4/9/2020

Đoàn Hồng Phát, MBA

[email protected]

1 CHAPTER
INTRODUCTION

1. The Birth of Macroeconomics

Microeconomics Macroeconomics

Scarcity
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1. The Birth of Macroeconomics

 Economics study how society allocates

scarce resources to meet unlimited demands
of people.

1. The Birth of Macroeconomics

 Microeconomics: shows consumers and

firms how to maximize their benefits in the
economy (MU>= MC)

Supply > Demand

The whole economy’s inefficiency

Macroeconomics
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2. What is Macroeconomics?
2.1. Definition
 Macroeconomics is the study of economy-
wide phenomena, including inflation,
unemployment and economic growth.

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2.2. Its Study

 The whole economy

2.3. Contents for researching

 National yield: the most important measure of

a nation’s achievement (GDP, GNP).
 Inflation: is an increase in the overall level of
prices.
 Unemployment: expresses the situation of
people who are in working ages, able to work,
seeking jobs but haven’t found it yet.
 International transactions: Export - Import

3. Positive versus normative analysis

 Positive statements: are statements that

attempt to describe the world as it is.
o Called descriptive analysis

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3. Positive versus normative analysis

 Normative statement: are statements about

how the world should be.
o Called prescriptive analysis

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3. Positive versus normative analysis

 An increase in the minimum wage will cause a

decrease in employment among the least-
skilled.
---> POSITIVE
 The income gains from a higher minimum
wage are worth more than any slightly
reductions in employment
---> NORMATIVE

3. Positive versus Normative Analysis

 State governments should be allowed to collect

from tobacco companies the costs of treating
smoking-relating illnesses among the poor.
---> NORMATIVE

 Higher federal budget deficits will cause interest

rates to increase.
---> POSITIVE

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4. Macroeconomics vs Microeconomics

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Macroeconomics vs. Microeconomics

 Should FPT invest in the technology of

producing computers?
---> Microeconomics
 Does the increase in input costs cause CPI to
increase in the upcoming period?
---> Macroeconomics
 How does the productivity affect GDP?
---> Macroeconomics

5. Macroeconomics System

Black
Box Outputs

(Paul. A. Samuelson)

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5. Macroeconomics System

 Inputs:
− External events: include uneconomic
events such as: weather, disaster, war…
− Internal events: include behaviors and
management tools of Government such as:
fiscal policy, monetary policy…

5. Macroeconomics System

 The black box: where the interaction between

AD and AS happens.
− It decides the quality of outputs.

 Outputs: show the quality of the economy

through economic growth, employment, trade
balance…

6. Objectives and management tools

Effective

Fair GOALS Stable

Growth

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6. Objectives and Management tools

 Fiscal policy: G and T.

 Monetary policy: MS and i -> Y.

 Income policy: P, W -> limit inflation.

 External economic policy: exchange rate,

tariff and non-tariff -> NX and BOP.

Summary

 Macroeconomics is the study of economy-wide

phenomena, including inflation, unemployment
and economic growth.
 Its study is the whole economy.
 Contents for researching include national yield,
inflation, unemployment and trade balance.
 There are 2 main methodology of study such as
positive economics and normative economics.

CHAPTER 2
MEASURING A NATION’S
INCOME

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CONTENTS

1. Gross Domestic Product (GDP)

2. Consumer Price Index (CPI)

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1. GROSS DOMESTIC PRODUCT (GDP)

1.1. Definition
1.2. Measuring GDP
1.3. Nominal GDP, real GDP and GDP deflator
1.5. GNP vs GDP
1.6. Other measures of national income

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1.1 Definition

Gross Domestic Product (GDP) is the

market value of all final goods and services
produced within a country in a given period of
time.

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1.1 Definition

 “GDP is the Market Value…”

∟ Output is valued at market prices.

 “…of All Final…”

∟It records only value of final goods, not
intermediate goods.

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1.1 Definition
• “ Final goods and services…”
∟ Are the ones which are not used to
produced another goods.
∟ They are only sold to final consumers.

 “ Intermediate goods and services…”

∟ Are the ones used to be inputs to
produce another goods and used up once
time in the production process
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1.1 Definition

 “…Produced…”
∟ It includes goods and services currently
produced, not transactions involving goods
produced in the past.

 “… Within a Country…”
∟ It measures the value of production within
the geographic confines of a country.

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1.1 Definition

 “…In a Given Period of Time”

∟ It measures the value of production that
takes place within a specific interval of time,
usually a year or a quarter (three months).

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1.1 Definition

In short:
1. To compute the total value of different G&S,
GDP uses market prices.
2. Intermediate goods are not counted in GDP.
3. The treatment of Inventories:
 If produced G&S spoil, it does not alter
GDP.
 If produced G&S is put into inventory,
GDP rises.
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1.1 Definition

In short:
4. Some G&S are not sold in the market and
do not have market prices, we must use
an estimate of their value.
5. Used goods are not included in GDP
calculation.

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1.2 Measuring GDP

The model of money-goods circular in a
simple economy.

 Assumptions:
• There is no role of Government and foreign
transactions.
• The economy has no savings.

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Figure 1 The Circular-Flow Diagram

MARKETS
Revenue FOR Spending
GOODS AND SERVICES
Goods •Firms sell Goods and
and services •Households buy services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labor, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of dollars

1.2 Measuring GDP

The model of money-goods circular in a
simple economy.

