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

1. 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}.
2. 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}.
3. 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.