ECON1102-Macroeconomics 1 - S2/2014 Lecturer: Dr. Gonzalo Castex
E-mail : [email protected] Office Hours:Mon and Wed:
3-4 pm Office 442C School of Economics 2Week 1 Measuring
Macroeconomic Performance: Output and Prices Reference: Bernanke,
Olekalns and Frank (BOF) - Chapter 1 Key Issues Indicators of
macroeconomic performance Measuring output (GDP) Measuring prices
and inflation3Learning Objectives: What does GDP mean? What are the
three ways of measuring a countrys GDP? What is the distinction
between nominal and real GDP? What does the consumer price index
(CPI) mean? How is the CPI measured? What is inflation and how it
is measured? What are the economic costs associated with inflation?
What is the relationship between rates of interest and the rate of
inflation? What is deflation and why is it regarded as a problem?4
Evaluating Macroeconomic Performance 1. Rising Living Standards
economic growth Tendency for the level of output (i.e. quantity and
quality of goods and services) to increase over time. Output
divided by population = output per capita May also care about the
distribution of living standards (very important for developing
economies) 5Real Quarterly GDP per-capita Australia (1973-2012)
0200040006000800010000120001400016000Sep1973Oct1974Nov1975Dec1976Jan1978Feb1979Mar1980Apr1981May1982Jun1983Jul1984Aug1985Sep1986Oct1987Nov1988Dec1989Jan1991Feb1992Mar1993Apr1994May1995Jun1996Jul1997Aug1998Sep1999Oct2000Nov2001Dec2002Jan2004Feb2005Mar2006Apr2007May2008Jun2009Jul2010Aug2011$perquarter6Real
output: Cycle vs trend: An example 72. Stable Business Cycle low
volatility in fluctuations of actual output around its trend or
potential output. Australias Real Quarterly GDP Growth Rates Decade
Averages1960s1970s1980s1990s2000s Mean 1.260.780.820.830.75
Standard Deviation 1.501.490.970.770.52 Ratio 0.840.530.851.081.44
8Fluctuations around the trend: some implications Expansion: Output
is expanding at a rapid pace and there is low unemployment rate.
(May cause inflation) Contractions: Output growth is low (negative)
and unemployment rate is high. A Recession is usually defined as a
two consecutive quarters in which the economys output declines. 93.
Relatively Stable Price Level low (positive) rate of inflation
Inflation: a sustained increase in the overall level of prices in
an economy through time. Inflation has been concern for most
developed countries over the last 40 years. Japan is an exception
and has experienced deflation over the last decade. 10Australian
Inflation - Consumer Price Index Measure
2.00.02.04.06.08.010.012.014.016.018.020.0Sep1970Nov1971Jan1973Mar1974May1975Jul1976Sep1977Nov1978Jan1980Mar1981May1982Jul1983Sep1984Nov1985Jan1987Mar1988May1989Jul1990Sep1991Nov1992Jan1994Mar1995May1996Jul1997Sep1998Nov1999Jan2001Mar2002May2003Jul2004Sep2005Nov2006Jan2008Mar2009May2010Jul2011Yearendedpercentagechange
11 12 13 4. Sustainable Levels of Public and National Debt Public
debt borrowing by public sector from private sector Influenced by
government budget deficits/surpluses Foreign debt borrowing by
domestic residents from foreign countries Influenced by an economys
current account deficits/surpluses14Budget Balance and Net
Government Debt for Australia
64202468200001200102200203200304200405200506200607200708200809200910201011201112201213201314201315BudgetBalance
NetDebt15Australias Net External Liabilities
0.010.020.030.040.050.060.070.0Jun-88Jun-90Jun-92Jun-94Jun-96Jun-98Jun-00Jun-02Jun-04Jun-06Jun-08Per
centNet Debt/GDP Net Equity/GDP Net External Liabilities/GDP16175.