 For the economy as a whole, income must

equal expenditure.
 There are 2 ways of computing GDP

Total expenditure Total income earned

on domestically – by domestically-
produced final located factors of
G&S production
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1.2. Measuring GDP

Expenditure Approach
Components of expenditure:
 Consumption (C):
∟the value of all G&S bought by households.
Includes:

Durable Nondurable
goods Services
goods

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1.2. Measuring GDP

Expenditure Approach
Save money in banks
 Investment (I): or buying stocks are
∟Investment spending by businesses and
households. Includes: not considered as
kinds of investment
 Business fixed investment: Spending on
plant and equipment that firms will use to
produce other goods & services.
 Residential fixed investment: Spending on
housing units by consumers and landlords.
because there is no
 Inventory investment: The change in the
value of all firms’ inventories. product manufactured.
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1.2. Measuring GDP

Expenditure Approach
 Government Purchases (G):
∟ The spending on goods and services by local,
state, and federal governments.
∟ G excludes transfer payments.
(e.g, unemployment insurance payments).

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1.2. Measuring GDP

Expenditure Approach
 Net Exports (NX):
∟ Exports minus imports.

GDP = C + I + G + NX

 Where:
Y = GDP = the value of total output
C + I + G + NX = aggregate expenditure

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A question for you

Suppose a firm:
 Produces $10 million worth of final goods
 But only sells $9 million worth
Does this violate the
Expenditure = output identity?

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Why output = expenditure

 Unsold output goes into inventory, and is

counted as “inventory investment”…whether the
inventory buildup was intentional or not.
 In effect, we are assuming that firms purchase
their unsold output.

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1.2. Measuring GDP

Income/Factor Cost Approach
 It measures GDP by adding together all
incomes paid by firms to households for
services of the factors of production they hire.
 GDP is the sum of incomes in the economy
during a given period.

GDP = W + i + R +Pr +Dep +T𝒊

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Consumption+Gross
Invesment+Government
purchase+Export-Import
EXERCISE (Expenditure) GDP=200+150+100+100-50

 In 2017, Vietnam had statistic data according to (Income) GDP=230+35+25+60+50+150-50

the territory as following: wages+rent+interests+profit+indirect
Gross Investment = 150 Consumption = 200 tax+Gross investment-Net investment
Net Investment = 50 Government purchase = 100
Wages = 230 Interests = 25 DEP
Rent = 35 Indirect tax = 50
Profit = 60 Net factor income = -50
Export = 100 CPI 2002 = 120
Import = 50 CPI 2003 = 150

Find GDP in expenditure approach and

income approach.

1.2. Measuring GDP

Value Added Approach
 A firm’s value added is: the value of its output
minus the value of the intermediate goods the
firm used to produce that output.
 GDP is counted by summing up VA of all firms
in the economy together.

GDP = ∑ VA of firms
= ∑ (G.O – I.I)

o G.O : Gross Output

o I.I : Intermediate Inputs 43

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EXERCISE

 A farmer grows a bushel of wheat and sells it to

a miller for $1.00.
 The miller turns the wheat into flour and sells it
to a baker for $3.00.
 The baker uses the flour to make a loaf of bread
and sells it to an engineer for $6.00.
 ƒThe engineer eats the bread.
Compute:
– value added at each stage of production
– GDP
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1.3. Real Vs. Nominal GDP

 GDP is the value of all final goods and services

produces.
 Nominal GDP measures these values using
current prices.
𝒏 𝒕 𝒕
GDPtn = 𝒊=𝟏 𝒑𝒊 𝒒𝒊

• i: final item 1, 2.., n

• t: the year counting
• p: price of each item
• q: quantity of each item
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1.3. Real Vs. Nominal GDP

 GDP is the value of all final goods and services

produces.
 Real GDP measure these values using the
prices of a base year.

𝒏 𝒕
GDPtr = 𝒊=𝟏 𝒑𝒊 𝒒𝒊
𝟎

t = 0: base year

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1.3. Real Vs. Nominal GDP

 Changes in nominal GDP can be due to
changes in:
• Prices
• Quantities of output produced
 Changes in real GDP can only be due to
changes in quantities.
 Used to calculate economic growth rate g
−
𝑮𝑫𝑷𝒕𝒓 − 𝑮𝑫𝑷 𝒕 𝟏
𝒓
g= − x 100
𝑮𝑫𝑷 𝒕 𝟏 𝒓
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1.3. GDP Deflator

 The GDP deflator

∟ is a measure of the average price level in
the economy.
∟ It shows changes in price in the current year
compared to the based year -> measure
inflation.

Nominal GDP
GDP deflator =  100
Real GDP
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1.3. GDP Deflator

Understanding the GDP deflator
Example with 3 goods
For good i = 1, 2, 3
Pit = the market price of good i in month t
Qit = the quantity of good i produced in month t
NGDPt = Nominal GDP in month t
RGDPt = Real GDP in month t

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1.3. GDP Deflator

Understanding the GDP deflator
NGDPt P1t Q1t  P2t Q2t  P3t Q3t
GDP deflator  100   100 
RGDPt RGDPt
  Q1t   Q2t   Q3t  
 100     P1t    P2t    P3t 
  RGDPt   RGDPt   RGDPt  

The GDP deflator is a weighted average of prices.

The weight on each price reflects
that good’s relative importance in GDP.
Note that the weights change over time.

Table 1 Real and Nominal GDP

1.4. GROSS NATIONAL PRODUCT -

GNP
 Gross National Product (GNP)
∟ is the total value of all final goods and
services produced by a nation’s citizens in a
given period of time

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1.4. GNP Vs. GDP

Vietnam Others
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1.4. GNP Vs. GDP

 A: the value of goods and services produced by

a nation’s citizens within its territory.

