ECOS2002 – Intermediate Macroeconomics
Week 1: Review and Introduction of Macroeconomic
Indicators
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The University of 2 – 2022
ECOS2002 – Intermediate Macroeconomics The University of Outline
General information about this unit
A Tour of the World
How do we examine key questions in macroeconomics?
Output, Unemployment and Inflation
The Short Run, Medium Run and Long Run
Readings: Blanchard and 1 and 2
ECOS2002 – Intermediate Macroeconomics The University of me
PhD Candidate in Macroeconomics at USyd
My research area is macroeconomics with a particular focus on
monetary policy and low interest rate environments
Consultation Hour: Tuesdays 11am-12pm via Zoom, Link on Canvas
ECOS2002 – Intermediate Macroeconomics The University of information about this unit
Objective: Develop a more in-depth analysis of two key aspects
macroeconomics: short run analysis and the long-run analysis
Prerequisite: ECON1002
Structure: Weekly lecture (2 hours) and tutorial (1 hour)
Ed (via canvas): For discussions and clarifications
Recommended Textbook:
I Blanchard. (2020). Macroeconomics. OR
I Blanchard, Sheen, J. (2013). Macroeconomics.
Australia.
ECOS2002 – Intermediate Macroeconomics The University of
In-semester test (Open book) 30% (Week 7, September 12th)
Final exam (Open book) 50% (Formal exam period)
I Quiz 1 due: Aug 21st 6pm Sydney time
I Quiz 2 due: Sept 4th 6pm Sydney time
I Quiz 3 due: Nov 2nd 6pm Sydney time
Tutorial Participation 5%
ECOS2002 – Intermediate Macroeconomics The University of Tour around the World
Let’s begin the course with a tour around the world!
ECOS2002 – Intermediate Macroeconomics The University of United States
ECOS2002 – Intermediate Macroeconomics The University of ustralia
ECOS2002 – Intermediate Macroeconomics The University of Euro Area
ECOS2002 – Intermediate Macroeconomics The University of
ECOS2002 – Intermediate Macroeconomics The University of Crisis
The global expansion from 2000–07 ended with the financial crisis
that began in 2008.
Was caused by the fall in US house prices from 2007, which had
doubled since 2000.
It exposed serious housing finance weaknesses in the US, creating a
crisis for major banks on Wall Street.
ECOS2002 – Intermediate Macroeconomics The University of Market Prices Fell, Everywhere
ECOS2002 – Intermediate Macroeconomics The University of Growth and Rising Unemployment
In fear of a major recession/depression, consumption and investment
fell, reducing output growth, which turned negative in many countries
Unemployment rose, particularly in the US and Europe (though not in
Australia)
ECOS2002 – Intermediate Macroeconomics The University of do we examine key questions in macroeconomics?
General approach
I Document the facts
I Develop a model
I Use the model to make other predictions that will eventually be tested.
But what is a model?
I Models simplify the complicated real world into its most relevant
I A model is useful if it has good predictive power
I Economic models often involve systems of multiple equations
ECOS2002 – Intermediate Macroeconomics The University of n Economic Model in a Nutshell
Endogenous Variables: Changed or determined by its relationship
with other variables within the model
Exogenous Variables: Independent and determined outside the
ECOS2002 – Intermediate Macroeconomics The University of n Economic Model in a Nutshell
The model outcome and predictions depend on the model design
No objective measures of economic outcomes
Assumptions matter!
ECOS2002 – Intermediate Macroeconomics The University of Macroeconomic Variables
Three key measures of macroeconomic analysis:
Output (GDP)
Unemployment rate
Inflation rate
ECOS2002 – Intermediate Macroeconomics The University of ggregate 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
Three ways of measuring GDP:
1. GDP is the value of the final goods and services produced in the
economy during a given period
2. GDP is the sum of value added in the economy during a given period
3. GDP is the sum of incomes in the economy during a given period
ECOS2002 – Intermediate Macroeconomics The University of GDP
ECOS2002 – Intermediate Macroeconomics The University of Question – #463634
When using the income approach to measure GDP, the largest share of
GDP generally consists of
a Labour income
b Capital income
c Interest income
d Indirect taxes
e Firms’ profits
ECOS2002 – Intermediate Macroeconomics The University of 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
ECOS2002 – Intermediate Macroeconomics The University of and Real Variables
Nominal Variables: Nominal variables are expressed at current
monetary values.
Real Variables: Real variables are adjusted for inflation and show
prices/wages at constant prices.
⇒ Nominal amounts might not be as useful for economic analysis
since they can increase either when people buy more physical goods
and services — more cars, steaks, and haircuts — or when prices rise.
