Week1 Lecture1

ECON1102 – Macro 1
Introduction
Steven Milch
Source: RBA Chart Pack at https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2024-01-27-06-46-03
State and Territory Final Demand
Welcome to Macroeconomics
This document provides a brief overview of some key
administrative issues in the course.
Complete details are provided by:

• Course outline
• Econ1102 Moodle site http://moodle.telt.unsw.edu.au/
• PlayMacro website www.playconomics.com:
• E-book (textbook, review questions, tutorial questions)
• Academia review MCQs for your own personal review.
• Sign up using the instructions on Moodle
Key Contacts
• Lecturer In Charge (LIC): Steven Milch
Consultation hours: Thursdays 1530-1630 (on lecture Zoom link) or by
appointment
Email: s.milch@unsw.edu.au
• Tutor In Charge (TIC): Mohamad Mourad

Email: m.mourad@unsw.edu.au
• Tutorial list and contact details are posted on Moodle
• Primary point of contact: econ1102@unsw.edu.au

Emailing this address ensures that your enquiry will be directed to the
most appropriate person and responded to promptly
Key Contacts
• Technical issues about PlayMacro →
support@lionsheartstudios.com
• Email is the recommended means of initial communication

with the teaching staff for this course.
• Your question should require no more than a couple of

sentences response. For longer responses, a consultation
during office hours is recommended.
• In any email communication it is required by university policy

that you use your UNSW email address (particularly for
private/confidential communication).
Course Structure
• Lectures: 3 hours of lectures per week (2 x 1.5hr lectures)
• Introduce important concepts, provide structure for each topic
• Must be supplemented by reading of the e-book before lecture,
tutorial activities and review questions (Academia and e-book) after
lecture
• Tutorials: 1.5hr tutorial per week (8 weeks)
• All students must be enrolled, commence in Week 2
• Please download Excel before your first tutorial
• You should attend the tutorial in which you are enrolled and actively
participate during tutorial
• Tutorials will consist of:
• A tutorial data exercise that counts for 10% of your grade. This will be
completed during tutorials.
• Tutorial questions which are included at the end of the Chapter in the e-
book. Assigned questions for each week are posted on Moodle. Your are
expected to have attempted the questions prior to coming to tutorials.
Assessments
• Tutorial Data Exercise – 10%
• Weekly, completed during tutorials
• Requires laptop equipped with Excel
• The first data exercise is for practise & not counted towards your grade
• Students can miss one tutorial data exercise without penalty
• Two In-Session Quizzes – 15% each
• 30-minute online Moodle quiz in Weeks 4 and 8 on Friday 1700-1900
• Short Answer Question – 10%
• Builds on the skills & knowledge you’ve learned in the Tutorial Data
Exercises
• Due Thursday Week 10 1600
• Final Exam – 50%
• 2 hours plus reading time, online MCQs
Resources – PlayMacro and Academia
• Textbook (in both e-book and pdf format) that provides
relevant coverage of all the course topics
• Tutorial questions and solutions plus additional review

questions in the textbook
• MCQ review questions via Academia (not assessed)
• A mini (macro) game (for fun, not assessed)

Learning Support
• Tutorials starting from Week 2
• Consultation on Thursdays 1530-1630 (on lecture Zoom link)

or by appointment (s.milch@unsw.edu.au)
• PASS (Peer Assisted Study Sessions) starting in Week 2
• Economics Exam PitStop before the final exam (Schedule will

be posted later)
How to Succeed in ECON1102
• Download lecture slides before the lecture
• Read the designated chapters from the e-book
• Attend lectures and tutorials and participate (cameras on)

How to Succeed in ECON1102
• Prepare for tutorials by attempting the tutorial questions

prior to the tutorial
• Do the review questions in the textbook and in Academia
• Follow up problems as they arise: use tutorials, consultation

hours, PASS, Economic PitStops
Some Final Tips
• Lectures indicate what’s important in the course. Use them
as your guide.
• Don’t fail Macro I because you didn’t hand in the Tutorial
Data Exercises or the Short Answer Question.
• Attempt some of the MCQs in Academia under exam
conditions. Give yourself 1.5 minutes per question.
• Attend Tutorials and Lectures and ask questions.
• Check if you really understand a macroeconomic concept or
model. Can you explain it to someone else? If not, then
perhaps you don’t really understand it.
• Terms are short - start working early.
Some Final Tips for Success
• Lectures are a map to what is important in the course. Use

