Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Title: ECON1102 Macroeconomics 1 chapter 8-10
Description: ECON1102 Macroeconomics 1 chapter 8-10 I studied these notes and attained straight A’s
Description: ECON1102 Macroeconomics 1 chapter 8-10 I studied these notes and attained straight A’s
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
ECON1102 Macroeconomics 1
ECON1102 Notes Chapter 8-10
Chapter 8: Aggregate Demand and Aggregate Supply
8
...
1
...
1
...
1
...
Changes in r0 reflect discretionary or exogenous changes in monetary policy
8
...
4 – Aggregate demand curve
A PAE curve that depends on the real interest rate
A policy reaction function for the RBA, in which the real interest rate responds to the
inflation rate
PAE curve (depends on real interest rate) and PRF (how the real interest rate is set on
inflation) = AD curve
Link output (GDP) (Y) and inflation (pie)
Deriving the aggregate demand curve:
AD curve has a negative slope and the first assumption is that household consumption and
planned investment are negatively related to the real interest rate
The actions of the central bank in responding to changes in inflation play a key role in
determining the slope of AD curve
8
...
5 – Other Reasons why Ad curves are negatively sloped
why does it slope downwards?
o Model explains negative slope as reflecting the behaviour of the central bank
o When inflation is high, the RBA will raise the real interest rate
o The increase in r reduces consumption and investment (i
...
PAE) and this produces a
fall in equilibrium output
o Other reasons not explicitly included in the model include: wealth, distributional and
uncertainty effects
o When inflation goes up – reduces value of money
8
...
6 – shifts in the AD curve
Shifts in the AD curve
o
o
o
1
...
Exogenous change in the RBA’s policy reaction function: r0
increase in r0 produces an upward shift in the policy reaction
function(tighter monetary policy) and leads to an inward shift in
the AD curve
if the PRF curve shifts upward, the AD curve shifts inwards
AD curve will be vertical if
Alpha = beta = 0
Gamma = 0
8
...
2
...
2
...
2
...
g
...
2
...
25– output gap and the inflation rate
in the longer term the putput gap is an important influence of inflation
expansionary (Y>Y*) = rising inflation
contractionary (Y
constant inflation = horizontal line
8
...
3
...
3
...
3
...
3
...
3
...
3
...
3
...
3
...
1 – Balance of Payments
The balance of payments is a record of transactions during some period between residents of
a country and non residents
The two main components of the balance of payments are the current account and the
capital and financial account
Transactions on the current account are classified into three main types: those related to
goods and services, to factor income flows and to transfers
9
...
1 – balance of trade
Australia’s international trade in goods and services is measured by the balance of trade
Balance of trade = X-M
9
...
2 – factor income flows
In any period, income payments can be made by Australian residents to non-Australian
owned factors of production (labour and capital) that are used in the production of
Australian GDP
Primary income = primary income credits – primary income debits
Credits are income payments to Australian owned factors of production and debits are
payments from Australia to foreign factors of production
9
...
3 – international transfers
There are also some income flows between residetns and non-residents which the ABS refer
to as secondary income
Secondary income captures international transfer payments (where real or financial
resources are provided to one party, without anything provided in return by the recipient)
9
...
4 – current account
Transactions leading to a change of ownership of commodities, direct income flows (foreign
investment) and transfers (foreign aid)
Different from Net exports/balance of trade as it includes net primary income (includes net
labour and property income payments/receipts) and net secondary income (transfer
payments)
Current account = balance of trade + primary income + secondary incoe
9
...
5 – capital and financial account
Is the sum of the balance on the capital account and the balance on the financial account
Balance on capital account + balance on financial account = balance of capital account
and financial account
Includes
o Transactions involving the purchase or sale of assets
o Transactions between domestic and foreign residents involving the acquisition of an
asset or a liability
o New liabilities are recorded as credits (as they bring in foreign exchange) – like
exports of goods and services
o Acquisition of assets are recorded as debits (as they require foreign exchange to be
given up by domestic residents) – like imports of goods and services
9
...
6
– financial account
Measures transactions between residents and non-residents involving financial assets and
liabilities
Asset is a claim by resident on non-resident e
...
shares and bonds
Liability is a claim by non-resident on resident
Includes equities/shares and debt (e
...
bonds)
Direct and portfolio investment
o Classification based on level of ownership and control
o Direct investment is where investor has a sufficient level of ownership to have some
control of business
o Portfolio investment is where investor has no influence on operation of business e
...
purchase of 10 apple shares
9
...
7 – capital account
The net acquisition/disposal of non-produced, non – financial assets e
...
sales/purchases of
land for foreign embassies
Cancellation of debt to foreign countries
o Relatively small component of account
9
...
8 – balance of payments
Accounting principle for balance of payments imply that
o Current account = (-) capital and financial account or
o Current account + capital and financial account = 0
o Balance on capital and financial account will be the same value as the balance on the
current account, though have the opposite sign
9
...
2
...
e
...
2
...
2
...
3 – exchange rates
Exchange rates are a fundamental variable in international transactions in goods, services
and financial assets
9
...
1 – nominal exchange rate
Nominal exchange rate – quoted in the market place, relative price of two different
currencies
o Rate at which two currencies can be traded for each other: bilateral exchange rate
Can be expressed
Quoting the bilateral exchange rate
o Note that we expressed the exchange rate between US and Australia currencies in 2
ways:
Us/A = 0
...
0575
o Exchange rates can be expressed as
Units of foreign currency per (one) unit of domestic currency; $US/$A
= 0
...
