Lecture 1: Int ermediate Macroeconomics

1. Lecture 1: Intermediate Macroeconomics Lecturer: Stella Huangfu Tutor: Gemma Kwan Tutes will start from Week 3 (Aug 13). See Outline for contact information and office hours.

2. Assessment Structure • Midterm Exam (30%) • Thursday, Sep 13, 6-7:30 pm. • Multiple-choice questions only. • Covers topics 1 – 4. • No lecture/tutorial in that week. • Sample questions will be posted on Bb before the exam.

3. Assessment Structure • Empirical Report (20%) • Due on Monday, Oct 15, 4 pm. • Must not exceed 2,000 words. • See Outline Section 8 for details.

4. Assessment Structure • Final Exam (50%) • Cumulative. Covers topics 1 - 10. • Multiple-choice questions + short-answer questions. • Sample questions will be posted on Bb before the exam.

5. Textbook • Olivier Blanchard and Jeffrey Sheen, Macroeconomics, 3rd Australasian Edition, Pearson.

6. Online Study Guide • http://wps.pearsoned.com.au/au_be_blanchardsheen_macroec_3/118/30377/7776691.cw/index.html • You can test yourself with many practice questions for each chapter. Also, there are links to interesting and relevant articles on topical issues. No password is required.

7. Topic 1(Chapters 1- 2) Introduction: A brief look at global conditions with a focus on Australia’s recent performance.output, inflation and unemployment; definitions of GDP.

8. Chapter 1 A Tour of the World

9. Section 1.1: Australia

10. Australia

11. Australia From an economic point of view, the period 1996-2006 was one of the best in recent memory. Output growth averaged 3.7%, higher than 1970-2006 Sustained growth was associated with a steady increase in employment and a steady decrease in the unemployment rate (=4.8% expected in 2009) The inflation rate remained low throughout the period (3.4% lower than 1970-2006)

12. Section 1.2: The United States

13. The United States

14. The United States As in Australia,1996-2006 was one of the best decades in recent memory: Output growth was 3.4%, 0.3% higher than average since 1970 Steady increase in employment and a steady decrease in the unemployment rate to an average of 5% (compared to 6.2%). Low inflation rate averaging 2% (compared to 4%).

15. Section 1.3: The European Union

16. The European Union 15 European countries (+ 8 east European + Malta & Cyprus) comprise the European Union, or EU27. Together, they form a formidable economic power, with a combined output close to the output of the United States. The standard of living in many of these countries is also close to that of the United States.

17. The European Union • These EU5 countries generate 75% of total EU27 output.

18. The European Union EU5

19. Section 1.4: China

20. China

21. In 2008, China is a major economic power with: four times the population of U.S. one third the GDP of U.S., and thus relatively poor at one eighth of US GDP per capita (PPP). China has been growing fast for 20 years, at an average of about 9% per year: Global financial crisis has badly affected Chinese exports, and growth is much lower in 2009. China

22. Despite problems with data quality (which has improved in recent years), growth has been high for 2 reasons: Very high accumulation of capital (about 40% of GDP), supported by low-cost labour moving from rural areas. Very fast technological progress, from foreign firms investing in China. Sources of China’s growth

23. China made a better transition from state planning to a market economy than central European countries and Russia. Possible reasons: China had a slower transition. Communist Party retained control, giving better property rights protection. Still a puzzle. Why has China done better than other transition countries?

24. Section 1.5: Looking Ahead

25. Other parts of the world Japan: Dramatic rise since WWII – ‘economic miracle’. Has done badly in last 15 years. Stock market bubble crashed in early 1990s leading to a prolonged slump (average growth 1%). Just as it started to emerge from this slump in 2007, the global financial crisis has hit Japan badly. Asia (including Singapore, South Korea, Taiwan, India): Fastest growing region, until the global financial crisis. India, the second most populous country, grew 7.7% in 2008, but its GDP <10% of US GDP.

26. Latin America: Went from very high to low inflation in 1990s. Chile in relatively good economic shape in 2008 but suffering badly in the global financial crisis. Argentina has suffered from repeated crises recently, but doing better. Central & Eastern Europe: Many still struggling with transition from communist to capitalist economies. Russia has done well recently due to high oil and gas prices, but now struggling in the 2008-9 crisis. Africa: Has long suffered economic stagnation, disease and war. Improvement by 2008 with growth of about 7% with most countries growing. The crisis will affect it badly. Other parts of the world

27. Chapter 2 A Tour of the Book

28. Key Macro Variables Three key measures of macro analysis • Output (GDP) • Unemployment rate • Inflation rate

29. Section 2.1: Aggregate 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.

30. GDP: Production and Income There are three ways of defining GDP: GDP is the value of the final goods and services produced in the economy during a given period. A final good is a good that is destined for final consumption. An intermediate good is a good used in the production of another good.

31. GDP: Production and Income

32. GDP: Production and Income There are three ways of defining GDP: GDP is the sum of value added in the economy during a given period. Value added equals the value of a firm’s production minus the value of the intermediate goods it uses in production.

33. GDP: Production and Income There are three ways of defining GDP: GDP is the sum of the incomes in the economy during a given period.

34. Nominal 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: The production of most goods increases over time. 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.

35. Nominal and Real GDP • Using 2007 dollars to compute real GDP, then:

36. Nominal and Real GDP Nominal GDP is also called dollar GDP or GDP in current dollars. Real GDP is also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation, or GDP in, say, 2007 dollars.

37. Nominal and Real GDP From 1960 to 2008, nominal GDP increased by a factor of 54. Real GDP (using 2007 dollars) increased by a factor of 4.9.

38. Nominal and Real GDP GDP growth equals: • Periods of positive GDP growth are called expansions. • Periods of negative GDP growth are called recessions.

39. Real GDP Growth

40. Section 2.2: The Other Major Macroeconomic Variables GDP is obviously the most important macroeconomic variable. But two other variables tell us about other important aspects of how an economic is performing: Unemployment Inflation

41. Labour force = employed + unemployed L = N + U Unemployment rate: The Unemployment Rate

42. The Unemployment Rate

43. The Unemployment Rate Only those looking for work are counted as unemployed. Those not working and not looking for work are not in the labour force. People without jobs who give up looking for work are known as discouraged workers. Participation rate Participation rate (July/2008) = 100*11.2/17.2 = 65%

44. The Inflation Rate Inflation is a sustained rise in the general level of prices—the price level. 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.

45. The GDP Deflator 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 ofInflation: • Nominal GDP is equal to the GDP deflator times real GDP:

46. The 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 CPI and the GDP deflator move together most of the time.

47. The Consumer Price Index and the GDP Deflator

48. Inflation • Why we hate inflation?

49. Section 2.3: A Road Map 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.