GENERAL INTRODUCTION OF

MACROECONOMICS
MACROECONOMICS: 3 CREDITS
DURATION: 45 PERIODS
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ANSWER THE 3 QUESTIONS

• 1. WHAT IS MACROECONOMICS?
• 2. WHICH PROBLEMS DOES MACROECONOMICS STUDY?
• 3. WHAT ARE THE AIMS OF STUDYING MACROECONOMICS?
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Module includes the following chapters:

• CHAPTER 1: GENERAL INTRODUCTION OF MACROECONOMICS
• CHAPTER 2: MEASURING NATION’S INCOME
• CHAPTER 3: AGGREGATE DEMAND AND NATIONAL
EQUILIBRIUM OUTPUT IN AN OPEN ECONOMY
• CHAPTER 4: FISCAL POLICY
• CHAPTER 5: MONETARY POLICY
• CHAPTER 6: COMBINATION OF FISCAL POLICY AND
MONETARY POLICY IN THE ECONOMY (IS – LM MODEL)-→ self
study
• CHAPTER 7: INFLATION AND UNEMPLOYMENT
• CHAPTER 8: MACROECONOMIC POLICIES IN AN OPEN
ECONOMY
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CHAPTER 1: GENERAL INTRODUCTION OF

MACROECONOMICS
1.1. Macroeconomics goals and tools
1.2. Principles of Macroeconomics
1.3. About Aggregate Supply (AS)
1.4. About Aggregate Demand (AD)
1.5. Macroeconomics goals on AS-AD model
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1.1. Macroeconomics goals and tools

Total Income,
National Output

Employment
Budget Deficit
GOALS and
Unemployment

Price Level and

Inflation
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1.1. Macroeconomics goals and tools

Total Income/National Output
• Goal: Growth in Total Income/National Output

𝐺𝐷𝑃𝑡 −𝐺𝐷𝑃𝑡−1
Economic gro𝑤𝑡h rate (g) = × 100
𝐺𝐷𝑃𝑡−1
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Vietnam Economic Growth Rate in 2005 – 2020

(Price in 2010)
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YEAR GDP (Bil.dong) GDP growth rate (%)

3/5/2024

2005 1,588,646 7.55

2006 1,699,501 6.98
2007 1,820,667 ?
2008 1,923,749 5.66
2009 2,027,591 5.40
2010 2,157,828 6.42
2011 2,292,483 ?
2012 2,412,778 5.25
2013 2,543,596 5.42
2014 2,695,796 ?
2015 2,875,856 6.68
2016 3,054,470 6.21
2017 3,262,548 6.81
2018 3,493,399 ?
2019 3,738,546 7.02
2020 3,847,182 2.91
Source: GSO
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YEAR GDP (Bil.dong) GDP growth

3/5/2024 rate (%)
2005 1,588,646 7.55
2006 1,699,501 6.98
2007 1,820,667 7.13
2008 1,923,749 5.66
2009 2,027,591 5.40
2010 2,157,828 6.42
2011 2,292,483 6.24
2012 2,412,778 5.25
2013 2,543,596 5.42
2014 2,695,796 5.98
2015 2,875,856 6.68
2016 3,054,470 6.21
2017 3,262,548 6.81
2018 3,493,399 7.08
2019 3,738,546 7.02
2020 3,847,182 2.91
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Vietnam Economic Growth Rate in 2005 – 2020

(Price in 2010)

7.55
6.98 7.13 6.81
7.08 7.02
6.42 6.24 6.68
5.98 6.21
5.66
5.40 5.25 5.42

2.91

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: GSO
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1.1. Macroeconomics goals and tools

Total Income/National Output
• Potential Output - 𝑌𝑝 is the level of output at Natural Rate of
unemployment
• Natural Rate of Unemployment includes: Frictional Unemployment and
Structural Unemployment
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Business Cycles 3/5/2024

• Shows the GDP fluctuations around its trend (Potential Output and Year) .

