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A Macroeconomics Primer

Topic 1

The “Big Three” Concepts of Macroeconomics

Unemployment Rate

U = (# of Unemployed) / Labor Force

Inflation Rate

%ΔP = (P1 – P0) / P0

Growth & Productivity

Economic growth = percentage change in RGDP

“Productivity” is the average output per hour of work that a nation produces in goods and services.

Macroeconomics vs. Microeconomics

Macroeconomics deals with the totals, or aggregates, of the economy such as:

The unemployment rate

Inflation

Microeconomics deals with parts of the economy like:

The unemployment rate of low-skilled workers in a certain state

The price of cars

Gross Domestic Product (GDP)

Definition: (Nominal) GDP is the value of all currently produced goods and services sold on the market during a particular time interval.

Real GDP adjusts the value of total output to correct for changes in prices.

The GDP of a country is often referred to as the country’s output and/or income

Natural Real (Potential) GDP is the level of real GDP in which there is no tendency for inflation to rise or fall.

Actual GDP, 1960–2017

GDP (Chain Volume Measure)

June 1960 June 1961 June 1962 June 1963 June 1964 June 1965 June 1966 June 1967 June 1968 June 1969 June 1970 June 1971 June 1972 June 1973 June 1974 June 1975 June 1976 June 1977 June 1978 June 1979 June 1980 June 1981 June 1982 June 1983 June 1984 June 1985 June 1986 June 1987 June 1988 June 1989 June 1990 June 1991 June 1992 June 1993 June 1994 June 1995 June 1996 June 1997 June 1998 June 1999 June 2000 June 2001 June 2002 June 2003 June 2004 June 2005 June 2006 June 2007 June 2008 June 2009 June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 245051 251142 254398 270207 289064 30636 0 313659 333427 350418 375102 402005 418101 434460 445816 464106 470373 482546 499905 504388 524783 540706 558754 577350 564532 590394 621385 646583 662782 700435 727525 753458 750538 753860 784309 815513 846742 879584 914472 956325 1004314 1043916 1064096 1106692 1139735 1185337 1223153 1257820 1305332 1353078 1379094 1407406 1441903 1498021 1537561 1576897 1613972 1659604 1692092 2.5 1.3 6.2 7 6 2.4 6.3 5.0999999999999996 7 7.2 4 3.9 2.6 4.0999999999999996 1.4 2.6 3.6 0.9 4 3 3.3 3.3 -2.2000000000000002 4.5999999999999996 5.2 4.0999999999999996 2.5 5.7 3.9 3.6 -0.4 0.4 4 4 3.8 3.9 4 4.5999999999999996 5 3.9 1.9 4 3 4 3.2 2.8 3.8 3.7 1.9 2.1 2.5 3.9 2.6 2.6 2.4 2.8 2

millions

Percentage Change

GDP per Capita (Chain Volume Measure)

June 1960 June 1961 June 1962 June 1963 June 1964 June 1965 June 1966 June 1967 June 1968 June 1969 June 1970 June 1971 June 1972 June 1973 June 1974 June 1975 June 1976 June 1977 June 1978 June 1979 June 1980 June 1981 June 1982 June 1983 June 1984 June 1985 June 1986 June 1987 June 1988 June 1989 June 1990 June 1991 June 1992 June 1993 June 1994 June 1995 June 1996 June 1997 June 1998 June 1999 June 2000 June 2001 June 2002 June 2003 June 2004 June 2005 June 2006 June 2007 June 2008 June 2009 June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 24117 24167 23904 24913 26147 27159 27262 28486 29417 30884 32401 33016 32918 33247 34089 34006 34544 35429 35317 36365 37028 37735 38352 36924 38131 39636 40664 41068 42723 43598 44487 43713 43378 44672 46032 47329 48551 49897 51673 53698 55185 55600 57093 58141 59791 61024 61934 63289 64391 64225 64375 65040 66507 67028 67623 68187 69121 69402 0.2 -1.1000000000000001 4.2 5 3.9 0.4 4.5 3.3 5 4.9000000000000004 1.9 -0.3 1 2.5 -0.2 1.6 2.6 -0.3 3 1.8 1.9 1.6 -3.7 3.3 3.9 2.6 1 4 2 2 -1.7 -0.8 3 3 2.8 2.6 2.8 3.6 3.9 2.8 0.8 2.7 1.8 2.8 2.1 1.5 2.2000000000000002 1.7 -0.3 0.2 1 2.2999999999999998 0.8 0.9 0.8 1.4 0.4

