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ECON1002
Introductory Macroeconomics
Week 1 Lecture
School of Economics
Semester 2, 2022
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Unit Information
1. Instructors:
Dr. Christian Gillitzer (Week 1 & Unit of Study Coordinator)
e: christian.gillitzer@sydney.edu.au
Consultation: Wed 1:30-2:30pm (Weeks 1 & 2) or by appointment
Zoom link: https://uni-sydney.zoom.us/j/87520344749
Dr. Catherine Roc (Weeks 2 to 13)
e: catherine.roc@sydney.edu.au
Consultation: TBA
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Unit Information
2. Textbook:
Principles of Macroeconomics by Bernanke et al.
(5th Australian edition)
Ben Bernanke
N.B. Previous editions are
imperfect substitutes.
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Unit Information
3. Assessments:
How do we monitor your progress and assess your performance ?
Online Quizzes
(10%)
Review your understanding
of preceding lecture
Tutorial participation
(10%)
Reinforce your understanding
Mid-semester exam
(30%)
Covers Weeks 1 to 6
End-of-semester exam
(50%)
Covers all but more focus on
Weeks 8 to 13
N.B. Exams will be online with an AI proctoring.
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 Tutorial begins in Week 1. Go to your designated (online
or on-campus) tutorial class for registration and group
allocation.
 Lecture slides will normally be posted on Canvas 48 hours
or earlier in advance.
 Tutorial problems will be normally posted by Thursday
the week before.
 Check the key dates for assessments.
 For any course related questions, use Ed Discussion.
 Read the UoS Outline for all general information and
policies. Check the Canvas course site regularly for any
announcements or updates.
IMPORTANT
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 What causes unemployment, inflation and recessions?
 What are the effects of monetary and fiscal policy?
How should they be used to achieve macroeconomic
stabilisation?
 Will the economy be better or worse by the time you
graduate?
 What determines a nation’s standard of living? Why
are some countries rich and others poor?
 What determines the value of the A$ relative to other
currencies (e.g. Chinese yuan)?
 Fiscal solvency: can a country go bankrupt? How?
Some Key Macroeconomic Questions
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Introduction Macro Micro
Why is macro important?
Help avoid mass
unemployment!
We don’t ever want to see
this again.
Source: The Age
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Introduction Macro Micro
Do prices allocate resources efficiently?
Prices determined by joint forces of
supply and demand
But prices sometimes fail due to
‘externalities’ and public goods.
q
s
d
Microeconomics emphasizes the role
of prices in a single market
How is Macro different from Micro?
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Measuring Macroeconomic Performance
When is the economy performing well?
1. Rising long-run living standards
2. Avoiding extremes, e.g. GFC. (financial crisis)
3. Preserve real value of the currency (not zero
inflation but low and stable inflation)
4. Sustainable public and external debt (rather than
zero debt)
5. Balancing current expenditure against future needs
(the next generation is important!)
6. Full employment (not zero unemployment)
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1. Gross Domestic Product (GDP)
GDP measures the value of final domestic output
(goods and services) produced during a given
period.
GDP is a commonly used macroeconomic indicator:
Short-run fluctuations in GDP are associated
with the business cycle.
Long-run growth in GDP is associated with
better living standards.
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Australia’s Real GDP 1959 - 2021
• Actual GDP
shows
fluctuations
relative to the
trend.
• Trend is not
linear.
• Trend captures
long-run growth.
• Why use a log
scale?
10.8
11.2
11.6
12.0
12.4
12.8
13.2
60 65 70 75 80 85 90 95 00 05 10 15 20
GDP
Trend
lo
g
sc
al
e
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12.0
12.2
12.4
12.6
12.8
13.0
13.2
60
70
80
90
100
110
120
1990 1995 2000 2005 2010 2015 2020
Log of Real GDP
Labour productivity
Australia’s Real GDP and Productivity in the long run
• GDP and
Productivity share
the long-run
(growth) trend.
• Australia’s labour
productivity has
slowed down since
2005.
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The market (monetary) value of the final goods and
services produced in a country during a given period.
(1) Market value
 Need market prices to calculate value (can we simply add
up all quantities?)
 Non-market activities are not counted in GDP. e.g. trees
planted, cleaning and cooking without wages received.
 Public goods and services do not have market prices and
are counted at their cost of provision (imputed).
Quiz: how has the expansion of paid childcare affected GDP?
