ECON1102: Macroeconomics
University of New South Wales
1Measuring Macroeconomic Performance
Macroeconomic goals -Rising living standards,
avoidance of expansions/contractions, stable
inflation, manageable debt, balance of
consumption/saving.
GDP โMarket value of final goods and services
produced in a country during a given period of time
Production method โ Sum market values of final
goods/services produced domestically
Expenditure method โ Sum amounts spent on final
goods/services produced domestically
Income method โ Sum revenue distributed from
sale of final goods/services produced domestically
Nominal GDP calculated with prices for that year
Real GDP calculated with prices from a base year
Real GDP generally indicates economic well-being but
ignores distribution of wealth, leisure, etc
CPI โ Cost of a basket of goods in current year
divided by cost of basket in base year
Inflation -๎
Inflation costs โShoe-leather costs, noise in price
system, distortions of tax system, unexpected
redistribution of wealth, interference with long-run
planning and menu costs
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Saving
Lifecycle
Precautionar
y
Bequest
Reason
Life goals
Emergencies
Inheritance
Real interest rate and inflation โ๎ ๎ ๎
Aggregate saving โ๎ ๎ ๎
Private saving โ๎ ๎ ๎
Public saving โ๎ ๎
Investment โ Depends on price of capital goods
and real interest
rate (opportunity
cost).
Supply of saving
must equal demand
of investment.
Investment
shifted by change
in technology,
saving shifted by
changed in government budget deficit
Labour market model โDemand downward
sloping because of diminishing marginal returns to
labour.
Demand shifted by โchange in relative price of
output, change in productivity of workers
Supply shifted by โ Change in size of working
population
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Costs of unemployment
Cost
Economic
Psychologic
al
Social
Example
Not paying tax
Self esteem
Crime
Types of unemployment
Frictional
Structural
Cyclical
Looking for
work
Skill mismatch
Business cycle
Potential output โ Output of an economy at full
employment
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2Short-term Economic Fluctuations
Business Cycle
Recession โ 2 consecutive quarters of negative real
GDP growth
Okunโs Law โ๎๎๎๎ ๎ ๎๎ ๎ ๎ ๎ ๎๎
