ECO 120
Macroeconomics
Week 1
Introduction to
Macroeconomics
Lecturer
Dr. Rod Duncan
Topics
•
•
•
•
•
Basic information about the subject
A definition of macroeconomics
Macroeconomic modelling as storytelling
The big questions of macroeconomics
Some important macroeconomics
variables
Some details
• Lecturer:
Roderick Duncan
Email: rduncan@csu.edu.au (preferred)
Phone: (02) 6338-4982
Office: C2 - G20
• Class webpage:
http://athene.riv.csu.edu.au/~rduncan/Teaching/
Eco120/Eco120.htm
Webpage
• Webpage
– The webpage will hold all the materials for the
class, except for some readings available at
the Library Reserve.
• Lecture Notes (available on Friday before the
class) and Tutorial Materials
• Hand-outs (available when used)
• Review notes (from last semester’s DE subject)
• Links for reading/research
• Any important notices
Lectures and tutorials
• Lecture
– Lecture notes available on the class webpage
• Tutorials
– Tutorial papers due for the last 12 tutorials
– Tutorial papers available on webpage and
through tutors
– Only highest 10 marks from tutorial papers
count towards final grade
Tutorial sign-ups
• Tutorial sign-up:
– Tutorial sign-up sheets will be handed out
during the first class and also available
outside C2-232.
– Each tutorial is limited to 20 slots. Please fill
out your first 5 preferences (from most
preferred to least).
– The tutorial sheets will be put up outside C2232 on Monday in the second week.
Textbook
• Textbook
– The recommended textbook is Jackson and McIver
Macroeconomics.
– Earlier editions of Jackson and McIver are fine, just
be sure that the topic selection is the same.
– Alternative textbooks: There are dozens of first year
macro books. Find a second-hand copy or a library
copy of another textbook. Just be sure that coverage
of the topics is the same.
Learning philosophy
• Subject learning philosophy and expectations of
students
– First year is a transition year between high schooltype work and university-type work.
– The design of this class is one of continuous
assessment- small chunks of work due at regular
intervals.
– Tutorial papers are collected each week and count for
20% of the final grade.
– One mid-term during the semester that counts for
15% of final grade.
Learning philosophy
• “I hear, I forget; I see, I understand; I do, I
remember.”
• The only way to learn economics is to do
economic problems.
• When you get to the final exam, you have to be
very good with solving the types of problems that
are on the exam- you need to practice, practice,
practice.
• There is a sample exam in the outline and two
sample mid-terms on the website.
Assessment
•
Four assessment items:
1. Tutorial papers- due each week- 10 top
grades used- 20% of final grade
2. Mid-term- in second hour of August 29
lecture- 15% of final grade
3. Report- due in tutorial in the 11th week- the
week of October 31- 15% of final grade
4. Final exam- during finals week- 50% of final
grade and must pass to pass subject.
Grade Distribution in Eco120- Spring 05
60
50
Number of students
40
30
20
10
0
HD
DI
CR
PS
FL/FW
Help with economics
• HELP! If you find yourself lost and/or
confused, what to do?
– Read the Subject Outline.
– Check the website.
– Email Rod at rduncan@csu.edu.au
– Talk to Student Services at
http://www.csu.edu.au/division/studserv/ (after
all, that’s what they are there for)
What is macroeconomics?
• 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?”
Teaching goals
•
What is it that students should gain from
a macroeconomics class?
1. Definitions of important economics terms
– Economics is a language. To speak it, you must
have a vocabulary.
2. Ability to use macroeconomics to talk about
the real world (story-telling)
– Explanation: use macroeconomics to explain the
past.
– Prediction: use macroeconomics to predict the
future.
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
economic story-telling.
Gorgeous, the shih tzu puppy
Two uses of a story/model
• Puppies get bored easily and, unless watched,
will tear things up.
• We have two variables: Parental supervision and
puppy destruction. A model simply represents
the relation ship between 2 or more variables.
(Not a very good) Model:
Parental supervision↑ → Destruction↓
• Explanation: “My socks are all over the living
room because I was not watching the puppy.”
• Prediction: “If I watch Gorgeous, she won’t get
hold of any socks.”
Elements of a good story
•
All stories have three parts
1. Beginning- description of how things are
initially- the initial equilibrium.
2. Middle- we have a shock to the system, and
we have some process to get us to a new
equilibrium.
3. End- description of how things are at the
new final equilibrium- the story stops.
•
“Equilibrium”- a system at rest.
Timeframes in economics
• In economics we also talk in terms of three
timeframes:
– “short run”- the period just after a shock has occurred
where a temporary equilibrium holds.
– “medium run”- the period during which some process
is pushing the economy to a new long run equilibrium.
– “long run”- the economy is now in a permanent
equilibrium and stays there until a new shock occurs.
• You have to have a solid understanding of the
equilibrium and the dynamic process of a model.
What are the big questions?
• What drives people to study
macroeconomics? They want solutions to
problems such as:
– Can we avoid fluctuations in the economy?
– How can we make the economy grow faster?