Gross Domestic Product (GDP)
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The market (monetary) value of the final goods and
services produced in a country during a given
period.
(2) Final goods
 The value of intermediate goods are not counted.
Why?
 The market value of final goods embody the cost of
intermediate products.
 Avoid ‘double counting’.
Gross Domestic Product (GDP)
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The market (monetary) value of the final goods and
services produced in a country during a given period.
(3) Space and time
 GDP includes only goods produced within a given
country (territory).
 GNI is used to measure a nation’s income based on
nationality.
 GDP is measured over a period of time (quarterly or
annual GDP). How is our income measured? How about
our wealth?
Gross Domestic Product (GDP)
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GDP vs GNI
 GDP is based on where production occurs but what if you want to
measure output based on the country of origin (nationality)?
 GNI = Gross National Income
 GNI = Income measure of GDP – Net factor income from non-
residents
 Is there any significant discrepancy between the two measures?
 In March 2016, Australia’s GDP = $ 414.3 billion and net factor
income from non-residents was –$12.2 billion. More income payable
to foreigners (e.g., Tom Cruise) than receivable by domestic residents
(e.g., Nicole Kidman). What was GNI for March 2016?
 For some countries, the discrepancy is quite significant! Why?
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Gross Domestic Product (GDP)
– Three approaches to measuring GDP
– 1. Final Goods or Expenditure approach
• Think of GDP in terms of who buys the goods and services
• GDP = C+I+G+X-M
» Consumption goods: C
» Investment goods and inventory investment: I
» Government: G
» Exports to foreigners: X
» LESS imports: M
• Expenditure side extremely useful for thinking about
economic fluctuations
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BILLIONS OF $ % of GDP
1. Consumption (C) 1068 52%
2. Investment (I) 357 17%
Nonresidential 96 5%
Residential 141 7%
Business investment 120 6%
3. Government Spending (G) 552 27%
4. Net Exports (NX) 90 4%
Exports (X) 459 22%
Imports (M) -369 -18%
GDP (Y) 2067 100%
SOURCE: ABS5204 Table 2
Gross Domestic Product (GDP)
Example: Composition of Australian GDP 2021
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Gross Domestic Product (GDP)
– 2. Production or Value-Added approach
• Value Added = Firms’ revenue – Cost of Intermediate Inputs
• GDP = sum of value added of all firms in an economy
• Example for an economy that produces $6 of bread:
– Wheat farmers’ value-added
= $2 (Wheat) – $0 (No Intermediate Input Costs) = $2
– Flour-making factory value added
= $3.5 (Flour) - $2 (Wheat) = $1.5
– Bakery Shop value added
= $6 (Bread) - $3.5 (Flour) = $2.5
• “Production” accounts show how each industry is performing
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Gross Domestic Product (GDP)
– 3. Income approach
• Think of GDP in terms of where payments for goods and services go
• Firms’ revenue = Compensation of Employees (wages) +
Gross Operating Surplus (profits + depreciation + interest) +
Indirect Taxes (taxes on production less subsidies) +
Cost of Intermediate Inputs
– Recall from Value Added Approach (#2):
• GDP = Value Added = Firms’ revenue – Cost of Intermediate Inputs
– Using the expression above, GDP under the income approach is:
• GDP = Compensation of Employees + Gross Operating Surplus + Indirect
Taxes
– Rising profit share an indicator of rising inequality
– All 3 approaches to measuring GDP in principle give the same answer.
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Y (GDP) ≡ labour income + capital income
+ (indirect taxes − subsidies).
Y = (W × L) + (R × K) (if net taxes = 0)
(Wage per unit x Quantity of Labour) + (Return per unit x Quantity of Capital)
= Labour income + Capital income
The Income Approach to GDP
THE COMPOSITION OF AUSTRALIAN GDP BY TYPE OF INCOME, 1960 AND 2021
SHARES 1960 2021
Labour income 58% 51%
Capital income 33% 41%
Indirect taxes and subsidies 9% 8%
Source: ABS 5206.0 Table 7. Note gross mixed income equally apportioned to labor and capital.
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 Nominal GDP is current production at ‘current
prices’, i.e. Sum of Price x Quantity over all goods!
 Problem: It can mislead when comparing GDP over
time.
 Why?: Nominal GDP can rise simply due to higher
general prices (P) rather than the production level (Q).
 Macroeconomists are more interested in changes to
the production level over time.
 Real GDP rises when quantities (Q) rise or when
higher valued items are being produced.