Economic Performance of the US, UK and Australia

Gapminder: https://www.gapminder.org/tools/#_state_entities_show_geo_$in@=aus&=usa&=gbr;;;;;&ui_presentation:true;&chart-type=linechart

What’s In and What’s Out of GDP

Check Your Knowledge

Why is each of the following excluded from GDP calculation?

The purchase of a company’s shares

The sale of a 1998 Holden

Payment of unemployment benefits by the government

Growing vegetables for home consumption

Basic Business-Cycle Concepts

At what phase of the business cycle is the average duration of unemployment likely to be the highest?

Short Run vs. Long Run

The “short run” lasts from 1-5 years and the main issue is the stability of the economy. The ups and downs (or “economic fluctuations”) of an economy are part of the business cycle.

The “long run” ranges from one to several decades and is concerned with economic growth.

Nominal GDP, Real GDP and the GDP Deflator

Nominal GDP is the value of gross domestic product in current (actual) prices.

Real GDP is the measure of gross domestic product using prices of a chosen base year. RGDP = Nominal GDP / Price Index x 100

The GDP deflator is a price index that measures the aggregate economy’s price level.

GDP Deflator = Nominal GDP / Real GDP * 100.

The percentage change in the GDP deflator gives a measure of the economy’s inflation rate

Check Your Knowledge

Suppose that RGDP in 2017 was $1,693,799 million and the price index was 110.7, what was nominal GDP?

Check Your Knowledge

If real GDP for a given year is $1,498 billion and nominal GDP is $1,498 billion

The GDP deflator for this year is 80

The GDP deflator for this year is 100

The GDP deflator for this year is 113

The GDP deflator for this year is 125

This year is the base year for the GDP deflator

b and e are correct

The Relation Between Actual and Natural Real GDP and the Inflation Rate

Unemployment: Actual and Natural

Actual Unemployment (U) is the unemployment rate observed in the economy.

The Natural Rate of Unemployment (U*) is the rate of unemployment at which there is no tendency for inflation to rise or fall.

If U > U*  inflation falls

If U < U*  inflation rises

The Behaviour Over Time of Actual and Natural Real GDP and the Actual and Natural Rates of Unemployment

Measuring Unemployment

The unemployed are those without who either are on temporary layoff or have taken specific action to look for work.

The total labour force is the total employed, plus total unemployed.

The actual unemployment rate (U) is defined below:

Actual GDP & Unemployment, 1978–2017

June 1978 June 1979 June 1980 June 1981 June 1982 June 1983 June 1984 June 1985 June 1986 June 1987 June 1988 June 1989 June 1990 June 1991 June 1992 June 1993 June 1994 June 1995 June 1996 June 1997 June 1998 June 1999 June 2000 June 2001 June 2002 June 2003 June 2004 June 2005 June 2006 June 2007 June 2008 June 2009 June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 0.9 4 3 3.3 3.3 -2.2000000000000002 4.5999999999999996 5.2 4.0999999999999996 2.5 5.7 3.9 3.6 -0.4 0.4 4 4 3.8 3.9 4 4.5999999999999996 5 3.9 1.9 4 3 4 3.2 2.8 3.8 3.7 1.9 2.1 2.5 3.9 2.6 2.6 2.4 2.8 2 6.3216591181818185 6.2405673083333326 6.080015725 5.7536193666666664 7.1540170749999996 9.9573357333333359 8.9679634166666666 8.2363515416666662 8.0550212416666671 8.0729404416666668 7.1951572000000006 6.1512660583333343 6.9384509666666672 9.5942879249999997 10.742844408333333 10.870241408333333 9.7050678833333333 8.4650898083333317 8.5073515333333329 8.3560040000000004 7.6774903333333322 6.8632539666666661 6.2733743583333341 6.7656599499999999 6.3618079500000002 5.9250440749999997 5.3882745166666659 5.02800475 4.7697927583333337 4.3673395083333322 4.2384994166666665 5.5640586416666666 5.2045569249999994 5.0780949916666671 5.218696041666667 5.6574162166666673 6.0599177249999991 6.0685779166666665 5.729884358333333 5.6312751400000014

