BUSS1040 Lecture Notes - Lecture 11: Human Development Index, Simple Algebra, Wage Share
28 May 2018
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WEEK 11: MACROECONOMICS – GDP AND BUSINESS CYCLE
INTRODUCTION TO MACROECONOMICS
• Macroeconomics: studies the behaviour of the entire economy
o Aggregates the impacts of individual decisions (of private agents and the government)
o Goals of Macroeconomic Policy:
§ Full employment
§ Economic growth (SR + LR)
§ Price stability (low inflation)
• Microeconomics: provides a foundation for macroeconomics
GROSS DOMESTIC PRODUCT (GDP)
• GDP: the money (market) value of all final G+S produced in a country in a given time period
• Three approaches to measuring GDP
1. Final Goods or Expenditure Approach
§ Think of GDP in terms of who buys the G+S
§ GDP = C + I + G + X – M
• Consumption + Investment + Government + Exports – Imports
§ Expenditure side is extremely useful for thinking about economic fluctuations
2. Production or Value Added Approach
§ GDP is total money value of all final G+S
§ Often difficult to distinguish intermediate and final goods
§ To avoid double counting, value-added method is used
§ E.g. economy produces $6 of bread
• Wheat farmers value added = $2 (wheat) - $0 (no intermediate input costs) = $2
• Flour making factor value added = $3.5 (flour) - $2 (wheat) = $1.5
• Bakery shop value added = $6 (bread) - $3.5 (flour) = $2.5
§ GDP measures the sum of the value added of all G+S produced in an economy
§ Production accounts show how each industry is performing
3. Income Approach
§ Think of GDP in terms of where payments for G+S go
• Compensation of employees = wages
• Gross operating surplus of producers (profits + depreciation + interest payments)
• Taxes on production – subsidies (indirect taxes)
§ Shares of income going to wages and profits useful for some macro studies
• Very high wage share in 1970s and early 80s suggested high wages were part of
unemployment problem
• Rising profit share now a major cause of rising inequality
NOMINAL GDP AND REAL GDP
• Nominal GDP: the money value of final G+S produced during a given year valued at the prices that prevailed in that
same year
• Real GDP: the value of final G+S produced in a given year when valued at the prices of a reference base year
o Moves with changes in quantity of G+S produced, not with changes in prices
o Real GDP = Nominal GDP divided (deflated) by a measure of average prices called a price index
o Measure of economic growth
GROWTH IN THE LONG TERM
• Real GDP growth
o
™´T$™NV;Xℎ = (™´T$¨1
™´T$¨−1) − 1
• Long term: Australian GDP has been growing at about 3.5% p.a. à Chinese economy has been growing at 8% p.a.
• Long term growth comes from:
o Growth in labour force (employment)
o Growth in skills of labour force (human capital)
o Growth in capital stock (investment)
o Growth in productivity (technology)
• EG is a key determinant of standards of living
Document Summary
Week 11: macroeconomics gdp and business cycle. Introduction to macroeconomics: macroeconomics: studies the behaviour of the entire economy, aggregates the impacts of individual decisions (of private agents and the government, goals of macroeconomic policy: Price stability (low inflation: microeconomics: provides a foundation for macroeconomics. Gross domestic product (gdp: gdp: the money (market) value of all final g+s produced in a country in a given time period. Three approaches to measuring gdp: final goods or expenditure approach. Think of gdp in terms of who buys the g+s. Gdp = c + i + g + x m: consumption + investment + government + exports imports. Expenditure side is extremely useful for thinking about economic fluctuations: production or value added approach. Gdp is total money value of all final g+s. Often difficult to distinguish intermediate and final goods. To avoid double counting, value-added method is used.
