Global Financial Crisis in 2008 reduced output
growth and inflation, and pushed up unemployment:
• Output growth reduced by 2% in 2009 compared to earlier in
the decade.
• Unemployment rose by 1.3% in 2009 compared to 2008.
• Inflation peaked in 2008, then fell by 1.6% in 2009.
• Output regained strength and unemployment started to fall in
2010.
• Despite the GFC, the Australian economy remains the strongest
among the developed economies—in all three dimensions.
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1-3
The United States, 2011
Output: US$15.1 trillion
Population: 311.9 million
Output per capita: US$48,400
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The United States
Latest Data (source: World Economic Outlook Database, Oct 2023)
United States
Output growth
Unemployment
Inflation
15
(forecast)
2017
2.2
4.3
2.1
2018
2.9
3.9
2.4
2019
2.2
3.8
1.8
2020
-3.4
8.1
1.2
2021
5.7
5.4
4.7
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2022
2.1
3.6
8
2023
1.5
4.1
3.6
The United States to 2007
The US economy did poorly in 2001 after the ‘dotcom’
crash: output growth slowed to 0.7% with a short
recession (defined as 2 quarters of negative growth).
Output growth recovered until 2007 due to:
§ Aggressive monetary policy (Fed kept interest rate
very low—down to 1%!)
§ Aggressive fiscal policy—big ‘temporary’ tax cuts by
Bush administration leading to big fiscal deficits
§ Weakening US dollar exchange rate boosting exports
US economists felt good about the US economy!!!
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1-4
The European Union, 2011
The Euro Area
Output: US$13.1 trillion
Population: 332.4 million
Output per capita: US$39,410
(US$33,795 in PPP terms)
Share of world GDP: 16.5%
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The European Union
15 European countries (+ 8 east European + Malta and Cyprus)
comprise the European Union, or EU27.
Together, they form a formidable economic power, with a combined
output close to the output of the United States.
The standard of living in many of these countries is also close to that
of the United States.
From 2002, 17 countries created a common currency—EURO.
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The European Union
§
19
These EU4 countries generate 60% of total
EU27 output.
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The European Union Performance
Latest Data (source: World Economic Outlook Database, Oct 2023)
Euro area
20
(forecast)
2017
2018
2019
2020
2021
2022
2023
Output growth
2.4
1.8
1.3
-6.1
5.2
3.3
0.7
Unemployment
9.1
8.2
8.0
8.1
7.7
6.7
6.6
Inflation
1.5
1.8
1.3
0.3
2.6
9.2
3.3
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The European Union Performance
Recent EU economic performance has been poor:
• Average output growth from 1980 to 1999 was only 2.2%
(0.9% less than US).
• Persistent high unemployment rate—10.9%—though little
lower in last few years. Now rising due to fiscal austerity.
• The global financial crisis affected Europe badly in
2008–9, and the resulting ‘sovereign debt crisis’ since
2010 has made everything worse. Especially for the
PIIGS.
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1-5
China
2008
2011
Output: US$7.3 trillion
(US $11.3 using PPP)
Population: 1.35 billion
Output per capita: US$5,414
(US$8,386 using PPP)
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China
Latest Data (source: World Economic Outlook Database, Oct 2023)
China
23
(forecast)
2017
2018
2019
2020
2021
2022
2023
Output growth
6.8
6.6
6.0
2.2
8.1
3.0
5.0
Unemployment
3.9
3.8
3.6
4.2
4.0
5.5
5.3
Inflation
1.6
2.1
2.9
2.4
0.9
1.9
0.7
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China
In 2012, China was now a major economic power
with:
§ more than four times the population of US
§ nearly half the GDP of the US, and thus
§ relatively poor at one eighth of US GDP per capita
(PPP).
(PPP measures—better than converting using the
exchange rate, since many goods are cheaper in poor
countries. The same income buys you more in Beijing
than in New York. PPP makes the correction.)
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Sources of China’s Growth
China has been growing fast for 20 years
§ At an average of about 9% per year (leads to doubling in 9
years!).
§ Global financial crisis hardly affected growth, due to large
fiscal stimulus, but has since fallen a little because the
Chinese government was concerned about an overheating
economy—inflation.
Despite problems with data quality (improved in recent
years), growth has been high for two reasons:
§ Very high accumulation of capital (about 40% of GDP),
supported by low-cost labour moving from rural areas.
§ Very fast technological progress, from foreign firms
investing in China.