 B: the value of goods and services produced by

other nations’ citizens within its territory.

 C: the value of goods and services produced by

a nation’s citizens in other nations’ territory.

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1.4. GNP Vs. GDP

 GDP = A + B => A = GDP – B (1)

 GNP = A + C (2)
Replace (1) into (2):
GNP = GDP + (C – B)
<=>
GNP = GDP + NFA (3)

With: NFA: Net Factor Income From Abroad: gap

between income created by domestic citizens in foreign
countries and income created by foreigners in domestic country.

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1.4. GNP Vs. GDP

 If NFA > 0: GNP > GDP

 If NFA = 0: GNP = GDP
 If NFA < 0: GNP < GDP

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1.5. Some other measures of national

income
 Net National Product (NNP):
NNP = GNP – Dep
 National Income (NI)
NI = NNP – Te
 Personal Income (PI)
PI = NI – Prretained earnings + Tr
 Disposable Income (YD)
YD = PI – TPI
YD = C + S

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2. THE CONSUMER PRICE INDEX

2.1. Definition
2.2. How the BLS constructs the CPI

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2.1. Definition

 CPI
∟ Is a measure of the overall cost of the goods
and services bought by a typical consumer.
∟Used to
• Track changes in the household’s cost of
living.
• Adjust many contracts for inflation
(i.e. “COLAs”)
• Allow comparisons of dollar figures from
different years
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2.2. How the BLS constructs the CPI

1. Survey consumers to determine composition of

the typical consumer’s “basket” of goods.
2. Every month, collect data on prices of all items
in the basket; compute cost of basket
3. CPI in any month equals

Cost of basket in that month

100 
Cost of basket in base period

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Basket of G&S for CPI in Vietnam

during the period 2015-2020

1. Food & Beverage 4% 3%

2. Drink & tobaco 6%
3. Texttile 3%
4. Housing
36%
5. Household applianes
6. Medicine & health services 9%
7. Transport
8. Post & Telecommunication
9. Education 5%
10. Culture, entertainment &
travel 7%
11. Others 4%
7%
16%
1 2 3 4 5 6 7 8 9 10 11
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Table 1 Calculating the Consumer Price Index and the Inflation

Rate: An Example

Table 1 Calculating the Consumer Price Index and the Inflation

Rate: An Example

Table 1 Calculating the Consumer Price Index and the Inflation

Rate: An Example

Copyright©2004 South-Western

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Table 1 Calculating the Consumer Price Index and the Inflation

Rate: An Example

Table 1 Calculating the Consumer Price Index and the Inflation

Rate: An Example

3. GDP deflator Vs. CPI

 The GDP deflator reflects the prices of all goods

and services produced domestically, whereas...

 …CPI reflects the prices of all goods and

services bought by consumers.

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3. GDP deflator Vs. CPI

 CPI compares the price of a fixed basket of

goods and services to the price of the basket in
the base year (only occasionally does the BLS
change the basket)...

 …whereas the GDP deflator compares the price

of currently produced goods and services to the
price of the same goods and services in the
base year.

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4. CORRECTING ECONOMIC VARIABLES

FOR THE EFFECTS OF INFLATION

 Price indexes are used to correct for the effects

of inflation when comparing dollar figures from
different times.

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4.1. Dollar Figures from Different Times

 Babe Ruth’s salary in

o 1931: $80,000
o 2001: $800,000
 CPI 1931 = 15.2
 CPI 2001 = 177
=> Did his salary increase in 2001?

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4.1. Dollar Figures from Different Times

 Do the following to convert (inflate) Babe Ruth’s

wages in 1931 to dollars in 2001:
Price level in 2001
Salary 2001  Salary 1931 
Price level in 1931

177
 $80,000 
15.2

 $931,579
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Table 3 The Most Popular Movies of All Times, Inflation

Adjusted

Copyright©2004 South-Western

4.2. IndexationTimes

 When some dollar amount is automatically

corrected for inflation by law or contract, the
amount is said to be indexed for inflation.

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4.3. Real and Nominal Interest Rates

 Interest represents a payment in the future for a

transfer of money in the past.

 The nominal interest rate is the interest rate

usually reported and not corrected for inflation.
• It is the interest rate that a bank pays.

 The real interest rate is the nominal interest rate

that is corrected for the effects of inflation.

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4.3. Real and Nominal Interest Rates

 You deposit $1,000 for one year.

 Nominal interest rate was 10%.
 During the year inflation was 7%.
Real interest rate = Nominal interest rate –
Inflation
= 10% - 7% = 3%

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CHAPTER SUMMARY

1. Gross Domestic Product (GDP) measures both

total income and total expenditure on the
economy’s output of goods & services.
2. Nominal GDP values output at current prices;
real GDP values output at constant prices.
Changes in output affect both measures,
but changes in prices only affect nominal GDP.
3. GDP is the sum of consumption, investment,
government purchases, and net exports.
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CHAPTER SUMMARY

4. The overall level of prices can be measured by

either
 the Consumer Price Index (CPI),
the price of a fixed basket of goods
purchased by the typical consumer, or
 the GDP deflator,
the ratio of nominal to real GDP

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CHAPTER 3
AGGREGATE DEMAND AND
AGGREGATE SUPPLY

CONTENTS

1. Aggregate demand curve.

2. Aggregate supply curve.
3. The short – run equilibrium.
4. The long – run equilibrium.
5. Economics fluctuation.

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1. THE AGGREGATE DEMAND (AD) CURVE

 The aggregate - demand curve shows the

quantity of G&S that households, firms, the
Government and customer abroad want to
buy at each price level.