0575
o A definition
Let e denote the nominal exchange rate, and define it as
e = number of units of foreign currency that one unit of the domestic
currency will buy
if we treat Australia as the domestic or home country then (denominator) :
e = foreign currency/home currency = Yen/$A or $US/$A
a rise in e corresponds to an appreciation of the $A
a fall in e corresponds to a depreciation of the $A
o appreciation: an increase in the value of a currency against other currencies
o depreciation: a decline in the value of a currency against other currencies
9
...
2 – cross rates
Cross rates
o We can use the exchange rate between the
Australian dollar and US dollar
Australian dollar and Euro
o To infer the exchange rate between the Euro and the US dollar
9
...
3 – real exchange rates
real exchange rate
o suppose we are interested in comparing the price of the same (or a very similar)
good in two countries
o e
...
computer in AU = 2300, computer in US =2000
o
need nominal USD-AUD exchange rate
o
measures the price of domestic goods relative to the price of foreign goods (when
prices are expressed in a common currency)
real exchange rate
o
real exchange rate and international competitiveness
o a rise in the real exchange rate implies that domestic goods are becoming more
expensive relative to foreign goods
o other things equal, this tends to reduce exports and encourage imports; with the
overall effect of reducing the level of net exports
o there is a negative relationship between net exports and real interest rate
9
...
purchasing power parity (PPP)
2
...
4
...
4
...
4
...
e
...
Services
trade barriers such as tariffs and quotas
...
4
...
4
...
4
...
g
...
4
...
4
...
4
...
4
...
4
...
1 – Economic growth
has delivered large increases in standard of living
concerned with the long run evolution of real output (Y)
assume zero output gap Y = Y*
measuring economic growth
o conventional to use real GDP per capita as a measure of a country’s living standards
and stage of economic development
o the rate of economic growth is measured by the growth rate of
𝐺𝐷𝑃
=
o real GDP per capital 𝑦 =
𝑃ç𝑃
𝑃ç𝑃
}
10
...
1 – Decomposition for Per-Capita
GDP
decomposition for real GDP per capita
o
o
o
o
𝑌
𝑃𝑂𝑃
=
𝑌
𝐿
𝑋
𝐿
𝑃𝑂𝑃
the right hand side is
average labour productivity (Y/L)
share of population in employment (L/POP)
increases in real GDP per capita must be associated with an increase in the
proportion of the population that is employed and/or an increase in aggregate
labour productivity
while there are short run changes in L/POP, is it bounded between 0 and 1, which
limits its ability to grow over time
main source of economic growth is labour productivity as it can display persistent
growth
10
...
) represents some general function that tells us how we combine
capital, labour and technology in an economy to produce real GDP
o E
...
F(K,L,A) = K + L + A
o Although simple, not a reasonable choice of F(
...
2
...
) is the Cobb Douglas Production
Capital K is raised to the power , labour has exponent (1- ) and technology has exponent 1
and then these three inputs are combined by multiplication
It exhibits constant returns to scale in labour and capital and both labour and capital
individually exhibit diminishing marginal productivity
10
...
2 – Constant returns to scale
The CB production given features constant returns to scale in L and K
By doubling both aggregate labour and capital we have doubled total output, and hence
exhibit constant returns to scale
The key to this cobb – Douglas function having CRS is that the exponents on labour ( )
andcapital (1- ) add to one
If the exponents sum to to more than one there are increasing returns to scale (IRS),
whereas if the exponents sum to less than one there are decreasing returns to scale (DRS)
10
...
3 – Marginal Products
Marginal product measures the effect on output of a change in a single input while all others
inputs are held constant
The marginal product of labour is the change in aggregate output for a small change in the
labour input when both K and A are held fixed
The aggregate marginal product of capital is the change in aggregate output for a small
change in the capital input when both L and A are held fixed
marginal product of labour:
marginal product of capital
MPL is equal to the exponent on L in the Cobb Douglas production x by the average product
of labour (Y/L)
Similarly the MPK is just equal to the exponent on K multiplied by the average product of
capital (Y/K)
10
...
3
...
3
...
3
...
3
...
3
...
4 – growth accounting
Growth accounting provides a method to answer the relative contribution of each of the
three inputs
10
...
1 – growth of output
Transform Y
where:
= AK L1-
into growth rates:
we can decompose the growth rate of output into:
o the contribution from growth in technology △A
o the contribution from growth in capital x △K
o the contribution from the growth of labour (1- ) x △L
10
...
2 – growth of technology
There are no direct measures of the growth rate of A
So rearrange the above equation to calculate A
10
...
3 – labour and capital income shares
One issue with calculating △A is we need an estimate of
Suppose labour and capital markets are competitive so that both labour and capital are paid
their respective marginal products
o MPL = w
o MPK = r
o Where w is the aggregate real wage and r is the aggregate return to capital
From the Cobb Douglas production function we derived the marginal product of labour:
and the marginal product of capital
now we can write
and if we re arrange
note that w x L is the real wage times the quantity of labour and so measures real income
payments to labour
since Y is real GDP real national income we can interpret the right hand side as labour’s
share of income
thus we can interpret the exponent on labour (1- ) in the cobb-douglas production functionas
the share of income that goes to labour
if we follow the same approach for capital we find
so that
is capital’s share of income
Title: ECON1102 Macroeconomics 1 chapter 8-10
Description: ECON1102 Macroeconomics 1 chapter 8-10 I studied these notes and attained straight A’s
Description: ECON1102 Macroeconomics 1 chapter 8-10 I studied these notes and attained straight A’s