ECON1002 – Lecture 1: Macroeconomic Foundations & National Accounting

Administrative & Course Logistics

Lecturer (Weeks 1–6): Graham White
- Office: Social Sciences Building (exact room not specified)
- Preferred: pre-arrange consultations (times listed on Canvas)
Unit Coordinator (Weeks 7–12): David Kim
- Contact & consult times already on Canvas
Canvas is the single source of truth for:
- Unit of Study Outline (UoS)
- Assessment details
- Lecture slides, reading guides, additional materials
- Reading list links (incl. PDFs for extra readings)
The “Lecture Topics & Reading Guide (Weeks 1–6)” on Canvas supersedes the topic list printed in the UoS outline.
- If the printed schedule conflicts, follow the online guide.
- A topic may spill into the next week—if it is not covered in lecture it is not examinable.
PASS (Peer-Assisted Study Sessions)
- 1-hour weekly sessions (Weeks 2–13)
- ~8–10 students + 1 high-achieving senior facilitator (all scored 90+ in ECON1002)
- Sign-up link/QR posted in lecture; attendance optional but correlated with +24 % grade improvement.

Attendance Rules

University policy: 90 % lecture attendance required; lecturers relaxed to 80 %.
- QR code will appear at random during lecture (not always in the first 10 min).
Tutorials start Week 2; follow same 80 % minimum attendance expectation.

Assessment Structure (Already on Canvas)

85 % of total grade = non-tutorial work
- 9 Weekly Quizzes (Weeks 3–?) → 9 % (1 % each)
- Week 3 quiz is the “Early Feedback Task.”
- Roughly half on Graham’s material (Wks 1–6), half on David’s (Wks 7–12).
- Mid-Semester Exam (Week 7) → 25 %
- Exact date/time posted on Canvas; no timetable mis-read excuses.
- Final Exam → 50 %
15 % Tutorial Component
- Mix of participation, worksheets, other tasks (see Canvas).
0 % penalty but strong advice: complete/read all required postings, readings, videos.

Required & Recommended Readings

Textbook: BOF5 (Blanchard, Olekalns & Fisher, 5th ed.) referenced throughout
Additional PDFs (Canvas → Reading List):
1. Topic 3: Extract from a 1990 “very old but favourite” macro text (downloadable)
2. Topic 6: RBA education pages on monetary-policy mechanics (2 short readings)

Lecturer’s Pedagogical Philosophy

Aim: You must “understand key concepts and propositions as presented in lecture, not merely textbook order.”
- Text is support; lectures choose ordering (e.g., Ch 2 → Ch 14 → Ch 3 …).
- Many textbook details omitted = not examinable if not lectured.
Macro is contested ground; dissenting views will be highlighted (lecturer not an orthodox fan).
Questions welcome during lecture (but ≠ 500 per session).

What Is Macroeconomics?

Studies system-level (aggregate) behaviour; cannot observe aggregates directly.
1. Aggregate economic activity (output / production)
2. Dynamics of aggregate price level (inflation)
3. Conditions in aggregate labour market (employment/unemployment)
Transition from micro-level behaviour → macro propositions requires theory; must seek logical consistency (“micro-foundations”).

Fallacy of Composition

Definition: Assuming that what is true for a part is automatically true for the whole.
Micro × 1 000 000 ≠ Macro.
Classic Keynesian wage-cut example (1930s UK Treasury):
- Micro firm: cut money wages $\Rightarrow$ lower costs $\Rightarrow$ higher profit $\Rightarrow$ more hiring.
- Macro economy-wide: wage cuts ↓ household income $\Rightarrow$ ↓ demand $\Rightarrow$ ↓ revenue; profitability may not rise, hiring may not increase.
Future lecture: Paradox of Thrift—aggregate saving can depress income even though individual thrift seems virtuous.

National Income Accounting & GDP

GDP Definition

“Market value of final goods and services produced within a country during a given period.”
Emphasis on final (outputs not resold as inputs in same period).

Final vs. Intermediate Goods

Intermediate good: produced good used as an input to produce another good within the same accounting period.
A good can be final or intermediate depending on its use (e.g., fridge in home vs. in factory).