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1. THE AGGREGATE DEMAND (AD) CURVE

 The 4 components of GDP (Y) contribute to

the aggregate demand for G&S.

Y = C + I + G + NX

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Figure 1: The Aggregate-Demand Curve...

Price
Level

P2

1. A decrease Aggregate
in the price demand
level . . .

0 Y Y2 Quantity of
Output
2. . . . increases the quantity of
goods and services demanded.

Copyright © 2004 South-Western

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1.1. Why AD Curve Slopes Downward

fixed
Y = C + I + G + NX
∟ Assume G fixed by Government policy.
∟ To understand the slope of AD, we must
consider how a change in P affects C, I and
NX.

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1.1.1. The Wealth Effect (P and C)

 Suppose P falls
o The dollar people hold buy more goods and
services.
o People feel wealthier.
 Result: C rises.
Với mức giá thấp, lượng tiền mà các hộ gia đình nắm giữ có
giá trị hơn => họ cảm thấy giàu có hơn nên chi tiêu nhiều
hơn.

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i1

i2

LF

1.1.2. The Interest-Rate Effect (P and I)

- deposit $ in banks
=>SLF increases
 Suppose P falls - buy stock
(supply of loanable fund)

o Buying goods & services requires fewer

dollars.
o To reduce their holdings of money, people
lend out.
o This makes interest rates decrease.
 Result: I rises.
Với mức giá thấp, các hộ tiêu dùng cần giữ ít tiền hơn
để dùng => họ cho vay số tiền thừa => lãi suất giảm =>
kích thích đầu tư

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P giảm, Money demanded giảm, lượng tiền vốn đầu tư tăng, lãi suất giảm, Investment tăng, AD tăng

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interest rate in domestic country (Mỹ) giảm < interest rate in foreign
countries => investors có khuynh hướng đầu tư vào nước ngoài => đổi tiền
=> nguồn cung dollar tăng => exchange rate giảm => giá cả hàng hoá Mỹ
giảm => nước ngoài tăng nhập khẩu hàng hoá mỹ, giá cả hàng hoá nước
ngoài tăng => hạn chế nhập khẩu hàng nước ngoài.
Hiệu ứng tỉ giá hối đoái
1.1.3. The Exchange-Rate Effect (P and NX)

 Suppose P falls
o US interest rates fall (the interest rate
effect).
o Domestic investors desire more foreign
bonds.
o Higher supply for $ in foreign exchange
market.
o US exchange rate depreciates.
o US imports fall and exports rise.
 Result: NX rises.
Với mức giá thấp, lãi suất giảm, hàng hoá 96

trong nước rẻ hơn hàng ngoại => khuyến

khích xuất khẩu, hạn chế nhập khẩu =>
tăng xuất khẩu ròng

SUM UP

 There are 3 distinct but related reasons a fall in

P level increases AD:
1. Consumers are wealthier -> stimulates the
demand for consumption goods.
2. Interest rates fall -> stimulates the demand
for investment goods.
3. The currency depreciates -> stimulates the
demand for NX. mất giá

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1.2. Why AD Curve Might Shift

 Any event that changes C, I, G or NX –

except a change in P – will shift the AD
curve.

- Movement: P changes, other factors unchanged:

income, taste, taxes, expectation, exchange rate

- Shift: P stable, other factors change

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1.2. Shifts in the AD Curve

Price
Level

P1

D2
Aggregate
demand, D1

0 Y1 Y2 Quantity of
Output

1.2. Why AD Curve Might Shift

 Changes in C C giảm => nhu cầu tiêu tiền giảm => AD shifts to the left

o Stock market boom/ crash

o Tax hikes/cuts Tax tăng => thu nhập khả dụng giảm => AD shifts to the left
 Changes in I
o Firms buy new factories, equipment.
o Expectations, optimism/pessimism.
Monetary policy, interest rates.

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1.2. Why AD Curve Might Shift

 Changes in G
o State & local spending, e.g., roads,
schools
 Changes in NX
o Booms/recessions in countries that buy
our exports.
Phá giá đồng tiền => hàng hoá rẻ => nước ngoài tăng
đồng nhân dân tệ
o Depreciation of CNY nhập khẩu các mặt hàng => tăng xuất khẩu => AD shifts
to the right

=> Nhiều quốc gia phá giá theo => thị trường ngoại hối mất ổn định =>
các quốc gia ko muốn mất thị phần hàng hoá của họ trên thị trường
quốc tế

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2. THE AGGREGATE SUPPLY (AS) CURVE

 The aggregate – supply curve shows the

total quantity of goods and services that
firms produce and sell at any given price
level.

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2. THE AGGREGATE SUPPLY (AS) CURVE

 In the long run, the AS curve is vertical.

 In the short run, the AS curve is upward
sloping.

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Figure 2: The Long-Run Aggregate-Supply Curve

In the long run, the aggregate supply of G and S does not depend on the prices.
Price
Level

Long-run
aggregate
supply

P2
2. . . . does not affect
1. A change the quantity of goods
in the price and services supplied
level . . . in the long run.

0 Natural rate Quantity of

of output = potential output Output

mức sản lượng tiềm năng:

các hoạt động diễn ra ở Copyright © 2004 South-Western

mức trung bình

Depends on: Nguồn lực của nền kinh tế (tài nguyên thiên nhiên, nguồn lao động, vốn, công nghệ)

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2.1. The long – run Aggregate Supply

Curve (LRAS)
 The natural rate of output (Y*) is the
amount of output the economy produces
when unemployment is at its natural rate.

 Y* is also called potential output.

