ECON 1002: Lecture 1: Introductory Macroeconomics

Lecture 1 Week 1: Learning outcomes By the end of week 1, you should be able to discuss The distinctions between microeconomics and macroeconomics The main macroeconomic performance measurements The concept of GDP ...

Lecture 1 Week 1: Learning outcomes By the end of week 1, you should be able to discuss The distinctions between microeconomics and macroeconomics The main macroeconomic performance measurements The concept of GDP Nominal versus real GDP Introduction to national accounting The limits of GDP as a measure of an economy’s performance What is economics about? Microeconomics Macroeconomics Macroeconomics is a set of theories about how the economy as a whole works It focuses on aggregate demand and aggregate supply It looks at national output, national employment, and the general level of prices Macroeconomics also examines a country’s economic relationship with the rest of the world Macroeconomics Macroeconomics Microeconomics provides a foundation for macroeconomics… And macroeconomics underpins many microeconomic decisions Macroeconomics’ main focus: the performance of a national economy Economic growth = rising living standard. When economic growth is high, the production of goods and services is rising, making possible increasing standard of living Macroeconomic theories are thus concerned with The factors that explain the increase in a country’s standard of living over time The role economic policy can play to speed up economic progress Main macroeconomics tools Measures of a country’s economic performance Macroeconomic theories to explain: The levels of certain economic variables (eg. economic growth, employment, prices, production…) The fluctuations of these variables Macroeconomic theories are also used to Forecast future levels of economic variables Understand and estimate the impact of economic policies and events Keep in mind… What is macroeconomics aiming to achieve? So why study macroeconomics today? Why study macroeconomics today? Macroeconomics is ubiquitous…and you know more macroeconomics than you think! Try and answer this: what are some of the implications for the low A$ exchange rates? For the economy? For you? Macroeconomics relevance to business (and your future employment) Some examples: Any firm: The current and future levels of interest rates are of utmost importance to businesses. Qantas: needs to be able to forecast future kerosene prices and passenger numbers. Economic growth forecast will help with forecasting both the demand for oil and the demand for travel. Rio Tinto: Needs to forecast commodity prices to decide future investment in its mining operation. Economic growth forecast in the major consumers of commodities will help to forecast the demand for commodities and ultimately commodity prices and the profitability of the mining industry. Understanding and managing major forthcoming issues Major issues with macroeconomics consequences which will shape our lives in the decades to come: Brexit, Europe, some future financial crisis Environmental challenges Global free trade … under threat? The rise of new world powers The impact of new technology Widening inequalities Population pressures … migration Macroeconomics also helps us answer questions such as: Why is Australia richer than India? Why some countries are so rich and others so poor? Why some countries are growing, or have stopped growing while others are not? Will the economy be better or worse by the time you graduate? Will the interest rate rise or fall next month? Will the Australian dollar be stronger or weaker next year? Why has wage growth been subdued for some time? Is the 2018-19 Budget good for the Australian econ? Major macroeconomic issues Economic growth and living standards: Some perspectives More than half the world’s population lives on less than US$4,000 per year. Average level of per capita income in Australia was US$55,507 in 2017. Korea had the same level of real income per capita as the Philippines in 1965; by 2010 Korea’s real income per capita was 6 times that of the Philippines In 1870, average real GDP per capita in the UK was 37% higher than that in the US. By 2010 average real GDP per capita is 32% higher in the US than in the UK Economic growth and living standards High standard of living in the US, Europe and Australia are the result of centuries of sustained economic growth, or the steady increase in the quantity and quality of goods and services produced (aggregate output). Because population growth accounts for a large share of the increase in output, a more accurate measure of standards of living is output per capita (we will look at that in more details later). Australia’s output Standard of living and Importance of Growth Rates A 1% growth rate over 40 years leads to an increase of 48% in the initial output per capita or standard of living 1.0140 - 1= 1.48 -1 = 48% “Rule of 70”: 1.0170 -1 = 1.007 = 100% Little (approximate) mental math tool: years to double=70/rate of growth So an economy growing at 2% per annum will double its output in 70/2 = 35 years. At 3% per annum, it will take 70/3=23 years. A broad look across time and space Growth of output per capita is a recent phenomenon and with it came major improvements in standard of living World population = 1 bn in 1900 7.7 bn todayLife expectancy = 40 yrs “ 72 yrs “Child mortality (<1yr old) = 25% “ 6% “% read & write = 25% “ 80% “Poverty ( [Show More]