LECTURE 1: MEASURING MACROECONOMIC
PERFORMACE OUTPUT & PRICES
Learning outcomes
What is macroeconomics?
What criteria suggests an economy is performing well?
What is Gross Domestic product (GDP)?
Measuring GDP
What is Consumer Price Index (CPI) and inflation?
Measurement of CPI
Economic costs of inflation
Inflation and interest rates
Deflation
To do List
Key Chapter of Text 1
What is macroeconomics?
• DEF: Economics is the study of how society managed and allocated its scare resources to best satisfy needs and
wants.
• DEF: Macroeconomics is the study of the economy as a whole, economy-wide phenomena.
o Under what circumstances is the economy performing well?
o What factors have produced particular macroeconomic outcomes?
o Influence of government on macroeconomic performance?
• 2 main indicators:
o GDP
o Inflation
Criteria of high economic performance:
• Higher material standard of living – eg. Low standard of livin ie. Poverty in Greece
• Stable macro perf over long term, avoid extremes, stable paced growth eg. Interest rates don’t double
• Exchange Rate – maintain real value of currency eg. 1 AUD = 0.7 US – we won’t it to maintain this value…
• Sustainable levels of public & foreign debt eg. Raises question marks
• Balances current AE against need to provide resources 4 future
• Full employment
What is Gross Domestic Product:
• DEF: The total market value of final goods and services produced by an economy over a particular period of
time, usually 1 year.
o Main indicator!
o = Aggregate output for econ
o ∆ in GDP 1 period —> next gives indication of econ growth
o ↑ GDP —> expansion —> smooth pattern (otherwise overheats)
• Upward movement on business cycle
•
o ↓ GDP —> contraction
• Decrease in business cycle
• Sometimes needed
Measuring GDP
• ABS calculated GDP
o Chain Volume Management – prices from different g & s tend to grow at different rates.
• Therefore the base year’s price info is irrelevant when it is far from actual yr
▪ ABS calculated GDP slightly diff than using base period price → real econs much more
complicated!!
• We need to get A of the quantities of many goods —> 1 number
• Not all g&s can be bought & sold in markets & therefore excluded from the GDP measurement
o Eg. Plumber fixing himself
o Eg. Childcare and home production – we can’t put a value on it
o Eg. Public goods like public defence don’t have a value
• To do with market value (prices used)
• Only looks at the final g&s produced —> otherwise you’d be double counting
o Don’t include all goods in production process – it’s the final
o Eg. Grain & flour = intermediate goods. Bread is the final good
• Hard to differentiate between intermediate goods or not
▪ To deal with this, economics will determine the final value of the good indirectly
• Sum up all the intermediate goods —> value added approach
• Value added by any firm = represent the portion of the value of g&s
that each firm created in its stage of production
• Summing up gives same value
• Market value of product – costs of inputs from other firms
o Only g&s produced within one country —> Domestic
Types of methods to calculate GDP
1. Value Added (Producction) Method
a. Calculated GDP using the value added for each good produced.
1. Expenditure Method (used mainly)
o We look at the expenditure of goods & services produced in the country
o Assumes 4 groups of user who purchase g&s in country:
o Households (Consumer spending on M, domestic g&s) , firms (invest), government (buys g&s, give away
welfare payments), foreign sector (buys X)
o We assume that the groups spent all the g&s
o National Income Accounting Identity: Expenditure EQN: Y(output/GDP/income) = C + I + G + NX
o Starting point of many macro models → used to predict national savings etc.
2. Income Method = is a different approach measuring GDP and looks at the income generated from capital &
labour.
o Considers when a good or service is sold, sale is distributed to the workers & owners of the capital
involved in the production of the good or service.
o Flow of income in the economy.
o GDP = Labour Y + Capital Y
o Labour Y = wages, salary & income of those employed
• 75% GDP
o Capital Income = payments to owners of physical capital & intangible capital comprised of 25% of GDP.
o
The model highlights that economist regard either production, income or expenditure as
equivalent means to describe GDP.
Limitations of GDP
nominal gdp
Nominal GDP is a gross domestic product figure which is not adjusted for inflation.
Problems with measurement
• Price levels change over time if in year 1 inflation is high but in year 2 inflation is low, it will make it appear that
year 1 had higher economic growth rate when this might not be the case.
Measuring Real GDP vs nominal GDP
real gdp
A GDP figure which is adjusted for price level change ie. Has had inflation removed.
Problems with measurement
• A country has a high standard of living only when residents have access to a large supply of goods & services
• Countries with high GDP but an extremely large population may not have necessarily high standards of living
• Profits of production may only be enjoyed by rich people, majority of population in poverty.
• Population in the economy rises over time
Real gdp per capita
GDP figure which takes into account population size, GDP per person.
By comparing GDP Per
Capita between years we
can tell how much better