105

2.1.1. Why LRAS Is Vertical?

 Y* determined by the economy’s supplies of

labor, capital, and natural resources and on
the level of technology.

 An increase in P does not affect any of

these, so it does not affect Y*.

106

2.1.2. Why the LRAS Curve Might Shift ?

 Any event that changes any of the

determinants of Y* will shift LRAS.

107

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2.1.2. Why the LRAS Curve Might Shift ?

 Changes in L Labour
o Immigration (VN)
o Baby boomers retire (Japan)

 Changes in K Capital
o Investment in factories, equipment

 Changes in T Technology
o The invention of computer helps increase the
productivity.
108

BABY BOOMERS RETIRE IN JAPAN

 Population: 127.018.680 persons (2018)

 Natural population increase: -345.863 persons
 Male: 62.047.488
 Female: 64.971.192
 Old population: 65%
 Highest rate of ages: 40-50 years old
 Decrease each year: 20.000 persons

109

BABY BOOMERS RETIRE IN JAPAN

 Be seriously lack of labors

 60% firms closed due to no successor người thừa kế
 Policies Gov recommend:
o Give birth (award JPY 10millions/ the first child
o Support kindergarten system
o Attract foreign labors
Raise
New married couple receives money for establishing new life
retiring
110

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DIGITAL ECONOMY IN VIETNAM

 Trend in digital economy based on internet:

o Application of shopping on mobile becomes
the most popular means to buy goods (72%,
2018).
o Trade through social network continues
developing.
o Demands for selling online of individuals
increase.

111

DIGITAL ECONOMY IN
VIETNAM

$9 $33
Bills Bills
The value of internet economy The value of internet economy in
in Vietnam in 2018 Vietnam in 2025

Source: e-conomy SEA, Temasek, 2018

Gross merchandise value of

INTERNET (GMV) contributes
to GDP (2018)

INTERNET ECONOMY

CONTRIBUTE TO GDP 4%

HIGHEST

GMV: Gross Merchandise Value

GDP - Gross Domestic Product

Source: World Bank (GDP)

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2.2. SHORT – RUN AGGREAGTE SUPPLY

CURVE (SRAS)
 The SRAS curve is upward sloping.
∟ P --> AS

114

Figure 3 The Short-Run Aggregate-Supply Curve

Price
Level

Short-run
aggregate
supply
P

P2
1. A decrease 2. . . . reduces the quantity
in the price of goods and services
level . . . supplied in the short run.

0 Y2 Y Quantity of
Output

Copyright © 2004 South-Western

2.2.1. Why the SRAS Slopes Upward?

116

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2.2.1.1. The Sticky-Wage Theory

 Nominal wages are sticky in the short run,

they adjust sluggishly.
chậm chạp
o Due to labor contracts
 Firms and workers set the nominal wage in
advanced based on PE - the price level they
expect to prevail.
chiếm ưu thế
mức giá kì vọng

P giảm, Wage tăng, production cost tăng, profit giảm, AS giảm

117

2.2.1.2. The Sticky-Wage Theory

 If P < PE: Production is less profitable, so

firms decrease output and employment.
 Lower P --> lower Y, so the SRAS curve
slopes upward.

118

2.2.1.3. The Sticky-Price Theory

 Many prices are sticky in the short run.

o Due to menu costs
o Examples: cost of printing new menus
 Firms set sticky prices in advance based on
PE.

119

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2.2.1.3. The Sticky-Price Theory

 Suppose the Fed decreases the money

supply unexpectedly. In the long run, P will
fall.
 Some firms reduce their prices immediately.
 Some firms lag behind
 Hence, lower P is associated with lower Y

120

2.2.1.4. The Misperceptions Theory

 Changes in the overall P level temporarily

mislead suppliers about what is happening in
the markets in which they sell their output.

 A lower price level causes misperceptions

about relative prices.
o These misperceptions induce suppliers
to decrease the quantity of goods and
services supplied.
121

2.2.2. Why the SRAS Curve Might Shift

 Everything that shifts LRAS shifts SRAS,

too (L, K, R & T)
 Also, PE shifts SRAS:
o If PE rises, workers & firms set higher
wages.
o At any given actual P, production is less
profitable, Y falls => SRAS shifts left.

122

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3. THE SHORT-RUN EQUILIBRIUM

Price
Level

Aggregate
supply

Equilibrium
price level

Aggregate
demand

0 Equilibrium Quantity of
output Output

Copyright © 2004 South-Western

Figure 4: The Short-Run Equilibrium, CASE 1

Price
Level
LRAS

AS

AD

0 Quantity of
Y* Y
Output

Copyright © 2004 South-Western

Figure 5: The Short-Run Equilibrium, CASE 2

Price
Level
LRAS

AS

AD

0 Quantity of
Y = Y*
Output

Copyright © 2004 South-Western

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Figure 6: The Short-Run Equilibrium, CASE 3

Price
Level LRAS

AS

AD

0 Y Quantity of
Y*
Output

Copyright © 2004 South-Western

4. THE LONG – RUN EQUILIBRIUM

Price
Level
Long-run
aggregate
Short-run
supply
aggregate
supply

Equilibrium A
price

Aggregate
demand
0 Natural rate Quantity of
of output Output

Copyright © 2004 South-Western

5. ECONOMIC FLUCTUATIONS

 Caused by events that shift the AD/ AS

 4 steps to analyze economic fluctuations:
1. Determine whether the event shifts AD/AS.
2. Determine if curve shifts left or right.
3. Use AD-AS diagram to see how the shift
changes Y and P in the short run.
4. Use AD-AS diagram to see how economy
moves from new SR eq’m to new LR eq’m