them as your guide.
• Do not fail Macro I because you didn’t hand in the tutorial
data exercises or the short answer question
• Attempt some of the MCQs in Academia under exam
conditions. Give yourself 1.5 minutes per question
• Attend tutorials and ask questions
• Check if you really understand a macroeconomic concept or
model. Can you explain it to someone else? If not then you
don’t really understand it.
• Terms are short, start working early.
• Immerse yourself in the international & domestic economic news.
• T1 will be very interesting!
• Great sources:
• rba.gov.au (Monetary Policy and economic conditions)
• abs.gov.au (Australian economic data)
• budget.gov.au (Fiscal Policy)
• imf.org/en/publications/weo (World Economic Outlook)
• cnbc.com/economy/ (Financial and economic news)
• The Economist
• Australian Financial Review
• Sydney Morning Herald (Ross Gittens)
• Podcasts: NAB Morning Call, Fear & Greed
Week 1: Lecture 1
Aggregate Production and Prices (Part 1)
Reference: e-book Chapter 1
Key Ideas
• Measuring aggregate output (GDP)
• Measuring aggregate prices and inflation

What is Gross Domestic Product (GDP)?
How do we measure the performance of an economy?
22
Which of the following is the correct definition of annual
GDP?
(a)Value of all goods and services bought and sold during a

year.
(b)Value of all new goods and services produced during a

year.
(c)Value of all final goods and services purchased during a

year.
(d) None of the above.
REMEMBER YOUR CHOICE!

24
Informal:
Measure of a country’s aggregate output or production.
Formal Definition:
The monetary value of final goods and services

produced in a country during a given period.
25
The monetary value of final goods and services produced in

a country during a given period.
Important aspects of this definition:
1. Measured in money terms (not physical units) as it’s

easier to compare monetary amounts
2. Includes only final goods and services

• These are for final use and are not subject to further
processing or manufacturing.
• Intermediate goods (goods subject to further
processing) are excluded to avoid double counting.
26
GDP is a measure of aggregate production or output.
- cars, oranges, computers, lectures, Big Macs
How do we add “apples and oranges?”
27
Use market prices to value (or weight) quantities of various

goods and services.
Year Cars Apples Price per Price per
car apple
1 10 10,000 $20,000 $1
2 5 120,000 $20,000 $1
Calculate GDP?
28
Use market prices to value (or weight) quantities of various

goods and services.
Year Cars Apples Price per Price per
car apple
1 10 10,000 $20,000 $1
2 5 120,000 $20,000 $1
Year 1 GDP = 10 x 20,000 + 10,000 x 1 = $210,000
Year 2 GDP = 5 x 20,000 + 120,000 x 1 = $220,000

29
What is included in GDP?
GDP excludes non-productive transactions.
• Where no production of goods or services occurs.
Two major types of non-productive transactions:
1. Purely financial transactions
• Public transfer payments, private transfer payments,

buying or selling of shares.
2. Sales of second hand goods.
30
What about goods and services with no observed market
price?
Some are excluded from GDP:

• Unpaid housework (e.g. cooking & cleaning)
Economic term is Household (or home) production:

• Production of goods and services by households for
own consumption using their own labour and capital.
31
What about goods and services with no observed market
price?
Some are included in GDP:
• Police services
• Public hospital
• Rental value of owner-occupied dwellings
32
How are unpriced goods valued in GDP?
1. Publicly provided goods and services such as police,

public servants, public hospitals.
Use the cost of providing these goods and services as a

measure of their contribution to GDP.
2. Rent on owner-occupied dwellings.
Imputed by the ABS using data from Census on rents and

the type and location of owner-occupied dwellings.
33
Exercise
Calculate GDP from the following data.
Quantity Market Price
10 cars $20,000 per car
10,000 apples $1 per apple
100 bottles cider $5 per bottle
34
Exercise
GDP = 10 x 20,000 + 10,000 x 1 + 100 x 5 = $210,500
35
GDP measures the value of final goods and services.
The production of final goods and services may involve the

use of intermediate inputs.
Intermediate inputs are goods and services used-up in the

production process and are not counted in GDP.
Example: in the production of a loaf of bread, flour and salt

are used as intermediate inputs.
36
Exercise
GDP = $210,500?
37
Exercise
What if some of the apples are used to make cider?
38
In calculating GDP it is important to ensure that intermediate

goods and services are not (double) counted.
Concept of Value Added:
The market value of a firm’s production less the cost of

inputs purchased from other firms.
39
Value Added for Computer Sales
Value Added = value of sales – cost of intermediate inputs
Firm Sales Input Costs Value

(Intermediate) Added
Intel Incorp 20,000 0

Macro Soft 5,000 0
Bell 80,000 25,000
PC Charlie’s 100,000 80,000
Value of final goods = ?
40
Value Added for Computer Sales
Value Added = value of sales – cost of intermediate inputs
Firm Sales Input Costs Value