Output Peak 𝑌𝑡
Peak

𝑌𝑝

Recession

Trough

contraction Expansion
Year
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1.1. Macroeconomics goals and tools

Unemployment
• Unemployment: people not working who have looked for work during previous
4 weeks
• Employment: paid employees, self-employed, and unpaid workers in a family
business.
• Labor force: is the total number of workers, including the employed and
unemployed.
• Unemployment rate (u-rate) % of the labor force that is unemployed
 15 UNEMPLOYMENT

Unemployment rate (“u-rate”):

% of the labor force at is unemployed

# of unemployed
u-rate = 100 x
labor force

Labor force participation rate:

% of the adult population that is in the labor force

labor force labor force

= 100 x
participation rate adult population
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Categories of unemployment based on the reason

• occurs when workers spend time
Frictional searching for the jobs that best suit
Unemployment their skills and tastes
• short-term for most workers Natural
• occurs when there are fewer jobs Unemplo-
Structural than workers yment
Unemployment
• usually longer-term

Cyclical • associated with business cycles, especially

Unemployment recession
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Explain whether each of the following events • e. Sansa has a birthday, becomes an adult,
increases, but has no interest in working.
decreases, or has no effect on the unemployment rate
and the labor-force participation rate. f. Jaime has a birthday, becomes an adult,
a. After a long search, Jon finds a job. and starts looking for a job
b. Tyrion, a full-time college student, graduates and • g. Cersei dies while enjoying retirement.
is immediately employed. h. Jorah dies working long hours at the
c. After an unsuccessful job search, Arya gives up
looking and retires. office.
d. Daenerys quits her job to become a stay-at-home
mom.
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1.1. Macroeconomics goals and tools

Inflation
• Inflation is a situation in which the price level of the economy increases
continuously over a period of time.
• Price level (P) is the average price of a variety of goods and services. The
average price is measured by price index.
• Price index includes: CPI, PPI and GDP deflator
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1.1. Macroeconomics goals and tools

Inflation
• Inflation Rate: The percentage change in the Price Index from the
preceding period.

Goal: Moderate Inflation (<10%)

 20 MEASURING
THE COST OF
LIVING

The Consumer Price Index (CPI)

• measures the typical consumer’s cost of living
• the basis of cost of living adjustments (COLAs) in many contracts and in
Social Security
 21 MEASURING
THE COST OF
LIVING

How the CPI Is Calculated

1. Fix the “basket.”
The Bureau of Labor Statistics (BLS) surveys consumers to determine
what’s in the typical consumer’s “shopping basket.”
2. Find the prices.
The BLS collects data on the prices of all the goods in the basket.
3. Compute the basket’s cost.
Use the prices to compute the total cost of the basket.
How the CPI Is Calculated
22 MEASURING
THE COST OF
LIVING

4. Choose a base year and compute the index.

The CPI in any year equals
cost of basket in current year
100 x
cost of basket in base year

5. Compute the inflation rate.

The percentage change in the CPI from the
preceding period.

Inflation CPI this year – CPI last year

= x 100%
rate CPI last year
EXAMPLE basket: {4 pizzas, 10 lattes}23

price of price of
year cost of basket
pizza latte
2007 $10 $2.00 $10 x 4 + $2 x 10 = $60
2008 $11 $2.50 $11 x 4 + $2.5 x 10 = $69
2009 $12 $3.00 $12 x 4 + $3 x 10 = $78

Compute CPI in each year Inflation rate:

using 2007 base year:
2007: 100 x ($60/$60) = 100 115 – 100
15% = x 100%
100
2008: 100 x ($69/$60) = 115
130 – 115
13% = x 100%
2009: 100 x ($78/$60) = 130 115
Problems with the CPI: 24

Substitution Bias
• Over time, some prices rise faster than others.
• Consumers substitute toward goods that become
relatively cheaper.
• The CPI misses this substitution because it uses a
fixed basket of goods.
• Thus, the CPI overstates increases in the cost of living.
Problems with the CPI: 25

Introduction of New Goods

• The introduction of new goods increases variety,
allows consumers to find products that more closely
meet their needs.
• In effect, dollars become more valuable.
• The CPI misses this effect because it uses a fixed
basket of goods.
• Thus, the CPI overstates increases in the cost of
living.
Problems with the CPI: 26

Unmeasured Quality Change

• Improvements in the quality of goods in the basket
increase the value of each dollar.
• The BLS tries to account for quality changes
but probably misses some, as quality is hard to
measure.
• Thus, the CPI overstates increases in the cost of living.
Problems with the CPI 27