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5.1. The Effects of a Shift in AD

 Event: stock market crash

1. Affects C, AD curve. investors lose their money
2. C falls => AD shifts left. reduction in income => decrease in the
consumption => AD shifts left

3. SR eq’m at B. P and Y lower,

unemployment higher. => tổng cầu thấp =>=>sản lượng của nền kinh tế giảm
a recession

4. Over time, PE falls, SRAS shifts right, until

LR eq’m at C. Y and unemployment back
at initial levels.
Để nền KT vượt qua được suy thoái => đưa Y2 về mức Y1

- Cách 1: The government will interfere

subsidy for consumer (tăng lương) => Yd (thu

nhập khả dụng) tăng => consumption tăng =>
AD shifts right

- Cách 2: The economy will adjust itself to overcome

unemployment rate tăng => wages

giảm => production costs giảm => AS
shifts right

Figure 7: A Contraction in Aggregate Demand

2. . . . causes output to fall in the short run . . .

Vấn đề cốt lõi của recession:
Price
unemployment rate tăng =>
Level thu nhập giảm
LRAS
AS1

AS2
3. . . . but over
time, the short-run
P1 A aggregate-supply
curve shifts . . .
P2 B
1. A decrease in
P3 aggregate demand . . .
C
AD1
AD2
0 Y2 Y1 Quantity of
4. . . . and output returns Output
to its natural rate.
Copyright © 2004 South-Western

5.2. The Effects of a Shift in SRAS

 Event: oil prices rise (assume LRAS

constant)
1. Increase costs, shifts SRAS. production costs tăng => SRAS shifts left
2. SRAS shifts left.
3. SR eq’m at point B. P higher, Y lower, u
higher. From A to B, stagflation, a period
of falling output and rising prices.
=> Y<Y* => the economy suffers inflation & recession => STAGFLATION (hiện tượng đình lạm)
P2>P1
=> unemployment rate tăng => wages giảm => cost of production giảm => AS tăng (the economy adjusts itself)
=> the G stimulates the demand => chuyển tới Y* but the price gets higher => saves the recession =>
tradeoff the inflation

=> To stabilize the price level => tradeoff a bigger recession

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Figure 8: An Adverse Shift in Aggregate Supply

1. An adverse shift in the short-

run aggregate-supply curve . . .
Price
Level
LRAS

AS2
AS1

B
P2
A
P1
3. . . . and
the price
level to rise.
AD
0 Y2 Y* Quantity of
2. . . . causes output to fall . . . Output

Copyright © 2004 South-Western

Accommodating an Adverse Shift in

SRAS
 If policymakers do nothing,
4. High employment causes wages to fall,
SRAS shifts right, until LR eq’m at A.

Figure 9: An Adverse Shift in Aggregate Supply

1. An adverse shift in the short-

run aggregate-supply curve . . .
Price
Level
LRAS

AS2
AS1

B
P2
A 4. SRAS shift back to right.
P1
3. . . . and
the price
level to rise.
AD
0 Y2 Y* Quantity of
2. . . . causes output to fall . . . Output

Copyright © 2004 South-Western

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Accommodating an Adverse Shift in

SRAS
 Or, policymakers could use fiscal or
monetary policy to increase AD and
accommodate the AS shift:
Y back to Y* but,
P permanently higher

Figure 10: Accommodating an Adverse Shift in Aggregate

Supply

1. When short-run aggregate

supply falls . . .
Price
Level
LRAS
AS2
AS1

P3
C 2. . . . policymakers can
P2 B accommodate the shift
A by expanding aggregate
3. . . . whichP demand . . .
causes the
price level
to rise 4. . . . but keeps output AD2
further . . . at its natural rate.
AD1
0 Y* Quantity of
Output

Copyright © 2004 South-Western

EXERCISE

 Explain whether each of the following events

will increase, decrease or have no effect on
the AD, AS or both.
1. Households decide to save a larger share
of their income. AD shifts to the left => Y* giảm, P giảm
2. Florida orange groves suffer a prolonged
period of below-freezing temperatures. AS shifts to the left => Y giảm, P tăng
3. Increased job opportunities overseas
cause many people to leave the country.
Both AS, AD shift to the left => Y giảm, P có thể tăng hoặc giảm

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EXERCISE
 For each of the following events, explain the
short-run and long-run effects on output and the
price level, assuming policymakers take no
action.
1. The stock market declines sharply, reducing
consumers’ wealth
2. The federal government increases spending
on national defense
3. A recession oversea causes foreigners to
buy fewer US goods.

CHAPTER SUMMARY

 All societies experience short-run economic

fluctuations around long-run trends.
 These fluctuations are irregular and largely
unpredictable.
 When recessions occur, real GDP and other
measures of income, spending, and production
fall, and unemployment rises.

CHAPTER SUMMARY

 Economists analyze short-run economic

fluctuations using the aggregate demand and
aggregate supply model.

 According to the model of aggregate demand

and aggregate supply, the output of goods and
services and the overall level of prices adjust to
balance aggregate demand and aggregate
supply.

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CHAPTER SUMMARY

 The aggregate-demand curve slopes downward

for three reasons: a wealth effect, an interest
rate effect, and an exchange rate effect.
 Any event or policy that changes consumption,
investment, government purchases, or net
exports at a given price level will shift the
aggregate-demand curve.

CHAPTER SUMMARY

 In the long run, the aggregate supply curve is

vertical.
 The short-run, the aggregate supply curve is
upward sloping.
 The are three theories explaining the upward
slope of short-run aggregate supply: the
misperceptions theory, the sticky-wage theory,
and the sticky-price theory.