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In Summary
2011
26
GDP @ PPP rate
(US $ trillions)
Share in world
GDP @ PPP
Population
(millions)
GDP per capita
@ PPP
Australia
0.91
1.2%
22.7
40,200
United States
15.09
19%
312
48,400
EU27
16.38
16.5%
332.4
33,795
Germany
3.10
3.9%
81.8
38,100
France
2.22
2.8%
63.1
35,100
Italy
1.85
2.3%
60.6
30,500
Spain
1.41
1.8%
46.1
30,600
United Kingdom
2.26
2.9%
63
36,090
China
11.30
9.2%
1,350
8,386
World
78.90
100.0%
6,865
14,417
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Other Parts of the World
Japan
§ Dramatic rise since WWII—‘economic miracle’
§ Has done badly in the last 15 years
§ Stock market bubble crashed in early 1990s leading to
a prolonged slump (average growth 1%)
§ Just as it started to emerge from this slump in 2007,
the global financial crisis hit Japan badly.
Asia (including Singapore, South Korea, Taiwan,
India)
§ Fastest growing region, until the global financial crisis
§ India, the second most populous country, has slowed to
a low 5.3% in 2012, and its GDP <10% of US GDP.
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Latin America
Other Parts of the World
§ Went from very high to low inflation in 1990s
§ Chile in relatively good economic shape in 2008 but suffered
badly in the global financial crisis
§ Argentina has suffered from repeated crises recently, but
doing better.
Central and Eastern Europe
§ Many still struggling with transition from communist to
capitalist economies
§ Russia has done well recently due to high oil and gas prices,
but struggling since the 2008-9 crisis.
Africa
§ Has long suffered economic stagnation, disease and war.
Improvement by 2008 with growth of about 7% with most
countries growing. Has improved lately.
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Chapter 2
A Tour of the Book
Key Macroeconomic Variables
Three key measures of macro analysis
•
Output (GDP)
•
Unemployment rate
•
Inflation rate
Section 2.1: Aggregate Output
•
National income and product accounts are an accounting
system used to measure of aggregate economic activity.
•
The measure of aggregate output in the national income accounts
is gross domestic product, or GDP.
GDP: Production and Income
There are three ways of defining GDP:
1.
GDP is the value of the final goods and services produced in
the economy during a given period.
• A final good is a good that is destined for final
consumption.
• An intermediate good is a good used in the production of
another good.
GDP: Production and Income
STEEL COMPANY (FIRM 1)
CAR COMPANY (FIRM 2)
Revenues from sales
$100
Revenues from sales
$200
Expenses
$80
Expenses
$170
Wages
Profits
$80
$20
Profits
Wages
$70
Steel purchases
$100
$30
GDP: Production and Income
There are three ways of defining GDP:
2.
GDP is the sum of value added in the economy during a given
period.
§
Value added equals the value of a firm’s production
minus the value of the intermediate goods it uses in
production.
GDP: Production and Income
There are three ways of defining GDP:
3.
GDP is the sum of the incomes in the economy during a given
period.
THE COMPOSITION OF AUSTRALIAN GDP BY TYPE OF INCOME, 1960 AND 2011
SHARES
1960
2011
Labour income
70%
55%
Capital income
23%
35%
Indirect taxes and subsidies
Source: RBA G12; labour income includes mixed income
7%
10%
Nominal and Real GDP
•
Nominal GDP is the sum of the quantities of final
goods produced times their current price.
•
Nominal GDP increases over time because:
•
1.
The production of most goods increases over time.
2.
The prices of most goods also increase over time.
Real GDP is constructed as the sum of the quantities of
final goods times constant (rather than current) prices.
Nominal and Real GDP
Year
Quantity of Cars
Price of cars
Nominal GDP
2009
10
$20,000
$200,000
2010
12
$24,000
$288,000
2011
13
$26,000
$338,000
Using 2010 dollars to compute real GDP, then:
Year
Quantity of Cars
Price of cars
2009
10
$24,000
$240,000
2010
12
$24,000
$288,000
2011
13
$24,000
$312,000
Real GDP
Nominal and Real GDP
•
Nominal GDP is also called dollar GDP or GDP in current dollars.
•
Real GDP is also called GDP in terms of goods, GDP in constant
dollars, GDP adjusted for inflation, or GDP in, say, 2010
dollars.
•
Problem: Real GDP growth rate depends on the choice of the base
year when there is more than one final good.
•
One solution: Construct real GDP by chaining the rate of changes.