(Intermediate) Added
Intel Incorp 20,000 0 20,000

Macro Soft 5,000 0 5,000
Bell 80,000 25,000 55,000
PC Charlie’s 100,000 80,000 20,000
GDP 100,000 100,000
41
GDP measures production within a specified geographic

location.
Excludes goods and services produced in other countries that

are consumed in Australia.
- Imports of goods and services
42
GDP is a flow variable – measured over a period of time.
Excludes goods and services produced in an earlier period

but re-sold in the current period.
- Second-hand goods
43
GDP is a flow variable – measured over a period of time.
Quarterly, in Australia: March, June, September, December
Example:
Australian GDP in Sep 2020 = $488.1 billion
Australian GDP in Dec 2020 = $532.0 billion
Australian GDP in Mar 2021 = $513.2 billion
Australian GDP in Jun 2021 = $555.5billion
Australian GDP in Sep 2021 = $547.3 billion
Australian GDP in Dec 2021 = $590.5 billion*
*GDP measured in current prices, original (not seasonally 44
adjusted). Source: abs.gov.au

Annual/Year – just sum GDP over 4 quarters
• Calendar – Mar-20 + Jun-20 + Sep-20 + Dec-20

• Australian GDP for 2021= $2,206.5 billon
• Financial – Sep-20 + Dec-20 + Mar-21 + Jun-21

• Australian GDP for 2020/21= $2,088.8 billon
45
3 Equivalent Ways to Measure GDP
1. Production Method (based on value added approach)
2. Expenditure Method
3. Income Method
46
Expenditure Method
Accounting Identity
expenditure on goods and services by final users
value of their production
47
Expenditure Method
Main Components of Expenditure
• Consumption (C) – purchases by Households
• Investment (I) – purchases by Firms; Household

dwelling construction; change in Inventories
• Government (G) – Government purchases
• Net Exports (NX ) – net purchases by foreign sector =

Exports (X) – Imports (M)
48
National Income Accounting Identity
GDP ≡ Expenditure
Y ≡ C + I + G + NX
Y≡C+I+G+X–M
Y+M≡C+I+G+X
Supply of goods and services ≡ Demand for goods and services
49
Expenditure Approach Example:
Australian GDP Sept Quarter 2023 (current prices, original)
$Billion %GDP
Household consumption 329.6 50
Private investment 123.1 19
Government spending 175.2 27
Exports 162.3 25
Less: Imports 143.1 22
Statistical discrepancy 7.4
GDP 654.5
https://www.abs.gov.au/statistics/economy/national-
accounts/australian-national-accounts-national-income-
expenditure-and-product/latest-release
50
Income Method
GDP also equals the aggregate incomes paid to:
• Labour (L)
• Capital (K)
in the production of goods and services
plus
• indirect taxes – subsidies
52
Income Method
GDP = Labour Income + Capital Income + Net Indirect Taxes
GDP = (W×L) + (R×K) + Net Indirect Taxes
Net indirect taxes = Indirect Taxes – Subsidies
Labour Income = W×L Capital Income = R×K
W = wages and salaries R = return to capital
L = labour K = capital stock
53
Expenditure Approach Example:
Australian GDP Sept Quarter 2023 (current prices, original)
$Billion %GDP
Compensation of employees 312.2 48
Gross operating surplus 248.0 38
Gross mixed income 39.1 6
Total factor income 599.3 92
Indirect taxes - subsidies 63.5 10
Statistical discrepancy -8.3
GDP 654.5
https://www.abs.gov.au/statistics/economy/national-accounts/australian-
national-accounts-national-income-expenditure-and-product/latest-release
54
Which of the following is the correct definition of annual
GDP?
(a)Value of all goods and services bought and sold during a

year
(b)Value of all new goods and services produced during a

year
(c)Value of all final goods and services purchased during a

year
(d) None of the above
55
Which of the following is the correct definition of annual GDP?
(a)Value of all goods and services bought and sold during a year
(This would include second-hand goods)
(b)Value of all new goods and services produced during a year

(This would double count intermediate goods)
(c)Value of all final goods and services purchased during a year

(Final G&S purchased (rather than produced) includes imports)
(d) None of the above (Correct choice)
56
Gross National Income (GNI)
GDP is based on the location of production.
But suppose a country uses:
• a large number of foreign workers (i.e. non-permanent

residents), or
• a large amount of foreign-owned capital in producing its

GDP.
Some of the income from production of GDP will accrue to

foreign nationals.
57
Gross National Income (GNI)
GNI measures income payments to Australian workers and