CHAPTER SUMMARY

 One possible cause of economic fluctuations is

a shift in aggregate demand.
 A second possible cause of economic
fluctuations is a shift in aggregate supply.
 Stagflation is a period of falling output and rising
prices.

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CHAPTER 4
AGGREGATE DEMAND AND
FISCAL POLICY

1. KEYNESIAN MODEL

 Purposes:
1. Explain factors on which Aggregate Planned
Expenditure depend.
2. Identify the equilibrium output and the
adjustment mechanism.
3. Analyze the impact of a change in G & T on
the equilibrium output.

145

1. KEYNESIAN MODEL

 Assumptions:
1. P & w unchanged in the short-run.
2. Many resources have not used in the
economy -> SAS is horizontal.
o Imply that AD will decide the output.
3. Exclude the impact of the monetary market
on goods market.

146

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1. KEYNESIAN MODEL

A B
P1 AS

AD2

AD1
Y

147

1.1. AGGREGATE EXPENDITURE

 Aggregate expenditure (AE) refers to

aggregate planned expenditure on
consumption, Investment, public G&S and net
export. AD: phản ánh tổng mức cầu tương ứng với các mức giá
AE: phản ánh mức chi tiêu tương ưng với các mức thu nhập

 AE curve shows the relationship between

aggregate expenditure and aggregate income
of all members in the economy.

148

1.1. AGGREGATE EXPENDITURE

AE

AE

minimum expenditure of the economy

149

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1.1. AGGREGATE EXPENDITURE

 Features:
o Slope upward: Y -> AE
o Y 1 unit -> AE but less than 1 unit.
o When Y = 0, AE > 0.

150

What will decide the equilibrium output

in the short- run when the economy
still has unused resources?

151

1.2. The income – output identity

GDP ≡ National Income ≡ Y

152

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1.3. The macroeconomics equilibrium in

the short-run based on the AE model

AE = GDP = Y

The total output of the economy equates the total

income, equates the total expenditure of the
economy.

153

1.3. The macroeconomics equilibrium in

the short-run based on the AE model

 450 curve: combine points at which total

income equates total expenditure.
 AE (APE) curve: shows aggregate planned
expenditure at given income level.

154

Figure 1: The macroeconomics equilibrium in

the short-run based on the AE model
A: equilibrium point of the economy

AE

B
UI >0
AE
A
C
F
BY1: Tổng thu nhập
CY1: Tổng chi tiêu
UI <0 At Y1: BY1>CY1 => lượng hàng hoá sản xuất nhiều hơn thu nhập (surplus)
=> Unplanned Inventory > 0
E

450
Y
Y2 Y0 Y1 155

EY2: Tổng thu nhập

FY2: Tổng chi tiêu Tại Y0: tổng sản lượng tạo ra bằng tổng mức chi tiêu => nền kinh tế cân bằng
At Y2: EY2<FY2 => shortage
=> UI < 0

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1.3. The macroeconomics equilibrium in

the short-run based on the AE model
 At Y1: AE < Y, UI > 0 -> Y
 At Y2: AE > Y, UI < 0 -> Y

156

1.3. The macroeconomics equilibrium in

the short-run based on the AE model

 Planned Inventory (PI): goods that firms

actively preserve to guarantee for their more
effective business.
Ex: alternative accessories, products for
unexpected demands.
 Unplanned Inventory (UI): goods produced
but not sold out.

157

2. THE EQUILIBRIUM OUTPUT IN THE

SIMPLE ECONOMY
 A simple economy includes:

Households Firms

AE = C + I
158

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2.1. Consumption - C

 C is the total expenditure for final goods and

services of households.
 Some factors affect C:
o Current disposable income
o Wealth (including stocks, bonds…)
o Estimated income in future
o Social factors (psychology, living
customs…)

159

2.1. Consumption - C

C = 𝑪 + MPC.YD

 YD: disposable income

 𝐶 : consumption volume does not depend on
income (minimum consumption or
autonomous consumption)
 MPC: marginal propensity to consume
(0<MPC<1) khuynh hướng tiêu dùng cận biên

160

2.1. Consumption - C

∆𝑪
MPC =
∆𝒀𝑫

 Meaning: If there is an extra increase in

disposable income, how much consumption
tends to increase.
 Eg: If MPC = 0.8 and income rises $100, C
rises ?

161

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2.1. Consumption - C S: saving

 YD = 0: C+S=0
𝐶+S=0
<=> S = - 𝑪 = 𝑺 (4.1)
 YD : ∆𝑌𝐷 = ∆𝐶 + ∆𝑆
∆𝐶 ∆𝑆
<=> 1 = +
∆𝑌𝐷 ∆𝑌𝐷

<=> 1 = MPC + MPS (4.2)

162

Saving - S

S = YD – C
<=> S = 𝑌𝐷 - (𝐶 + MPC.YD)
<=> S = - 𝐶 + 1 − 𝑀𝑃𝐶 𝑌𝐷
<=> S = 𝑺 + 𝑴𝑷𝑺. 𝒀𝑫 (4.3)
 MPS: marginal propensity to save
(0<MPS<1)

∆𝑺
MPS = ∆𝒀
𝑫
163

2.2. Investment - I

 The spending on capital equipment,

inventories, and structures, including new
housing.
 Some factors affect I:
o Demands for goods created by new
investment: D -> I
o Investment costs: i => I costs for borrowing money tăng =>
o Investors’ expectation
 Investment Function: I = 𝐼

