ECON10004 · Introductory Microeconomics
Macroeconomic Foundations
ECON10004 is a microeconomics subject — it studies individual markets, firms and households. This closing chapter steps back to ask a different question: how does the whole economy behave when you add every market together? That shift in scale, from one market to the aggregate, is the line between micro and macro economics. You meet the circular-flow picture of how money and goods loop between households and firms, then the three numbers used to take the economy's temperature — GDP (total output), the CPI and inflation (the price level), and unemployment (the labour market) — and finally a first look at the AD–AS model that explains short-run booms and recessions. It sits at the very end of the course: it builds directly on the demand-and-supply engine you already own, and it is the bridge into ECON10003 Introductory Macroeconomics, where every idea here is developed in full.
What this chapter covers
- 01From micro to macro: the change in scale
- 02The circular flow of income
- 03GDP — measuring total output
- 04Real vs nominal GDP and the deflator
- 05Inflation and the Consumer Price Index (CPI)
- 06Unemployment and the labour market
- 07A first look at Aggregate Demand & Aggregate Supply
- 08Where ECON10004 points next
Real vs nominal GDP, and a CPI inflation rate
- +2Nominal GDP = current price × current quantity. 2023: $4 × 100 = $400. 2024: $5 × 110 = $550.
- +1Real GDP uses base-year prices. Value 2024 output at 2023's $4 price: $4 × 110 = $440. (2023 real GDP equals its nominal, $400, in the base year.)
- +1Real growth = (440 − 400) / 400 = 0.10 = 10%. This is genuine extra output, with the price rise stripped out — note nominal grew 37.5% but most of that was just higher prices.
- +1CPI inflation = (cost of basket now − cost before) / cost before = (210 − 200) / 200.
- +1= 10 / 200 = 0.05 = 5% inflation over the year.
Key terms
- Gross Domestic Product (GDP)
- The total market value of all final goods and services produced within a country in a given period. It counts only final goods (not intermediate inputs) to avoid double-counting, and is the headline measure of the size of an economy's output.
- Real vs nominal GDP
- Nominal GDP values output at current prices, so it rises with both quantity and inflation. Real GDP values output at constant base-year prices, isolating the change in actual quantity produced. Real GDP is the better gauge of living standards over time.
- Consumer Price Index (CPI)
- The cost of a fixed representative basket of goods and services bought by a typical household, expressed as an index relative to a base year. The percentage change in the CPI from one period to the next is the inflation rate.
- Unemployment rate
- The number of people unemployed as a percentage of the labour force, where the labour force is the employed plus the unemployed (those without work who are actively looking). People not seeking work are outside the labour force and are not counted as unemployed.
- Aggregate demand & aggregate supply (AD–AS)
- The macro model whose axes are the overall price level and real GDP. Aggregate demand (total spending C+I+G+NX) slopes down; short-run aggregate supply slopes up. Their crossing sets the economy's price level and output in the short run.
Macroeconomic Foundations FAQ
What's the actual difference between microeconomics and macroeconomics?
It is a question of scale, not subject matter. Micro (all of ECON10004 before this chapter) studies single markets and the decisions of individual households and firms — the price of coffee, one firm's output. Macro adds every market together and studies economy-wide aggregates: total output (GDP), the average price level (inflation), and the overall labour market (unemployment). The same demand-and-supply logic carries over, but the questions become 'what determines total output and the price level for the whole economy?' rather than 'what is the price in one market?'.
Why use real GDP instead of nominal GDP to compare years?
Nominal GDP is measured at each year's current prices, so it goes up when output rises AND when prices rise. If you compared two nominal figures you couldn't tell whether the country actually produced more, or whether it just charged higher prices for the same amount. Real GDP fixes prices at a base year, so any change reflects only the change in quantity of goods and services. That is why real GDP, not nominal, is used to judge growth and living standards. A common exam trap is to call a nominal increase 'growth' — strip out inflation first.
If someone has given up looking for a job, are they unemployed?
No — and this is the classic trap. To be counted as unemployed you must be without work AND actively looking for it. Someone who has stopped searching (a 'discouraged worker') is classified as outside the labour force, not unemployed. Because the unemployment rate is unemployed ÷ labour force, people leaving the labour force can actually make the measured unemployment rate fall even though no one got a job. Always check the labour-force definition before computing the rate.
In AD–AS, which curve does a fall in consumer confidence move?
Aggregate demand. AD is total planned spending = consumption + investment + government + net exports (C + I + G + NX). Anything that changes one of those components — confidence, interest rates, government spending, the exchange rate — shifts AD. Aggregate supply is shifted instead by changes in production costs and productivity (input prices, technology, the capital stock). Keep the two channels separate: demand-side shocks move AD, cost/productivity shocks move AS. Falling confidence cuts C, so AD shifts left, pushing output and the price level down in the short run.
Exam move
Marks in this foundation chapter are won on precise definitions and the nominal-vs-real split, and lost on sloppy aggregation. Nail three reflexes: (1) always strip prices out — call only real GDP growth 'growth', and compute inflation as the % change in the CPI basket; (2) state the labour-force definition before you touch an unemployment number, since discouraged workers are not unemployed; and (3) in AD–AS, decide first whether the shock hits spending (AD) or costs/productivity (AS), then read the new crossing for both the price level and real GDP. A clean, labelled AD–AS diagram with the shift arrow and the new equilibrium marked is worth more than a paragraph of words.
