eco 120 macroeconomics week 1 introduction to macroeconomics lecturer dr. rod duncan
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ECO 120 Macroeconomics
Week 1
Introduction to Macroeconomics LecturerDr. Rod Duncan
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Topics
• Basic information about the subject
• A definition of macroeconomics
• Macroeconomic modelling as storytelling
• The big questions of macroeconomics
• Some important macroeconomics variables
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Some details
• Lecturer:Roderick DuncanEmail: [email protected] (preferred)Phone: (02) 6338-4982Office: C2 - G20
• Class webpage:http://athene.riv.csu.edu.au/~rduncan/
Teaching/Eco120/Eco120.htm
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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)
• Hand-outs (available when used)• Review notes (from last semester’s DE subject)• Links for reading/research• Any important notices
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Lectures and tutorials
• Lecture– Lecture notes available on the class webpage
and as hand-outs in class (reduced)
• 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
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Tutorial sign-ups
• Tutorial sign-up:– Tutorial sign-up sheets will be posted outside
M&M office on 3rd floor after first class– Each tutorial is limited to 20 slots. Do not sign
up if tutorial slots are all filled. Excess signatures will be erased.
– Tutorial switch sheet: If your first choice of tutorial is filled, sign up for a second choice and put your name down on the tutorial switch sheet.
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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.
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Learning philosophy
• Subject learning philosophy and expectations of students– First year is a transition year between high school-
type 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.
– Two mid-terms during the semester that each account for 20% of final grade.
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Assessment
• Four assessment items:1. Tutorial papers- due each week- 10 top
grades used- 20% of final grade
2. Mid-term 1- in second hour of August 30 lecture- 20% of final grade
3. Mid-term 2- in second hour of November 1 lecture- 20% of final grade
4. Final exam- during finals week- 40% of final grade and must pass to pass subject.
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Macroeconomics
• HELP! If you find yourself lost and/or confused, what to do?– Read the Subject Outline.– Check the website.– Email Rod at [email protected]– Talk to Student Services at
http://www.csu.edu.au/division/studserv/ (after all, that’s what they are there for)
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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?”
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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.
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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.
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Gorgeous, the shih tzu puppy
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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.”
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Elements of a good story
• All stories have three parts1. 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.
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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.
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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?
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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 cheese-makers)
– “Goods and services”- both count as output
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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
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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
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Some Australian economic historyAustralian GDP 1950-1995
0
100 000
200 000
300 000
400 000
500 000
600 000
1950 1960 1970 1980 1990 2000
Mil
lio
n A
$
GDP
GDP Change
Real GDP
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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.
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Australian business cycleAust Business Cycle
-4
-2
0
2
4
6
8
10
1950 1960 1970 1980 1990 2000
% Ch RGDP
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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?
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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)
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Unemployment
• Working age population = Labour force + Not in labour force
• Labour force = Employed + Unemployed
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UnemploymentUnemployment over the Business Cycle
-4
-2
0
2
4
6
8
10
12
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995
Pe
rce
nt
(%)
Unemployment
Change in GDP
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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.
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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
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InflationConsumer Price Inflation
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Sep
-70
Sep
-72
Sep
-74
Sep
-76
Sep
-78
Sep
-80
Sep
-82
Sep
-84
Sep
-86
Sep
-88
Sep
-90
Sep
-92
Sep
-94
Sep
-96
Sep
-98
Sep
-00
Sep
-02
Sep
-04
Inflation
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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”.
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Interest Rates
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Jan-
70
Jan-
73
Jan-
76
Jan-
79
Jan-
82
Jan-
85
Jan-
88
Jan-
91
Jan-
94
Jan-
97
Jan-
00
Jan-
03
Bank Interest Rates
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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.
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Current Account Deficits (1949-1996)
-30000
-28000
-26000
-24000
-22000
-20000
-18000
-16000
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
2000
4000
Mill
ions
A$
-20
-15
-10
-5
0
5
% o
f GD
P
In A$
% of GDP