• Each of these problems causes the CPI to overstate

cost of living increases.
• The BLS has made technical adjustments,
but the CPI probably still overstates inflation
by about 0.5 percent per year.
• This is important because Social Security payments
and many contracts have COLAs tied to the CPI.
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Relationship between
Output and Unemployment

Source: Robert J. Gordon, Macroeconomics,

Chapter 1, p.6
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Relationship between
Output and Inflation

Source: Robert J. Gordon, Macroeconomics,

Chapter 1, p.5
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1.1. Macroeconomics goals and tools

Deficit – Budget Deficit
(B – Budget) 𝑩 = 𝑻 − 𝑮
G: Government spending on Goods and Services
T: Net Tax 𝑻 = 𝑻𝒙 − 𝑻𝒓
✓Budget Deficit: 𝐺 > 𝑇 (𝐵 < 0)
✓Budget Surplus: 𝐺 < 𝑇 (𝐵 > 0)
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1.1. Macroeconomics goals and tools

Deficit – Trade Deficit
• Net Export – NX 𝑵𝑿 = 𝑿 – 𝑴

NX > 0 => Trade Surplus

NX < 0 => Trade deficit

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2 basic Goals

Stability Growth
• Reduce the fluctuation of • Increase the growth rate of
business cycles (keep the real GDP and potential
rate of unemployment and Output
inflation low • Long run
• Short run
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2 basic goals 3/5/2024

Source: Robert J. Gordon, Macroeconomics, Chapter 1, p.10

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Macroeconomic Tools (Policies) 3/5/2024

• Change net Tax (T) and government

Fiscal Policy purchase (G)

• Change Money Supply, done by the

Monetary Policy central bank

• Foreign Trade Policy

Foreign Trade Policy • Foreign Exchange Rate Policy

Income Policy • Price-Wage-Money Policy

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1.2. Principles of Macroeconomics 3/5/2024

HOW THE ECONOMY AS A WHOLE WORKS?

• Principle 8: A country’s standard of living depends on its ability
to produce goods & services.
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1.2. Principles of Macroeconomics

HOW THE ECONOMY AS A WHOLE WORKS?
• Principle #9: Prices rise when the government prints too much money.
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1.2. Principles of Macroeconomics 3/5/2024

HOW THE ECONOMY AS A WHOLE WORKS?

• Principle #10: Society faces a short-run tradeoff between
inflation and unemployment
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1.3. Aggregate Supply (AS)

• Aggregate Supply (AS) shows the total amount of goods and
services produced and sold at any given price level.
• In long run, AS curve is vertical.
• In short run, AS curve is upward sloping.
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1.3. Aggregate Supply (AS) – Why AS curve is

vertical in long run?
Natural
Capital (K) Resources P LRAS
(R)

Technology
Labor (L) (T)
Output
𝑌𝑝 Y
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1.3. Aggregate Supply (AS) 3/5/2024

AS curve in short run

The Sticky-
Price
P SRAS
Theory
The Sticky- The
Wage Mispercepti
Theory -ons Theory

AS curve is
upward
sloping in
Y
short run
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1.3. Aggregate Supply (AS) - AS curve shifts:

AS curve in long run (LRAS) AS curve in short run (SRAS)

1. Change of Labor 1. Change of Labor
2. Change of Capital 2. Change of Capital
3. Change of natural resources 3. Change of natural resources
4. Change of technology 4. Change of technology
5. Change of expected price
1.4. The Aggregate-Demand (AD) Curve 42

P
The AD curve
shows the P2
quantity of
all g&s
demanded
in the economy P1
at any given price AD
level.
Y
Y2 Y1
Why the AD Curve Slopes Downward 43

Y = C + I + G + NX P
Assume G fixed
by govt policy. P2
To understand
the slope of AD,
must determine P1
how a change in P
AD
affects C, I, and NX.
Y
Y2 Y1
The Wealth Effect (P and C ) 44

Suppose P rises.
• The dollars people hold buy fewer g&s,
so real wealth is lower.
• People feel poorer.
Result: C falls.
The Interest-Rate Effect (P and I ) 45

Suppose P rises.
• Buying g&s requires more dollars.
• To get these dollars, people sell bonds or other
assets.
• This drives up interest rates.
Result: I falls.
(Recall, I depends negatively on interest rates.)
The Exchange-Rate Effect (P and NX ) 46

Suppose P rises.
• U.S. interest rates rise (the interest-rate effect).
• Foreign investors desire more U.S. bonds.
• Higher demand for $ in foreign exchange market.
• U.S. exchange rate appreciates.
• U.S. exports more expensive to people abroad,
imports cheaper to U.S. residents.
Result: NX falls.
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Equilibrium
• Equilibrium Price is defined at which AD = AS
• If price is not equilibrium price, the economy automatically adjusts
to the equilibrium.