Three Equivalent Measures of GDP

Expenditure Approach (GDP $_{E}$ ) $Y \equiv C + I + G + (X - M)$
- $C$ = Household consumption
- $I$ = Private gross fixed capital formation + inventory change
- $G$ = Govt. consumption + govt. investment
- $X$ = Exports; $M$ = Imports → $NX = X-M$
- Accounting trick: unwanted inventories counted as firm “purchase” of own output, ensuring $Y\equiv\text{Total Expenditure}$ .
Value-Added Approach (GDP $_{VA}$ )
- For each firm: $\text{Value Added} = \text{Sales} - \text{Cost of Intermediate Inputs}$ .
- $GDP = \sum\text{Value Added across all industries}$ .
Income Approach (GDP ${I}$ ) $GDP{I} = \text{Comp. of Employees} + \text{Gross Operating Surplus} + \text{Gross Mixed Income} + (\text{Indirect Taxes} - \text{Subsidies})$
- Wages, salaries
- Profits (corporate), rents, interest
- Mixed income (farmers, self-employed)
- Add taxes that raise market values; subtract subsidies that lower them.

Wheat–Flour–Bread Example (3-sector chain)

Values (\$ million): Wheat 120; Flour 240; Bread 380.
Incorrect method: 120 + 240 + 380 ⇒ double counts wages/profits embodied in intermediate sales.
Correct: Compute Value Added in each sector or take only price×quantity of final good (bread).
- Shows why “final” is crucial and demonstrates prevention of double counting.
Reveals that GDP = sum of factor incomes (wages + profits) generated.

Savings–Investment Identity (Closed Economy)

Disposable income $Y_D = Y - T$ .
Private saving $SP = YD - C = Y - T - C$
Public saving $S_G = T - G$ (budget surplus)
Total saving $S = SP + SG$
With $NX = 0$ , expenditure identity gives $Y \equiv C + I + G$ ⇒ rearrange: $I \equiv Y - C - G$ .
Therefore $\boxed{I \equiv S}$ (accounting identity, not causal).
- Alternative leakage–injection form: $I + G \equiv S_P + T$ .
If foreign sector allowed: $I \equiv S + (M - X)$ where $M - X$ = overseas saving/borrowing.

Key Concept Pairs

Stocks vs. Flows

Flow: time-bound quantity (per week, per year)
- Income, saving, GDP, consumption, investment, exports.
Stock: quantity at a single point in time
- Wealth, capital stock, money supply, debt.
Interaction: flows change stocks (e.g., cumulative investment raises capital stock; persistent budget deficits raise public debt stock).

Nominal vs. Real Variables

Nominal: measured in current $Pt\times Qt$ values, conveys $\text{price}×\text{quantity}$ mixture.
Real: holds prices constant (base year) to isolate physical quantity changes → crucial for analysing employment, growth.
Example two-good economy:
- Nominal output $Y^N = P1Q1 + P2Q2$
- Fix base-year prices $P1^0, P2^0$ ⇒ $Y^R = P1^0 Q1 + P2^0 Q2$ .
Real wage = $\text{Money wage} / \text{Price level}$ ⇒ indicator of purchasing power.

Upcoming Topics Preview

Topic 2: Competing macro theories; alternative equilibria; causal debate saving ⇄ investment.
Topic 3: Additional reading (1990 book extract).
Topic 4: Paradox of Thrift & aggregate demand.
Topic 5/6: Money, monetary policy mechanics (RBA resources).

Practical & Ethical/Philosophical Asides

Economic policy often rooted in contested theory; lecturer will expose dissent (e.g., unemployment ≠ simple labour-market issue).
Wage-cut prescription still resurfaces in modern debates—students encouraged to scrutinise such claims using macro logic.

Meta-Advice for Success in ECON1002

Attend ≥ 80 % lectures/tutorials; QR check-in required.
Download Lecture Topics & Reading Guide each week to avoid outdated syllabus references.
Focus study on lecture concepts & propositions; quizzes/exams drawn from them.
Work tutorial problem-sets promptly; they map 1-for-1 to lecture material.
Use PASS for active practice; 1 hr in PASS ≈ 3 hrs solo.
Email Graham sparingly but early for content confusion (900 students!).
Keep distinction clear: investment ≠ financial saving; learn accounting identities before causation debates.