Introductory Macroeconomics Notes ECON10003
Topic 1: Gross Domestic Product
• Market value of final goods and services produced in a country during a given period of time o Excludes:
§ Intermediate goods (avoids double counting)
§ Goods produced overseas even if by Australian firms (not domestic production)
§ Financial assets (no production of new goods and services)
§ Resale of pre-existing goods (no production of new goods and services)
• Consumed by the ultimate user
• Consumed in production
• Identify changes in the pace of economic activity
• Compare international living standards and other data between countries
• Identify the composition of production, expenditure and income
• Explain changes in unemployment, hours worked and productivity
• Avoids household production and activities of the underground economy
• Does not account for factors such as inflation, population growth and income equality
• Does not account for non-material factors such as leisure time, life expectancy and environmental quality
• Does not account for resource depletion
• Slope indicates the growth rate
Topic 5: Labour Market
• Cultural/social factors
o Attitude towards gender
• Institutional factors o Minimum wage
§ Sets a price floor on wages, increasing the cost of labour and decreasing demand.
Increases unemployment for low-skilled workers as individuals become unemployed if their MP is less than their MC
o Unemployment benefits
§ Reduces the incentive to intensively search for work
• Business cycle
o Cyclical unemployment
• Assumed to be perfectly competitive:
o Large number of workers on the supply side and a large number of firms on the demand side
§ Ensures that both workers and firms are price-takers o Perfect information
• Demand for labour is dependent on the demand for goods by households. When demand is high, firms require more labour to produce more output
• 𝑦"# = 𝑓(𝑘"#, 𝑙"#)
• Properties
o Output increases as capital/ labour increases
§ +,(-+-./,0./)
./ > 0
§ +,(-+0./,0./)
./ > 0
o Output increases at a diminishing rate
§ +3,(-+0./,0./)
./3 < 0
§ +3,(-./,0./)
+-./3 < 0
§ Shown by the decrease in slope as labour increases
• First worker or capital is provided with the most productive task and the next is provided with the next most productive task
• 𝜋"# = 𝑝"#𝑓(𝑘"#, 𝑙"#) − (𝑤"#𝑙"#+ 𝑟"#𝑘"#+ 𝑑"#𝑘"#)
• +<+0./
./ = 𝑝"#∗+,(-+0./,0./)
./ − 𝑤"# = 0
• Rearranged to form +,(-+0./,0./)
./ =>./
?./
o If MP > MC, firms increase labour to increase profits
Topic 10: Financial Markets and Intermediation
• Transfers resources from savers to individuals seeking to borrow o Savers have funds they want to invest to earn income o Investors want access funds to provide a return on a project
• Information asymmetry
o Difficult to identify if investor is a good risk. Partly solved by banks as they have more resources to identify whether an investor is a good risk
• Accept deposits from savers
o Pays interest on these deposits
• Lend savings to investors o Receives interest
• Bonds
• Stocks
• Offer to repay debt and interest in the future in return for funds today
• Offer a share of profits in return for funds today
• Equityholders have a residual claim to the assets of the firm and bear a higher risk compared to bondholders so expect a higher rate of return
• Information properties of bond and stock markets
o Firms must reveal information to participate in these markets
• Diversification properties of bond and stock markets o Investing in many different projects reduces risk
• Transfers resources from savers to borrowers
• Stock/bond crashes reduce expenditure and economic activity via the wealth effect
• Financial intermediaries lent too much to the housing market resulting in high house prices
• Housing bubble burst and the value of houses and housing loans declined with some individuals defaulting
• Banks were prohibited from lending due to weaker balance sheets, increasing interest rates
• Large decline in investment and consumption due to difficulty in attaining credit, decreasing economic activity, resulting in the GFC
• Medium of exchange
o No need to barter and have something the seller wants
§ Double coincidence of wants o Allows for specialisation
• Measure of economic value
• Store of value
o Allows for the transfer of purchasing power over time
Topic 15: Introduction to Economic Growth
• Prior to 1750: Relatively little growth and dispersion in income/ living standards per capita across countries
• Industrial Revolution: Sustained levels of strong growth in a small set of rich countries
• 1800 to 1950: Divergence in per capita incomes
• 1960s to 1980s: Weak relationship between per capita income and growth
• Recent years: Slight evidence of convergence between countries suggesting improvements in equality
• Output per capita influences:
o Life expectancy o Education
• Small differences in growth rates compound over time leading to large differences in output per capita
• Business cycles
o Emphasises deviations in output from potential output
§ Booms, recessions
o Focuses on market failure where prices do not adjust quickly
§ Role of government intervention to reduce this
• Economic growth
o Emphasises change in potential output over time
o Less focus on market failure as prices adjust in the long run
§ Market failure can still be important such as public goods that boost economic growth
• @
AB?C0D#"BE = @
F∗ F
AB?C0D#"BE
• Output per capita = labour productivity * employment to population ratio
• Trends:
o Employment to population ratio has remained largely static (cannot increase above 1) o Labour productivity has grown over time explaining the increase in output per capita
• The slowdown is temporary and should return to normal when economies recover from the GFC
• Productivity growth has been harder to measure
• It has become harder to develop new technology that improve productivity
• Technology + physical capital
• Political and legal environment: Market/ planned economies
• Human capital: Education and skills
• Land and other natural resources
• 𝑦# = 𝐴#𝑓(𝑘#, 𝑙#)
• 𝑦# = 𝐴#𝑘#H𝑙#(IJH)
Topic 18: International Trade
• Endowment economy is provided with a given set of goods and services, representing their consumption
o They don’t produce goods
• Trade allows for consumption at different levels shown by the budget set
•
• Able to produce more goods in a given amount of time
• Able to produce a good at a lower opportunity cost
• Specialisation allows for an increase in productivity
o Gains from trade occur if good X is priced between the opportunity costs of the two countries for producing good Y
• Alternative foregone when undertaking an action
• Fewer minutes is BETTER (lower opportunity cost)
• Slope represents opportunity cost of producing X
• The most efficient producer (lowest opportunity cost) produces each product
• Allows for an increase in output relative to no specialisation
• Slope no longer goes from A to B as the country with a comparative advantage with producing X is shifted to producing X
• Set of points at which the economy is utilising resources efficiently
• Opportunity cost changes gradually since there are more producers
• Points inside the curve indicate inefficient use of resources o Cyclical unemployment
• Slope represents the opportunity cost
o Steeper the slope, higher the opportunity cost of producing X
• Optimal production is when the slope is tangential to the price of Y in terms of X o Can produce goods and then trade them allowing for the highest consumption