Econ1002 Wk1 L1

Measuring Macroeconomic Performance: Output

You should be able to discuss: Distinctions between microeconomics and macroeconomics Recent Australian macroeconomic performance What GDP is, how to calculate it, and know the distinction between nominal and real GDP The national income accounting identity

Microeconomics vs. Macroeconomics Microeconomics Focuses on the markets for individual commodities and on the decisions of single economic firms. Holds total income constant Macroeconomics Focuses on the economy as a whole, including households, firms, government and overseas markets (i.e. import/export) Spends much time analysing how total income changes and how changes in income cause changes in other modes of economic behaviour. Spends a great deal of time and energy investigating how people form their expectations and change them over time. Considers the possibility that decision makers might change the quantities they produce before they change the prices they charge.

Doesnt worry much about how decision makers form their expectations Assumes that economic adjustment occurs first through prices that change to balance supply and demand and that only afterward do producers and consumers react to the changed prices by changing the quantities they make, buy, or sell.

Measuring Macroeconomic Performance We know that the economy is performing well when: 1. Living standards rise in the long run This is deduced from the growth theory: the study of LR growth performance of economies 2. Macroeconomic extremes are avoided SR business cycle: the tendency for economies to experience bouts of economic expansion (Output; Employment) followed by economic contraction (Output; Employment) Recession: occurs when there are at least two consecutive quarters of economic contraction

Inflation: is the tendency for the overall level of prices in the economy to rise through time 3. Real value of currency is preserved Changes in price levels imply that any given amount of currency will hold a corresponding amount of purchasing power. e.g. 1) Inflation: causes real value of currency (i.e. $1 buys fewer goods) e.g. 2) Deflation: is the sustained fall in average prices over time. This means that $1 buys more goods 4. Levels of public and national debts are sustainable Consider: income flow<borrowed debt unsustainable debt policy Public debt: the amount government owes non-government (private) sector National debt: the amount the nation owes other to other countries Budget deficits: government expenditure < tax revenue (government borrows money from private sector to meet spending commitments) Budget surplus: government expenditure > tax revenue (allows government to pay off accumulated debt from past deficits. The OC is that some of the money could have been used to finance health or education systems, etc) 5. High employment rates When unemployment is low it indicates that jobs are secure an is associated with improved wages and working conditions Gross Domestic Product (GDP) GDP: the market value of final goods/services produced in a country during a given period. It is the sum of expenditure of final goods and services. When we calculate GDP, we need to determine the time frame: a quarter, a year, a month, etc. In Australia, GDP is calculated once per month. GDP is given by: Y=C+I+G+XM

GDP

Consumption Govt. Spending Investment

Net Exports

NB: GDP is a flow; not a stock Nominal vs. Real GDP When economists add up final goods and services produced in the year to calculate GDP, how do they weight each good or service? The answer is that they use market value what people paid for a good or service in the calculation of nominal GDP.

Nominal GDP: is a measure of GDP in which the quantities produced are valued at current year prices. It measures the current dollar value of production. Real GDP: is a measure of GDP in which the quantities produced are valued at the prices in a base year. It measures the actual physical volume of production. NB: Nominal GDP is not a good measure of productivity or material output. It confuses changes in the overall price level inflation or deflation with changes in total production. Nominal GDP = Price Real GDP $Y=PY