Australian-owned capital.
GNI = GDP + net primary (or factor) income from non-residents
Net primary (or factor) income =
Primary income credits (receipts) less debits (payments)
Australia Sep-23: GDP $654bn, GNI $637bn, NPI -$17bn
58
Nominal and Real GDP
With our current measure of GDP, the number could

increase due to a general increase in the prices of goods and
services.
Important to have a measure of changes in physical

production or volume of goods and services produced.
Its the quantity of goods produced that affects our

living standards (not its price).
59
Nominal
• values quantities of goods and services produced
at their current year (or year of production) prices
Real (or constant price or chain volume measure)

• values quantities of goods and services produced
at base year prices – measures the actual physical
volume of production and removes the effect of
inflation
60
Example 1
2007 2008 % Change

No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
No. of Apples 100 100 0
Price of Apples $1 $2 100
Nominal GDP
What’s happened to quantities (volumes)?

What’s happened to prices?
61
2007 2008 % Change
No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
Nominal GDP
Nominal GDP 2007 = 10 x 20,000 + 100 x 1 = 200,100
Nominal GDP 2008 = 10 x 40,000 + 100 x 2 = 400,200
62
Example 1
2007 2008 % Change

No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
Nominal GDP $200,100 $400,200 100
Real GDP
63
Example 1
2007 2008 % Change

No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
Nominal GDP $200,100 $400,200 100
Real GDP
2007 prices $200,100 $200,100 0
64
Example 1
2007 2008 % Change

No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
Nominal GDP $200,100 $400,200 100
Real GDP
2007 prices $200,100 $200,100 0
2008 prices $400,200 $400,200 0
65
Choice of Base Year
In the above example, whether we use 2007 or 2008 as the base

year for prices we arrive at the same answer for the growth rate
of real GDP.
This is not the case in general, particularly when comparing real

GDP over a 5-10 year period (over which price changes can be
significant).
Laspeyres index: Using initial prices (ie 2007) is known as a

Laspeyres index.
Paasche index: Using final prices (ie 2008) is known as a Paasche

index.
66
Example 2
2007 2008 % Change
No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
No. of Apples 100 1000 900
Nominal GDP $201,000 $425,000 111
Real GDP
2007 prices $201,000 $210,000 4.5
2008 prices $402,500 $425,000 5.6
Calculate % change in real GDP between 2007 and 2008:
Use same base year prices!

(Real GDP 2008/Real GDP 2007 – 1)*100 = % Change
(210,000 / 201,000 – 1) *100 = 4.5 (Laspeyres)

(425,000 / 402,500 – 1) *100 = 5.6 (Paasche) 67
Example 2
2007 2008 % Change
No. of Cars 10 10 0
Price of Cars $20,000 $40,000 100
No. of Apples 100 1000 900
Nominal GDP $201,000 $425,000 111

Real GDP
2007 prices $201,000 $210,000 4.5
2008 prices $402,500 $425,000 5.6
Average % change = (4.5+5.6)/2 = 5.05

When using two consecutive years, this is the “chain-weighted growth rate”
68
Chain-weighted measure of Real GDP
1.Take average of growth rates implied by 2007 and 2008 prices:
5.05 = (4.5 + 5.6)/2
2. Choose either 2007 or 2008 as the base-year (nominal=real GDP).
Let’s pick 2007:

2007 2008
Nominal GDP 201,000 425,000
Real GDP 201,000 211,151 [= 201,000×(1 + 0.0505)]
69
Chain Weighting
For any two consecutive years compute the growth rates of

real GDP implied by both the Laspeyres and the Paasche
indexes.
Then take the average of the two growth rates and this is the
chain-weighted growth rate. This can be used to compute a
real chained-weighted GDP series.
Finally, to compute a change index over a long period, the

above approach is applied on a year-by-year basis.
70
The following relationship holds:
nominal GDP = price level × real GDP
Therefore, if we know any 2 variables we can derive the 3rd:
price level = nominal GDP / real GDP
real GDP = nominal GDP / price level
71
Real GDP per Capita
Real GDP per capita = (Real GDP)/Pop
Pop = population
Commonly used as an indicator of economic progress

(economic growth).
72
Real GDP per Capita
Real GDP Per Capita - Australia

24,000
$, seasonally adjusted, base year 2021-22
22,000
20,000
18,000
16,000
14,000
12,000
Source: ABS
10,000
Sep-1973 Sep-1981 Sep-1989 Sep-1997 Sep-2005 Sep-2013 Sep-2021
73
Is GDP A Good Measure of Economic Wellbeing?
Omissions from GDP that might matter for economic welfare:
• Leisure Time (extra week of holidays)

