1. The macroeconomic environment 2012
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

2. Slides prepared by Muni Perumal, University of Canberra, Australia
INTRODUCTION
In this class we are going to briefly explore a range of important macroeconomic concepts.
Macroeconomics is the study of the entire economy and not just a single market.
Macroeconomic problems often require political solutions at a national level.
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

3. Slides prepared by Muni Perumal, University of Canberra, Australia
Macro is the study of the external environment of the firm, opportunities and threats?
These days the external environment of firms is variable, dark, gloomy and seen a threat.
But if managers understand how the macro economy works then they may be able to turn threats in opportunities.
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

4. Gross Domestic Product
GDP is the total market value of all final goods and services produced in the economy during a specific period
Measured in money terms and not in physical units
Usually measured over a year
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

5. Slides prepared by Muni Perumal, University of Canberra, Australia
Is Zimbabwe the fastest growing economy in the world?
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

6. Slides prepared by Muni Perumal, University of Canberra, Australia
What is included in GDP?
Only final goods and services
Intermediate goods are excluded to avoid double counting
To avoid double counting calculate value added
the market value of a firm’s output less the value of intermediate component
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

7. What is included in GDP? (cont.)
GDP excludes non-productive transactions
Two major types of non-productive transactions:
purely financial transactions, the commission may be included in GDP but the value of the shares traded
sales of second-hand goods, the cost of preparing a used car for sale may be included in GDP but not the acquisition cost of the car.
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

8. Two Approaches to Measuring GDP
Expenditure approach (GDPE)
Measures GDP as the sum of all the expenditures involved in taking that total output off the market
Income approach (GDPI)
Sum of the incomes derived from the production of the GDP
What really happens (GDPA)
Both approaches have errors and omissions, there is still a sizeable black economy is Australia, so the ABS calculates an average
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

9. Slides prepared by Muni Perumal, University of Canberra, Australia
Expenditure Approach
GDP is derived as a sum of (The Aggregate Expenditures model), this is the Keynesian Model.
Consumption expenditures by households (C)
Investment expenditures by business (I)
Government purchases of goods and services (G)
Net export expenditures (NX)
GDP = C + I + G + NX or
GDP = C + I + G + (X – M)
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

10. The Two-sector Model of the Economy
Drawn on the assumption that;
Firms do all the producing, but own not factors of production
Households do all the consumption and own all the factors of production,
Neither households nor firms save
So by definition production = consumption

11. Household sector Firms sector The Two-sector Model of the Economy
Productive resources
Factor market
Income
Household sector
Firms sector
Goods and Services
Product market
Expenditure

12. So, we have a four sector model of the economy
But in reality
Households save (maybe not mine)
Firms save, they build up inventories
There is financial sector
There is a government
Countries trade with each other
So, we have a four sector model of the economy
This is a simple model but very powerful

13. The Four Sector Model of the Economy
Household sector
Financial
sector
Government
External
Firms
Imports
Savings
Government expenditure
Exports
Taxation
Investment
INJECTIONS
LEAKAGES
Expenditure
Income

14. Slides prepared by Muni Perumal, University of Canberra, Australia
Money GDP vs Real GDP
Money GDP is GDP measured in current prices (nominal GDP)
Real GDP is money GDP adjusted for inflation by an implicit price deflator, also called constant price GDP
Nominal GDP needs to be deflated using a price index to take into account inflationary effects.
Target: RGDP growth of 3 – 4% pa to allow for 2% pa real per capital growth
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

15. Inflating and Deflating
Consumer Price Index
measures the price level of a ‘market basket’ of goods and services for a typical family.
In Australia the basket contains 107 different goods and 30,000 prices are sampled each month.
This is the most commonly used price deflator, but others are available.
Target: with the advent of monetarism and strong independent central banks target is 2 to 3 %
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