Balance between Current and Future Consumption How much should an
economy save/invest? This decision may affect business cycle and
growth. 18Australian Private Investment and National Saving
0.05.010.015.020.025.030.0Sep1969Nov1970Jan1972Mar1973May1974Jul1975Sep1976Nov1977Jan1979Mar1980May1981Jul1982Sep1983Nov1984Jan1986Mar1987May1988Jul1989Sep1990Nov1991Jan1993Mar1994May1995Jul1996Sep1997Nov1998Jan2000Mar2001May2002Jul2003Sep2004Nov2005Jan2007Mar2008May2009Jul2010Sep2011%ofGDPNationalSaving/GDP
PrivateInvestment/GDP196. Full Employment Provision of employment
for all individuals seeking work 20Australian Unemployment Rate
Monthly
0.02.04.06.08.010.012.0Feb1978Jan1979Dec1979Nov1980Oct1981Sep1982Aug1983Jul1984Jun1985May1986Apr1987Mar1988Feb1989Jan1990Dec1990Nov1991Oct1992Sep1993Aug1994Jul1995Jun1996May1997Apr1998Mar1999Feb2000Jan2001Dec2001Nov2002Oct2003Sep2004Aug2005Jul2006Jun2007May2008Apr2009Mar2010Feb2011Jan2012Percent21
Measuring National or Aggregate Output GDP Gross Domestic Product
Definition:The market value of final goods and services produced in
a country during a given period. 22The market value of final goods
and services produced in a country during a given period. GDP is a
flow variable measured over a period of time. Quarter March, June,
September, DecemberAustralian GDP in March 2012 = $368.4 billion
Australian GDP in March 2013 = $379.6 billion Year just add-up GDP
over 4 quarters Calendar Mar-12 + Jun-12 + Sep-12 + Dec-12
Financial Sep-12 + Dec-12 + Mar-13 + Jun-13Australian GDP in 2012
(Calendar) = $1,488.4 billion 23 The market value of final goods
and services produced in a country during a given period. GDP is
measure of aggregate production or output Use market prices to
value (or weight) quantities of various goods and services Example:
QuantityMarket Price10 cars $20,000 per car100 apples $1 per apple
24GDP = $200,000 + $100 = $200,100What about goods and services
with no observed market price? Some are included in GDP: National
defense use costs of provision (costs of buying equipment, wages of
soldiers, etc.) ; Public education.
Some are excluded from GDP Unpaid housework25 The market value
of final goods and services produced in a country during a given
period. GDP excludes intermediate goods and services. These goods
are used-up in the production process. Example: In the production
of a loaf of bread, the flour used is an intermediate input and is
not counted in GDP. 26Concept of Value Added: The market value of a
firms production less the cost of inputs purchased from other
firms. This method eliminates the problem of dividing the value of
a final good or service between two periods. 27Problem 1.2
IntelligenceIncorporatedproduces100computerchipsandsellsthemfor$200eachtoBellComputers.Usingthechipsandotherlabourandmaterials,Bellproduces100personalcomputers.Bellsellsthecomputers,bundledwithsoftwarethatBelllicensesfromMacrosoftat$50percomputer,toPCCharliesfor$800each.PCCharliessellsthecomputerstothepublicfor$1000each.CalculatethetotalcontributiontoGDPusingthevalueaddedmethod.Doyougetthesameanswerbysummingupthemarketvaluesoffinalgoodsandservices?
28Value Added in Computer Sales: Chapter 1, Problem 2 (Textbook)
FirmSalesCost of inputsValue AddedIntel Incorp20,0000 20,000 Macro
Soft 5,000 0 5,000Bell 80,00025,00055,000 PC Charlies
100,00080,00020,000 PC Charlies final sales = $100,000 Sum of Value
Added = $100,000 293 Ways to Measure GDP 1. Production Method 2.
Expenditure Method 3. Income Method 30Expenditure Method Accounting
IdentityExpenditure on goods and services by final users must equal
the value of their production. Components of Expenditure
Consumption (C) purchases by Households Investment (I) purchases by
Firms Government (G) Government purchases Net Exports (NX ) net
purchases by foreign sector NX = Exports Imports31National Income
Accounting Identity GDP=Expenditure Y = C + I + G + NX consumer
firms, companies government net exports/imports 32Australian GDP
March Quarter 2013 Expenditure Approach $ billionHousehold
Consumption210.0 Private Investment 86.8 Government (Public)
Spending85.7 Change in Inventories-0.5 Exports 76.4 Less Imports
76.0 Total 382.4Statistical discrepancy -2.8GDP 379.633Income
Method GDP also equals the aggregate incomes paid to Labour (L)
Capital (K)in the production of goods and services. GDP = Labour
Income + Capital Income loans or investment e.g. labour= worker/
salaries capital = return on investment34Australian GDP March
Quarter 2013 Income Approach $ BillionCompensation of
Employees184.0Gross Operating Surplus126.7 Gross Mixed Income30.1
GDP (at factor cost) 340.8 Taxes Subsidies37.5GDP (Market
Prices)378.3Statistical discrepancy1.3GDP379.6textbook -
highlight35Nominal vs. Real GDP Nominalvalues quantities of goods
and services produced at current year prices (current price GDP)
Realvalues quantities of goods and services produced at base year
prices measure of the actual physical volume of production
(constant price GDP) 36Example20072008% ChangeNo. of Cars10 10 0
Price of Cars $20,000$40,000100 No. of Apples 1001000 Price of
Apples$1$2 100 Nominal GDP$200,100$400,200 100 Real GDP 2007
prices$200,100 $200,10002008 prices$400,200 $400,200 0 37Choice of
Base Year (Bit Technical) In the above example whether we use 2007
or 2008 as base year prices gives the same answer for the growth
rate of real GDP This is not the case in general, particularly if
you are comparing real GDP over a 5-10 year period. Using initial
prices (i.e. 2007) is known as a Laspeyres index Using final prices
(i.e. 2008) is known as a Paasche index 38 Chain Weighting For any
two consecutive years compute the growth rates of real GDP implied
by both the Laspeyres and the Paasche indexes. Then take the
average of the two growth rates and this is the chain-weighted
growth rate.This can be used to compute a real chained-weighted
GDP. Finally to compute a change index over a long period, the
above approach is applied on a year-by-year basis.
39Example20072008% ChangeNo. of Cars10 100 Price of Cars
$20,000$40,000100 No. of Apples 100 1000900Price of Apples$10
$25150 Nominal GDP$201,000$425,000 111 Real GDP 2007 prices$201,000
$210,0004.5 2008 prices$402,500 $425,000 5.6 40Chain-weighted
measure of Real GDP Take average of growth rates implied by 2007
and 2008 prices.5.05 %= (4.5% + 5.6%)/2 Choose either 2007 or 2008
as the base-year (nominal=real GDP).Lets pick 2007 20072008Nominal
GDP 201,000 425,000 Real GDP 201,000211,151 (=201,0001.0505) 41Is
GDP A Good Measure of Economic Wellbeing?Some Omissions Leisure
Time (eg. Weekend cricket games) Household production (non-market
activities) Environmental Degradation (eg. Pollution) Quality of
Life (eg. Crime rate, traffic congestion) Economic Inequality It is
likely that GDP is positively related (correlated) with economic
wellbeing Variety of goods and services Health and Education (link)
42Measures of the Price Level Want to measure the average level of
prices in the economy. Main Measures Consumer Price Index (CPI) GDP
Deflator/Price Index, Producer Price Index (PPI) CPI For a given
period, measures the cost in that period of a given basket of goods
and services relative to their cost in a fixed year called a base
year. 43Construct a CPIChoose a basket of goods and services
Basket2000 (base)2008Rent (2 bedroom flat) $500 $630 Hamburgers
(60)$150$150 CDs (2) $30 $70Total Expenditure $680$850 CPI = Cost
of base-year basket of goods and services in current yearCost of
base-year basket of goods and services in base year 44CPI =
$850/$680 = 1.25 Cost of living is 25 percent higher in 2008 than
it was in 2000 Average prices are 25 percent higher in 2008 than in
2000 Australian CPI Published quarterly by ABS (Australian Bureau
of Statistics) Household Expenditure Survey used to determine
typical basket Base year changes every 5 years 45Inflation (and
Deflation) Inflation is measured by the percentage change in the
CPI over a given period. Inflation rate =100 * ]) 1 () 1 ([ CPICPI
CPI
Inflation rate = 0 implies prices are constant Inflation rate
> 0 implies prices are rising Inflation rate < 0 implies
prices are falling Deflation
462.00.02.04.06.08.010.012.014.016.018.020.0Sep1970May1972Jan1974Sep1975May1977Jan1979Sep1980May1982Jan1984Sep1985May1987Jan1989Sep1990May1992Jan1994Sep1995May1997Jan1999Sep2000May2002Jan2004Sep2005May2007Jan2009Sep2010%AustralianCPI(Yearended%change)47Limitations
with CPI Quality Adjustment and New Goods Bias Quality improvements
may show up as higher prices for goods and services New goods are
often not included until CPI is re-based Substitution Bias Use of a
fixed basket means that no allowance is made for consumers
substitution toward relatively less expensive goods. CPI tends to
overstate the rate of inflation.48Costs of Inflation Important to
distinguish between relative price change and a change in the
general price level Shoe-leather costs inflation reduces the real
purchasing power of a given amount of money Menu costs real costs
of changing prices Introduces noise into the price mechanism
Distorts tax systems (if not indexed to inflation) Unexpected
re-distributions of wealth 49Inflation and Interest Rates Nominal
Interest Rates percentage increase in the nominal (or dollar) value
of a financial asset. Real Interest Rate percentage increase in the
real purchasing power of a financial asset. i r r = real interest
ratei = nominal interest rate = inflation rate 50 51 Fisher Effect
Nominal interest rate = real rate + (expected) inflation rateer i
52 Inflation and Nominal Interest Rate
-2.00.02.04.06.08.010.012.014.016.0Mar-86Mar-88Mar-90Mar-92Mar-94Mar-96Mar-98Mar-00Mar-02Mar-04Mar-06Mar-08%
per annumInflation (year-ended) 10 Year Bond Rate 53 Why is
important price stability:Link