Nominal and Real GDP
Potato chip and Computer production and prices
Potato Chips (bags)
Computers (unit)
Year
Q
P($)
Q
P($)
1998
10,000
2
1
10,000
1999
11,000
2.5
2
5,000
2000
12,000
3
4
2,500
Real GDP measured by the fixed-base-year method (in $1,000)
Year
1998 prices 1999 prices
2000 prices
1998
30
30
32.5
1999
42
37.5
38
2000
64
50
46
Numbers along the diagonal are nominal GDPs. Why?
39
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Nominal and Real GDP
Real GDP measured by the fixed-base-year method (in $1,000)
Year
1998 prices 1999 prices
2000 prices
1998
30
30
32.5
1999
42
37.5
38
2000
64
50
46
Real GDP growth (% change)
Period
1998 prices 1999 prices 2000 prices Chained rate
1998-99
40
25
16.9
32.5
1999-00
52.4
33.3
21.1
27.2
With more than one good, the real GDP growth rates vary with the base year.
The chained rates are simple averages of the two alternative growth rates
over the period.
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Nominal and Real GDP
How to compute the level of real GDP?
•
First, pick an arbitrary year as the base year, say 1998.
•
Using the chained rates and the nominal GDP in 1998 ($30,000), we can
then compute the real GDP in chained (1998) thousand dollars:
Year
Chained rate
real GDP (in chained (1998)
thousand dollars)
1998
100
30
1999
32.5
39.8
2000
27.2
50.6
𝑐ℎ𝑎𝑖𝑛𝑒𝑑 𝑟𝑎𝑡𝑒!""#$""
32.5
= 30× 1 +
= 39.75
100
100
𝑐ℎ𝑎𝑖𝑛𝑒𝑑 𝑟𝑎𝑡𝑒!"""$&&
27.2
𝑅𝐺𝐷𝑃%&&& = 𝑅𝐺𝐷𝑃!""" × 1 +
= 39.75× 1 +
= 50.56
100
100
𝑅𝐺𝐷𝑃!""" = 𝑅𝐺𝐷𝑃!""# × 1 +
41
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Australian Nominal and Real GDP
§ Nominal GDP increased by a factor of 83
§ Real GDP increased by a factor of 6
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Nominal and Real GDP
GDP growth equals:
Yt - Yt -1
Yt -1
• Periods of positive GDP growth are called
expansions.
• Periods of negative GDP growth are called
recessions.
Real GDP Growth
Most recent recession was in 1990–1!
44
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Section 2.2: The Other Major Macroeconomic
Variables
GDP is obviously the most important macroeconomic variable. But
two other variables tell us about other important aspects of how an
economic is performing:
1.
Unemployment
2.
Inflation
The Unemployment Rate
labour force = employed + unemployed
L
=
N
+
U
unemployment rate:
U
u=
L
Australia
June 2012
Employed
11.5 million
'.)*
𝑢!"#$%& = '.)*+%%., =5.2%
Unemployed
0.63 million
46
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The Unemployment Rate
The crisis of 2008 had a small but visible effect.
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The Unemployment Rate
§ Only those looking for work are counted as
unemployed. Those not working and not looking
for work are not in the labour force.
§ People without jobs who give up looking for work
are known as discouraged workers.
§ Participation rate
labour force
=
population of working age
48
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The Inflation Rate
•
Inflation is a sustained rise in the general level of prices—the price
level.
•
The inflation rate is the rate at which the price level increases.
•
Deflation is a sustained decline in the price level, or a negative
inflation rate.
The GDP Deflator
nominal GDPt
$Yt
Pt =
=
real GDPt
Yt
•
The GDP deflator is what is called an index number—
set equal to 100 in the base year.
•
The rate of change in the GDP deflator equals the rate
of Inflation:
( Pt - Pt -1 )
Pt -1
• Nominal GDP is equal to the GDP deflator times real GDP:
$Yt = PY
t t
The Consumer Price Index
•
The GDP deflator measures the average price of output,
while the consumer price index (CPI) measures the
average price of consumption, or equivalently, the cost
of living.
•
The CPI and the GDP deflator move together most of
the time.
Inflation of the Consumer Price Index and
the GDP Deflator in Australia
52
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Inflation
Why do we hate inflation?
•
Suppose the inflation rate is 5% per year. How long does it take to
double the price?
Big Mac Price in Australia
(source: The Economist)
7
6
AUD
5
4
3
2
1
0
2000
•
2005
2010
What if the inflation rate is 10% per year instead?
Who loves inflation?
2015
Section 2.3: A Road Map
Output is determined by:
•
demand in the short run, say, up to a few years;
•
the level of technology, the capital stock, and the labour force in
the medium run, say, up to a decade or so;
•
factors such as education, research, saving, and the quality of
government in the long run, say, a half century or more.