– Can we lower the unemployment rate?
– Why do we have inflation?
– How can we manage interest rates?
– Is the foreign trade deficit a problem?
Economic output
• Gross domestic product- The total market
value of all final goods and services
produced in a period (usually the year).
– “Market value”- so we use the prices in
markets to value things
– “Final”- we only value goods in their final form
(so we don’t count sales of milk to cheesemakers)
– “Goods and services”- both count as output
Nominal versus real GDP
• We use prices to value output in
calculating GDP, but prices change all the
time. And over time, the average level of
prices generally has risen (inflation).
– Nominal GDP: value of output at current
prices
– Real GDP: value of output at some fixed set
of prices
Measuring GDP
• Are we 40 times (655/16) better off than
our grandparents?
– Australian GDP in 1960- $15.6 billion
– Australian GDP in 2000- $655.6 billion
• What are we forgetting to adjust for?
Measuring GDP
• Population- Australia’s population was 10
million in 1960 and 19 million in 2000.
– GDP per person in 1960 = $15.6 bn / 10m
= $1,560
– GDP per person in 2000 = $655.6 bn / 19m
= $34,500
• Prices- $1,000 in 1960 bought a better lifestyle than $1,000 in 2000.
Nominal versus real GDP
• So how to correct for rising prices over
time?
– Measure average prices over time (GDP
deflator, Consumer Price Index, Producer
Price Index, etc)
– Deflate nominal GDP by the average level of
prices to find real GDP
Real GDP = Nominal GDP / GDP Deflator
Some Australian economic history
Australian GDP 1950-1995
600 000
500 000
Million A$
400 000
GDP
300 000
GDP Change
Real GDP
200 000
100 000
0
1950
1960
1970
1980
1990
2000
Measuring GDP
• Real GDP -If we instead use 1996-1997
prices to calculate GDP then Australia
GDP in 1960 was $138 billion while
Australian GDP in 2000 was $631 billion.
• Real GDP per person
– 1960: $138bn/10m = $13,800
– 2000: $631bn/19m = $33,200
• So we are 2.5 times better off than our
grandparents.
Business cycle
• The economy goes through fluctuations over
time. This movement over time is called the
“business cycle”.
– Recession: The time over which the economy is
shrinking or growing slower than trend
– Recovery: The time over which the economy is
growing more quickly than trend
– Peak: A temporary maximum in economic activity
– Trough: A temporary minimum in economic activity.
Australian business cycle
Aust Business Cycle
10
8
6
4
% Ch RGDP
2
0
1950
-2
-4
1960
1970
1980
1990
2000
Two sides of macroeconomics
• Short-term fluctuations- business cycle
– Concerned only with short-term changes in GDP due
to shocks to the economy
– Covered by various models like the Aggregate
Demand-Aggregate Supply model
– Questions: What impact will a rise in interest rates
have on the economy?
• Long-term changes- economic growth
– Concerned with long-term evolution of GDP over time
– Covered by various models such as the Solow growth
model
– Questions: Why are Australians paid 10 times what
Indonesians are paid?
Unemployment
• To be officially counted as “unemployed”,
you must:
– Not currently have a job; and
– Be actively looking for a job
• “Labour force”- the number of people
employed plus those unemployed
• “Unemployment rate”
– (Number of unemployed)/(Labour force)
Unemployment
• Working age
population = Labour
force + Not in labour
force
• Labour force =
Employed +
Unemployed
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
Inflation
• Inflation is the rate of growth of the
average price level over time.
• But how do we arrive at an “average price
level”?
– The Consumer Price Index surveys
consumers and derives an average level of
prices based on the importance of goods for
consumers, ie. a change in the price of
housing matters a lot, but a change in the
price of Tim Tams does not.
Consumer Price Index
• Then the CPI expresses average prices
each year relative to a reference year,
which is a CPI of 100.
CPIt = (Average prices in year t)/(Average
prices in reference year) x 100
• Inflation can then be measured as the
growth in CPI from the year before:
– Inflationt = (CPIt – CPIt-1) / CPIt-1
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
• The Reserve Bank of Australia manages
Australian interest rates.
• The management of interest rates is one
aspect of what is called “monetary policy”.
• All interest rates (whether home loan
rates, business interest rates, RBA cash
rates) all move together, so we commonly
just refer to “interest rates fell”.
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
Balance of payments
•Current account of a country’s international
transaction refers to the record of receipts from the sale
of goods and services to foreigners (exports), the
payments for goods and services bought from
foreigners (imports), and also property income (such as
interest and profits) and current transfers (such as gifts)
received from and paid to foreigners.
•Capital account is a summary of country’s asset
transactions with the rest of the world, such as sales of
Australian property to foreigners and Australian
purchases of foreign properties.
Current Account Deficits (19491996)
4000
5
2000
0
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
-2000
0
-4000
-6000
-5
-10000
% of GDP
Millions A$
-8000
-12000
-14000
-16000
% of GDP
-10
-18000
-20000
-22000
-15
-24000
-26000
-28000
-30000
In A$
-20