ECOS2002 – Intermediate Macroeconomics The University of Basics
The growth rate:
Can be rewritten as:
yt+1 = yt(1 + g)
yt = y0(1 + g)
ECOS2002 – Intermediate Macroeconomics The University of DP: Level versus Growth
Economists focus on the rate of growth of real GDP, on GDP
Real GDP growth =
Periods of positive GDP growth are called boom or expansions
Periods of negative GDP growth are called recession or depression
ECOS2002 – Intermediate Macroeconomics The University of Unemployment Rate
Employment (E) is the number of people who have a job
Unemployment (U) is the number of people who do not have a job
but are looking for one
The labour force (L) is the sum of employment and unemployment:
The unemployment rate (u) is the ratio of the number of people
who are unemployed to the number of people in the labour force:
Economists care about unemployment for two reasons:
1. Unemployment has important social consequences.
2. The unemployment rate gives them an indication of whether an
economy is operating above or below its normal level of activity
ECOS2002 – Intermediate Macroeconomics The University of Unemployment Rate
Only those looking for work are counted as unemployed
Those not working and not looking for work are not in the labour
People without jobs who give up looking for work are known as
discouraged workers
Participation rate:
Participation rate:
labour force
working age population
ECOS2002 – Intermediate Macroeconomics The University of Labour Force
Source: RBA, n.d.
ECOS2002 – Intermediate Macroeconomics The University of Unemployment Rate in Australia
Source: ABS, 2022
ECOS2002 – Intermediate Macroeconomics The University of Inflation Rate
Inflation is a sustained rise in the general level of prices — the price
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
Economists care about inflation for at least two reasons:
1. It affects relative prices (e.g. the real wage) and thus income
distribution.
2. It creates other distortions: changes in relative prices create uncertainty
and affect decision making
ECOS2002 – Intermediate Macroeconomics The University of GDP Deflator
The GDP deflator in year t, Pt , is defined as the ratio of nominal
GDP to real GDP in year t:
nominal GDPt
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)
Nominal GDP is equal to the GDP deflator times real GDP:
$Yt = PtYt
ECOS2002 – Intermediate Macroeconomics The University of Consumer Price Index
The consumer price index (CPI) measures household inflation
measure of the average change over time in the prices paid by
households for a fixed basket of goods and services
CPI is a very popular measure of inflation but has some limitations:
1. CPI is not an indicator of the price level
2. Quality changes not always included
3. New products not immediately included
4. Not adjusted for changes in household spending patterns (substitution
ECOS2002 – Intermediate Macroeconomics The University of 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 two prices need not to be the same — the set of goods produced
in the economy is not the same as the set of goods purchased by
consumers, for two reasons:
1. Some of the goods in GDP are sold not to consumers but to firms
(machine tools, for example), to the government or to foreigners
2. Some of the goods bought by consumers are not produced
domestically, but are imported from abroad
However, the CPI and the GDP deflator move together most of the
ECOS2002 – Intermediate Macroeconomics The University of Price Index and the GDP Deflator in Australia
(quarter-on-quarter growth)
Source: ABS, 2022
ECOS2002 – Intermediate Macroeconomics The University of targeting in Australia
Target an inflation rate of 2–3 per cent, on average, over time.
The inflation target is defined as a medium-term average rather than
as a rate (or band of rates) that must be held at all times
Source: ABS, 2022
ECOS2002 – Intermediate Macroeconomics The University of targeting in Australia
Source: RBA, n.d.
ECOS2002 – Intermediate Macroeconomics The University of Inflation Shock
The Consumer Price Index (CPI) rose 1.8% in the 2022-Q2 quarter
(quarter-on-quarter growth)
Over the twelve months to the June 2022 quarter, the CPI rose 6.1%.
The most significant price rises were New dwelling purchase by
owner-occupiers (+5.6%), Automotive fuel (+4.2%), and Furniture
Source: ABS, 2022
ECOS2002 – Intermediate Macroeconomics The University of ’s Law
Intuition suggests that if output growth is high, unemployment will
decrease, and this is indeed true
Okun’s Law: Output growth is negatively related to the change in
the unemployment rate
Slope: –0.36 ⇒ This implies that, on average, an increase in the
growth rate of 1 per cent decreases the unemployment rate by
roughly –0.36 per cent
ECOS2002 – Intermediate Macroeconomics The University of Curve
Intuition suggests that, when unemployment becomes very low, the
economy is likely to overheat, and that this will lead to upward
pressure on inflation
Phillips Curve: The change in the inflation rate is negatively related
to the unemployment rate
The line is downward sloping (slope: –0.26), although the fit is not as
tight as it was for Okun’s law
ECOS2002 – Intermediate Macroeconomics The University of Short Run, Medium Run and Long Run
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
ECOS2002 – Intermediate Macroeconomics The University of
We will start with the short run
Next week:
I Goods Market
I Money Market
This will help us to develop a mathematical representation of
Keynesian Economics: The IS-LM model
ECOS2002 – Intermediate Macroeconomics The University of Sydney
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