Percentage change in GDP (%)

Unemployment Rate (%)

Who is Unemployed?

Frictional Unemployment

University graduates looking for first jobs

People who voluntarily quit jobs and are now looking again

Structural Unemployment

People who have lost their jobs because their skills are no longer required in the economy

Cyclical Unemployment

People who have lost their job because of an economic downturn

Flaws in the Definition of Unemployment

The unemployment measure misses “forced part time workers” – underemployed.

The unemployment measure misses “discouraged workers” who are not actively seeking jobs and therefore are not in the labour force,

The Unemployment Rate from 1929–41 Compared with 1998–2010

Author’s calculations using ABS data and dx Data, RBA Preliminary Annual Database

1925/26 1926/27 1927/28 1928/29 1929/30 1930/31 1931/32 1932/33 1933/34 1934/35 1935/36 1936/37 1937/38 1938/39 1939/40 1940/41 1941/42 1942/43 1943/44 1944/45 1945/46 4.93 4.1900000000000004 6.18 6.73 9.7799999999999994 16.41 19.739999999999998 18.93 15.99 13.97 10.98 8.83 7.46 8.76 8.99 4.8499999999999996 1.88 0.95 0.98 1.19 2.1800000000000002 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 8.5782838250000015 7.9736547583333346 7.2762155833333333 6.609550183333333 6.3439723416666665 6.7134956333333315 6.1309823749999994 5.6418845666666657 5.1865528416666669 4.9627745916666663 4.5139233999999995 4.2347251916666666 4.9116539166666664 5.4606630166666674 5.0329053500000001 5.1600751333333328 5.4295427749999989 5.8362182750000002 6.1643148666666674 5.889582616666666 5.7077044999999993

Check Your Knowledge

Why do people who have been unemployed for a long time find it very difficult to find a job?

Keeping Track of GDP and other Australian Data

The National Accounts contain detailed GDP data for Australia.

Some of the major sources for Australian economic data include:

The Australian Bureau of Statistics (ABS)

The Reserve Bank of Australia (RBA)

The australia.gov.au

Other sources of data:

OECD, the World Bank and the IMF

Taming Business Cycles

Macroeconomic analysts have two main tasks:

Analyse the causes of changes in macroeconomic

variables

Predict the consequences of alternative policy

changes

“The only function of economic forecasting is to make

astrology look respectable.” John Kenneth Galbraith (1908 - 2006)

Macroeconomic target variables important to analysts and policy makers include:

Inflation

Unemployment

Economic growth

Productivity

The Role of Stabilisation Policy

Stabilisation Policy is any policy that seeks to influence the level of aggregate

Monetary policy tries to influence aggregate demand by changing the money supply and/or interest rates

Fiscal policy tries to influence aggregate demand by changing government spending and/or tax rates)

Goal of stabilisation policy is to reduce the severity of the business cycle – reduce the peaks and troughs

To intervene or not to intervene?

Business Cycles

Check Your Knowledge

Given the path of natural real GDP growth, economists prefer an economy such as ________, in which the real GDP gaps are ________.

Stabilia's, minimised

Stabilia's, maximised

Volatilia's, minimised

Volatilia's, maximised

The “Internationalisation” of Macroeconomics

A closed economy has no trade in goods, services or financial assets with any other nations.

An open economy exports and imports goods and services to and from other nations, and has financial flows to and from foreign nations.

Source: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/AustraliaTrade

Road to the Great Depression

Global Financial Crisis