16. Slides prepared by Muni Perumal, University of Canberra, Australia
Real and Nominal GDP
Money GDP =
Real
GDP
Price Index
(as a decimal)
We can find the price index value on the ABS website
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

17. Slides prepared by Muni Perumal, University of Canberra, Australia
The Business Cycle
The recurrent, somewhat cyclical, increases and decreases in the level or rate of growth in economic activity that typify the pattern of progress of our economy’s real GDP over time
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

18. Phases of the Business Cycle
Peak
temporary maximum economic activity often associated with demand pull and maybe cost push inflation
Slow down or contraction
decline in output and employment to lower than planned levels
A recession two or more quarters of negative growth
A depression is a severe and prolonged recession, no accepted definition
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

19. Phases of the Business Cycle (cont.)
Trough
output and employment bottom out at their lowest levels, inflation is no longer a problem but unemployment may be a problem
Recovery or Expansion
output and employment expand towards the full-employment level or capacity level
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

20. Phases of the Business Cycle
slowdown
PEAK
RECOVERY
GROWTH
TREND
Level of business activity
TROUGH
Time
Long-run trend is only about 2% pa, but over 300 years this has led to huge increases in living standards,
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

21. Slides prepared by Muni Perumal, University of Canberra, Australia
Types of Unemployment
Frictional
workers ‘between jobs’, temporarily laid off due to seasonality, and new entrants
allows movement of labour from low to high productivity
inevitable and partly desirable, facilities allocative efficiency
Structural
mismatch in skills and geographic location
not employable without additional training, education and geographical movement
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

22. Slides prepared by Muni Perumal, University of Canberra, Australia
Types of Unemployment
Cyclical
unemployment caused by the business cycle, or due to insufficient aggregate demand or total spending
Seasonal
Historically in Australia related to agricultural production, but now more closely related to fluctuations in labour demand in tourism and hospitality
Target: government has adopted full employment as a goal, but no target, it constantly changes by now seems to 4-5%
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

23. Slides prepared by Muni Perumal, University of Canberra, Australia
Inflation
Inflation is a continuous rise in the general price level
The inflation rate is measured as follows:
Inflation
rate
Current year index – Previous year index
Previous year index ×
100 =
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

24. Slides prepared by Muni Perumal, University of Canberra, Australia
Theories of Inflation
Two general theories of inflation:
Demand-Pull Inflation
caused by excess demand for output
Cost-Push Inflation
rise in prices arising from increased cost of production due to:
wage push
profit push
Target: Govt adopted stable prices as a goal, RBA sets target of 2 to 3 per cent
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

25. Demand-Pull Inflation
Occurs when an increase in AD pulls up the price level
Graphically: AD shifts rightward along a stable AS curve
Short-run: increased prices and real output
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

26. Slides prepared by Muni Perumal, University of Canberra, Australia
Demand pull inflation
ASLR
AD0
AD3
AD1 AS
Price Level P2 P1 P0 Q0 Q1 Q2
Real GDP
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

27. Slides prepared by Muni Perumal, University of Canberra, Australia
Cost-Push Inflation
Occurs when an increase in the cost of production at each price level shifts the AS curve leftward, resulting in increased prices
Short run: increased prices and decreased real output (and more unemployment)
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

28. Slides prepared by Muni Perumal, University of Canberra, Australia
Cost push inflation
AS3
AS2
ASLR QF
AD1
AS1
Price Level P3 P2 P1 Q1 Q3 Q2
Real GDP
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

29. Demand-Pull Inflation
In the short run demand-pull inflation will drive up the price level and increase output
In the long run, the increase in aggregate demand has only moved the economy along the vertical aggregate supply curve ASLR
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

30. Demand-Pull Cost-Push Inflation
AS2
ASLR
AD2
AD1
AS1 P3 e3
Price Level P2 Q2 e2 P1 e1 Q1
Real GDP
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia

31. Slides prepared by Muni Perumal, University of Canberra, Australia
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia