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ECON1102 Notes
Macroeconomics 1 -2

Chapter 1: Aggregate Production and Prices
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Key aggregate variables include: total production of goods and services, the general level of
prices, the level of employment and the unemployment rate

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services) is to use the cost of providing the good or service
in place of its unknown market value
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3 Intermediate Goods and Value added
 GDP refers to final G/S, doesn’t include intermediate goods
 Intermediate goods: good that is used in the production of another good or service
 In calculating GDP, it is important to count the value of each good only once, avoid double
counting intermediate goods = value added concept
 Value added: the market value of a firms production less the cost of inputs purchased from
other firms
 Two ways to calculate the contribution of the production of a good to GDP
o One method is to measure the market price of the good when it
o The second method is to add-up the value added of each producer who contributes to
the final product
 Production approach: to calculating GDP is the summation of value added for all businesses
operating in an economy
 The definition of GDP refers to the production within a country
 The final element of the definition of GDP refers to it being measured over some period of
time, typically 3 months/1 quarter – excludes G/S produced in an earlier period, but re sold
in the current period

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4 Expenditure Approach to GDP
 Expenditure approach: to calculating GDP entails the summation of expenditures on
domestically produced final goods and services by households, businesses, governments and
by the rest of the world
 Expenditure on goods and services by final uses = value of their production
o Household expenditure = consumption spending C
o Business expenditure = private investment spending I
o Government spending G
o Domestically produced gods and services that are purchased by the rest of the world
= exports X
o Foreign produced that are purchased from the world = imports M
o Net exports NX= X-M
 Decomposition of GDP Y = (triple equal sign) C + I + G + X – M
 Supply of G & S = Demand for G & S
o The triple equal sign indicates this is an accounting identity
o The value of production of final goods and services must be equal to the value of
expenditure on final goods and services
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5 Statistical Discrepancy
 The three approaches to measuring GDP can result in errors and differences in result
 The ABS averages these three measures
 Private Investment – Inventories
o Inventories are currently unsold stocks of goods held by businesses, calculated by
inventory level (end of period) – inventory level (beginning period)
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6 Second Hand Goods
 A fraction of expenditure will involve the purchase of second-hand or used goods
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include the purchase of a used car or a second-hand textbook
 The value of such sales are not included in the calculation of current GDP
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7 Income Approach to GDP
 Income approach to measuring GDP is obtained as the sum of payments to labour L and
capital K plus any net indirect taxes
 In order to produce goods and services, businesses use labour and capital (factors of
production)
 Payment must be made by business to the owners of the factors of production representing
income in an economy
 The total value added received by businesses in an economy must be either paid to labour in
the form of wages and salaries or paid to capital in some form (rent, interest, profit)
 Sum of payments to labour and capital = GDP at factor cost
 To obtain GDP we need to account for any indirect taxes that are levied on goods and
services or any subsidies that are paid
 GDP is the sum of GDP at factor cost plus net indirect taxes
o Y = labour income + capital income + (indirect taxes – subsidies)
Y = (WxL) + (RxK) + net indirect taxes
o L = labour, K = capital, W = wage per unit of labour, R = rate of return to a unit
of capital, net indirect taxes = indirect taxes – subsidies

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8 Gross National Income (GNI)
 GNI: equals the income measure of GDP plus any net factor income receivable from nonresidents
 Based on the country of origin of the factors of production
 Some of the income from GDP will accrue to foreign nationals
 GNI = GDP + net primary (or factor) income from non-residents
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9 Nominal and Real GDP
 Variations in nominal GDP over time reflect a combination of the effects of changes in the
quantity or volume of goods and services produced and their current prices
 Value of nominal GDP: values quantities of goods and services produced at their current
year (or year of production prices)
 Real GDP uses final goods and services prices for a common base year to value the
quantities produced in other years
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10 Nominal, Real GDO and the GDP price index
 Nominal GDP = real GDP x GDP price index
 Can be used to compute a price index or deflator for GDP, if we have values for nominal and
real GDP we can use those to compute a price index for GDP as:
𝒏𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑮𝑫𝑷 𝒑𝒓𝒊𝒄𝒆 𝒊𝒏𝒅𝒆𝒙 =
𝒓𝒆𝒂𝒍 𝑮𝑫𝑷
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11 Growth in Real GDP
 Commonly used as an indicator of economic progress
𝒓𝒆𝒂𝒍 𝑮𝑫𝑷 𝒑𝒆𝒓 𝒄𝒂𝒑𝒊𝒕𝒂 =

𝒓𝒆𝒂𝒍 𝑮𝑫𝑷
𝒑𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏

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12 GDP and Economic Welfare
 GDP is an incomplete measure of the general concept of economic welfare
 There are many factors that can affect people’s economic welfare which aren’t measure by
GDP, GDP omits many non-market activities
 Economic welfare depends on distribution of income and degree of income inequality
 One approach to adjust this is to adjust the GDP to try and capture more of the depreciation
costs
 Second approach involves arguments GDP with a variety of other economic and social
indicators
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14 Business Cycles
 The business cycle is used to describe general or widespread variations in the rate utilisation
of resources in an economy
 A recession occurs when there are at least two consecutive quarters of negative economic
growth, has to fall for at least quarters
 Contraction: period of level of GDP falls
 Expansion: period of level of GDP rises
 Peak: beginning of contraction, high point of
GDP prior to a downturn
 Trough: end of contraction, low point of
GDP prior to an uptown

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15 Technical Recession
 Much simpler method for defining and identifying a recession is a technical recession
 Technical recession: defined by the simple rule of at least two consecutive quarters of
negative growth in real GDP

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1 Labour Market Definitions and Data


a country’s economically active population includes all people involved in the production of
goods and services

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1 Definitions
 working age population: consists of members of the Australian population who are
civilian, usually resident and 15 years or older
 labour force: comprised of members of the Australian population who are employed or
unemployed
 employed person: worked for at least one hour during the previous week for some form of
compensation or who had a usual job or business but were not at work in the previous week
for some reason (type of leave)
 unemployed person: not employed in the previous week but had either looked for work in
the previous month and was available to begin work or was waiting to start a new job within
the next moth and could start if job was available
 a person not in the labour force does not meet the requirements to be either employed or
unemployed and includes retirees, unpaid home-workers or volunteers, permanently unable to
work, voluntary inactive in labour market and people in institutions
 LF = L + U – where LF is the labour force, L are those employed and U are
those unemployed
 Full time employment: corresponds to working at least 35 hours per week
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3 Competitive model of the labour market
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1 Demand for labour by a business
 we assume that by increasing the quantity of labour used, the business is able to increase its
volume of output
 thus the level of output increases with the quantity of labour employed

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marginal product of labour (MPL) is the addition to ouput from increasing the labour
input by one unit, with all other factors of production held fixed e
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calculate the additional
cups of coffee produced by adding each extra worker
value of marginal product of labour is marginal product of labour times the price of the
business’s output
o VMPL = MPL x p
o Where MPL is the marginal (physical) product of labour and p is the price of a cup of
coffee
The money or nominal wage is simply the wage received by a worker measured in units of
currency
The real wage is the money or nominal wage divided by some measure of the price of goods
and services
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