• Household Production (cook at home)
• Environmental Degradation (pollution)
• Quality of Life (happiness)
• Economic Inequality (distribution of income)
74
Is GDP positively correlated with economic welfare?
Yes: Medical care
No: Income distribution over last 20 years
Maybe: Income and measures of Happiness
75
Alternatives (complements) to GDP
1. Direct measures of Happiness
Survey-based measures
https://worldpopulationreview.com/country-
rankings/happiest-countries-in-the-world
2. Indexes of variables that might affect welfare
https://www.smh.com.au/national/wellbeing-index-
shows-impact-of-jobless-on-society-20140606-39okt.html
76
Business Cycles
Economies tend to experience periods of expansion and

contraction in the level of economic activity.
If we focus on GDP as a measure or economic activity then:
• A contraction is a period during which the level of GDP

falls.
• An expansion is a period when the level of GDP is rising.
Typically, we look at the growth rate of real GDP to assess

business cycles.
56
Real GDP
Real GDP - Australia

700,000
$m, seasonally adjusted, base year 2021-22
600,000
500,000
400,000
300,000
200,000
100,000
Source: ABS
0
Sep-1973 Sep-1981 Sep-1989 Sep-1997 Sep-2005 Sep-2013 Sep-2021
78
Stylised Representation of a Peaks and Troughs:
Business Cycle:
In moving between periods of
Level of expansion and contraction,
GDP the economy will experience
peaks and troughs.
expansion
• A peak is the beginning of
a contraction - the high
contraction
point of GDP prior to a
downturn.
• A trough is the end

of a contraction - the
Peak Trough Peak low point of
Time (quarters) economic activity
prior to a recovery.
57
“Rule of Thumb” Definition of Recession
A recession occurs when there are at least two consecutive

quarters of negative economic growth.
This means the level of GDP has to fall for at least two
quarters.
This occurred in the first half of 2020 in Australia.

Prior to this the last recession the Australian economy
experienced was at the start of the 1990s.
58

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ECON1102 – Macro 1

Complete details are provided by:

• Tutor In Charge (TIC): Mohamad Mourad

• Tutorial list and contact details are posted on Moodle

• Primary point of contact: econ1102@unsw.edu.au

• Email is the recommended means of initial communication

• Your question should require no more than a couple of

• In any email communication it is required by university policy

• Tutorial questions and solutions plus additional review

• MCQ review questions via Academia (not assessed)

• A mini (macro) game (for fun, not assessed)

• Consultation on Thursdays 1530-1630 (on lecture Zoom link)

• PASS (Peer Assisted Study Sessions) starting in Week 2

• Economics Exam PitStop before the final exam (Schedule will

• Read the designated chapters from the e-book

• Attend lectures and tutorials and participate (cameras on)

• Prepare for tutorials by attempting the tutorial questions

• Do the review questions in the textbook and in Academia

• Follow up problems as they arise: use tutorials, consultation

• Lectures are a map to what is important in the course. Use

Aggregate Production and Prices (Part 1)

Reference: e-book Chapter 1

• Measuring aggregate output (GDP)

• Measuring aggregate prices and inflation

How do we measure the performance of an economy?

(a)Value of all goods and services bought and sold during a

(b)Value of all new goods and services produced during a

(c)Value of all final goods and services purchased during a

(d) None of the above.

REMEMBER YOUR CHOICE!

Measure of a country’s aggregate output or production.

The monetary value of final goods and services

The monetary value of final goods and services produced in

Important aspects of this definition:

1. Measured in money terms (not physical units) as it’s

2. Includes only final goods and services

GDP is a measure of aggregate production or output.

- cars, oranges, computers, lectures, Big Macs

How do we add “apples and oranges?”

Use market prices to value (or weight) quantities of various

Use market prices to value (or weight) quantities of various

Year 1 GDP = 10 x 20,000 + 10,000 x 1 = $210,000

Year 2 GDP = 5 x 20,000 + 120,000 x 1 = $220,000

GDP excludes non-productive transactions.

• Where no production of goods or services occurs.

Two major types of non-productive transactions:

1. Purely financial transactions

• Public transfer payments, private transfer payments,

2. Sales of second hand goods.

Some are excluded from GDP:

Economic term is Household (or home) production:

Some are included in GDP:

• Rental value of owner-occupied dwellings

1. Publicly provided goods and services such as police,

Use the cost of providing these goods and services as a

2. Rent on owner-occupied dwellings.

Imputed by the ABS using data from Census on rents and

Calculate GDP from the following data.

Quantity Market Price

10 cars $20,000 per car

10,000 apples $1 per apple

100 bottles cider $5 per bottle