P
AS

Surplus
𝑃1

𝑃0 𝐸0
𝑃2 AD
Shortage

𝑌0 Y
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Equilibrium
• When AS curve or AD curve shifts, the equilibrium price and
output can change.

AS unchanged AS rises AS falls

AD unchanged P unchanged P falls P rises

Y unchanged Y rises Y falls
AD rises P rises P ambiguous P rises
Y rises Y rises Y ambiguous
AD falls P falls P falls P ambiguous
Y falls Y ambiguous Y falls
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AD shifts
LRAS
P
𝐴𝑆1
AD falls => 𝐴𝑆2 In long run,
Output (Y) falls in SRAS rises and
short run output (Y)
returns to the
𝑃1 𝐸1
initial
𝑃2 equilibrium
𝐸2
𝐴𝐷1
𝑃3
𝐴𝐷2
𝐸3
𝑌2 𝑌1 Y
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AS curve shifts
LRAS
P 𝐴𝑆2
SRAS falls=>
𝐴𝑆1
Output Y falls and
Policy makers can
Price (P) rises in
stimulate AD=>
short run
Output Y returns
𝑃3 𝐸3 to initial level but
𝑃2 𝐸2 price level
𝐴𝐷2 increases highly
𝑃1
𝐸1 𝐴𝐷1
At 𝐸2 , P rises, Y falls
=> Stagflation
𝑌2 𝑌1 Y
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- Money AD and AS determine Output

Supply (Y)
-Government
macroeconomic variables
purchase and
Employ-
Tax AD ment and
- Others
Unemploy
-ment
AS-AD model Price
level
- Labor and
- Capital Inflation
- Natural
AS
Resources
- Technology Net
Export
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1.5. Macroeconomic Goals: Stability and economic

3/5/2024

growth on AS-AD model

Goal: Stability
Case 1: AD falls 𝑌𝑝
P
𝑌𝑡 < 𝑌𝑝 AS

Recession (low employment

and output

The policy makers protect 𝑃1

the economy from 𝐸2 𝐸1 𝐴𝐷1
𝑃2
recession by stimulating
𝐴𝐷2
AD through expansionary
policies 𝑌2 𝑌𝑝 Y
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1.5. Macroeconomic Goals: Stability and economic

3/5/2024

growth on AS-AD model

Goal: Stability
𝑌𝑝
Case 2: AD rises P
AS
𝑌𝑡 > 𝑌𝑝
Inflation rises
𝑃3
𝐴𝐷3
𝑃1
The policy makers protect the 𝐸1 𝐴𝐷1
economy from high inflation
by reducing AD through
contractionary policies 𝑌𝑝 𝑌3 Y
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1.5. Macroeconomic Goals: Stability and economic

3/5/2024

growth on AS-AD model

Goal: Growth
𝑌𝑝𝑡 𝑌𝑝𝑡+𝑛
P
Policies on increasing
productivity=> economic growth

𝑃𝑡+𝑛 ′
𝐸𝑡+𝑛

𝑃𝑡
𝐸𝑡 𝐸𝑡+𝑛

𝑌𝑝𝑡 𝑌𝑝𝑡+𝑛 Y
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Is each of the following statements True (T) or False (F)?

1. Potential Output is not the highest level of output that an
economy can attain
2. The goal of growth always goes together with the goal of stability
3. The recession happens when real output is higher than potential
output
4. AD rises when exchange rate falls
5. The stagflation happens when inflation rises and output falls
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Choose the reasons in column I that can lead to the effects in column II.

I II
1. Labor resource increases A. LRAS changes but SRAS doesn’t .
2. Technology is innovative B. SRAS changes but LRAS doesn’t
3. Nominal wage increases C. Both SRAS and LRAS change.
4. Money supply increases D. Both SRAS and LRAS don’t change.
5. Income of foreign countries
increases
6. Exchange rate rises