Nominal and Real GDP
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Consider an economy producing bikes and burgers only.
 Nominal GDP is the sum of expenditures at current prices.
 How did we calculate Real GDP?
 Yes, used constant (either 2015 or 2016) prices!
N.B. Real GDPs are different for using different prices!
Nominal and Real GDP
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Nominal and Real GDP
Percentage Change in Real GDP over 2015-2016 using Real GDP
measured at 2015 prices
Percentage Change in Real GDP over 2015-2016 using Real GDP
measured at 2016 prices
Calculating growth in Real GDP
To improve the measure, let’s take a simple average for growth
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Chain-weighted GDP measure
Statistical agencies use a chain-weighted measure of real GDP
growth and volume! How do we now calculate the level of real
GDP?
The National Statisticians (ABS) uses a chain volume measure of real GDP.
Pick any arbitrary year as the initial base year (say, 2010)
Then, Real GDP (RGDP) for 2016
=
Measure real GDP using a chain of RGDP ratios!
2015
2016
2010
2011
2010 RGDP
RGDP.....
RGDP
RGDPRGDP ×××
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Questions:
–Why does
nominal GDP grow
faster?
–When do they
coincide?
Nominal and Real GDP in Australia, 1959-2021
Nominal and Real GDP
0
100,000
200,000
300,000
400,000
500,000
600,000
60 65 70 75 80 85 90 95 00 05 10 15 20
Nominal GDP
Real GDP
$
M
il
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Nominal and Real GDP
Nominal GDP ($Y) = Real GDP (Y) x Price level (P)
Real GDP (Y) = Nominal GDP ($Y) / Price level (P)
(for the economy as a whole, we use the aggregate price level or price index)
, also known as GDP Deflator
Quiz: Suppose nominal GDP has grown by 5% over a year and the
prices have grown by 3% over the year. How much has the economy
grown in real terms?
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Nominal GDP, Real GDP and Price Index (GDP deflator)
Recall the table of economy producing bikes and burgers
Using 2015 prices to calculate Real GDP
We can decompose a change in nominal GDP into a change in
real GDP and a change in the overall prices (price index)
2015 2016 %Change
Nominal GDP $275,000 318.2 15.7
Real GDP $275,000 298,000 8.4
GDP Price Index (x100) 100 106.8 6.8
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Real GDP as a measure of Living Standards
– Aggregate Size of Economy in 2021 (est.) in constant US dollar
terms
– China’s Real GDP = US$24.31 trillion
– Australia’s Real GDP = US$1.59 trillion
– Living Standards in terms of Real GDP per capita, measured as
Real GDP Per Capita = Real GDP / Population (purchasing power
adjusted)
– China’s Real GDP per capita = US$17,218
– Australia’s Real GDP per capita = US$61,631
Source: OECD
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GDP & Well-being
What GDP does not consider (ignore or exclude)
 Leisure time
 Non-market (& underground) economic activities
 Environmental quality and resource depletion
 Quality of life (but positively correlated)
 Poverty and economic inequality
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Other Measures of Well-being
Better Life Index (BLI) by the OECD (Organisation for
Economic Co-operation and Development), constructed based on
11 variables measuring household income, education,
environment, health and work-life balance etc (http://
www.oecdbetterlifeindex.org/)
Happiness Index, based on a survey, World Database of
Happiness (http://worlddatabaseofhappiness.eur.nl/ ).
Human Development Index (HDI) by UNDP, based on Health,
Education and Income measures
(https://hdr.undp.org/en/content/human-development-index-hdi)
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What GDP is Not: GDP & Well-Being
Source: http://pewglobal.org/files/pdf/257.pdf, the Pew Global Attitudes Project
Real GDP is not the same as economic well-being
For a larger set of
countries including the
developing world
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Is Bhutan the happiest nation?
Happiness is subjective!
GDP is still positively correlated with many “quality” aspects
of life, living standards, e.g. life-span, health care, access to
education etc.
GDP is imperfect but very important.
GDP & Happiness
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IMPORTANT!
• First Online Quiz will be open under ‘Quizzes’ tab on
Friday August 12 at 5pm. See the details under
’Tutorial and Online Quiz Information’ on Canvas with direct link
(https://canvas.sydney.edu.au/courses/43408/files/25559735?mod
ule_item_id=1665828).
• Tutorials begin in Week 1. Go to your designated tutorial
class.