164

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2.3. The equilibrium output in the

simple economy
Yd=Y-T (but in this case there is no tax because the G isn’t involved)

 AE = C + I = 𝐶 + 𝐼 + 𝑀𝑃𝐶. 𝑌 (Y = YD)
 AE = Y  𝐶 + 𝐼 + 𝑀𝑃𝐶. 𝑌 = Y

𝑪+𝑰
Y= 𝟏 −𝑴𝑷𝑪
o 𝐶 + 𝐼 : autonomous expenditure of the
economy
1
o m= 1 −𝑀𝑃𝐶: expenditure multiplier of the
economy (m>1) Số nhân chi tiêu của nền kinh tế
165

2.3. The equilibrium output in the

simple economy

 Expenditure multiplier reflects changes in

yield when autonomous expenditure
chi tiêu tự định
changes in 1 unit.

166

3. THE EQUILIBRIUM OUTPUT IN A

CLOSED ECONOMY WITH GOVERNMENT
 A closed economy with government includes:

AE = C + I + G
167

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3.1. The role of Government

 G=𝐺
 T = Tx – Tr
o T: net taxes
o Tx: taxes collected from households & firms
o Tr: transfer payment

168

3.1. The role of Government

 Case 1: T = 𝑇
C = 𝐶 + MPC (Y - 𝑇) (YD = Y - 𝑇)
AE = C + I + G
= 𝐶 + 𝐼 + 𝐺 + MPC (Y - 𝑇)
 Case 2: T = t. Y
C = 𝐶 + MPC.(1-t)Y (YD = Y - tY)
AE = C + I + G
= 𝐶 + 𝐼 + 𝐺 + MPC (1-t)Y

169

3.2. The equilibrium output in a

closed economy with government
 Case 1: T = 𝑇
AE = Y  𝟏 −𝑴𝑷𝑪
Y = 𝟏−𝑴𝑷𝑪 𝒙 (𝑪 + 𝑰+ 𝑮) + 𝟏−𝑴𝑷𝑪
x𝑻

o 𝐶 + 𝐼 + 𝐺 : autonomous expenditure of the

economy
1
o m= : expenditure multiplier (m>1)
1 −𝑀𝑃𝐶
−𝑀𝑃𝐶
o m’ = 1 −𝑀𝑃𝐶 : tax multiplier

170

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3.2. The equilibrium output in a

closed economy with government
 Case 2: T = t. Y
AE = Y  𝑪+ 𝑰+𝑮
Y = 𝟏−𝑴𝑷𝑪(𝟏−𝒕)

o 𝐶 + 𝐼 + 𝐺 : autonomous expenditure of the

economy
1
o m= : expenditure multiplier
1 −𝑀𝑃𝐶(1−𝑡)

171

4. THE EQUILIBRIUM OUTPUT IN AN

OPEN ECONOMY
 An open economy includes:

172

4.1. International trade

 Export: X = 𝑋 không phụ thuộc vào tiêu dùng trong nước

 Import: phụ thuộc vào tổng thu nhập Y
o Some factors affect imports: yield and
income of importing countries.
o Import Function: M = MPM.Y
∆𝑴
MPM = ∆𝒀 (reflects changes in imports
when income increases 1 unit)

 Net export (NX): NX = X – M = 𝑋 − 𝑀𝑃𝑀. 𝑌

173

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4.2. The equilibrium output in an

open economy
 Case 1: T = 𝑇
AE = Y

𝟏 −𝑴𝑷𝑪
𝒙(𝑪 + 𝑰 + 𝑮 + 𝑿)+ 𝒙𝑻
𝟏−𝑴𝑷𝑪+𝑴𝑷𝑴 𝟏−𝑴𝑷𝑪=𝑴𝑷𝑴
+
o 𝐶 + 𝐼 + 𝐺+ 𝑋 : autonomous expenditure of the
economy
1
o m= : expenditure multiplier
1 −𝑀𝑃𝐶+𝑀𝑃𝑀
−𝑀𝑃𝐶
o m’= : tax multiplier
1−𝑀𝑃𝐶+𝑀𝑃𝑀

174

4.2. The equilibrium output in an

open economy
 Case 2: T = t. Y
AE = Y  𝑪+𝑰+ 𝑮+𝑿
Y=
𝟏−𝑴𝑷𝑪 𝟏−𝒕 +𝑴𝑷𝑴

1
o m= 1 −𝑀𝑃𝐶(1−𝑡)+𝑀𝑃𝑀
: expenditure multiplier

175

Figure 2: The short-run equilibrium based on

expenditure approach

AE
450

AE = C+I+G+X
A

450
Y
Y0 176

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5. FISCAL POLICY

 Fiscal policy refers to the government’s

choices regarding the overall level of
government purchases or taxes.
 Aim to:
o Economic growth
o Price stabilization
o More job creation

177

5. HOW FISCAL POLICY INFLUENCES

AGGREGATE DEMAND

FISCAL POLICY

EXPANSIONARY CONTRACTIONARY
chính sách tài khoá mở rộng chính sách tài khoá thắt chặt
178

5.1. Expansionary fiscal policy

 Expansionary fiscal policy relates to the

increase in government purchases or decrease
in taxes or the combination of both.
 Application: during the depression
increase buying GandS => increase expenditure

delta Y=m.delta AE

179

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5.1. Expansionary fiscal policy

 Mechanism:
G -> AE -> Y
T -> YD -> C -> AE -> Y

With ΔG: ΔY = m x ΔG

180

Figure 3: Mechanism of expansionary fiscal

policy

AE
450

AE1
B

AE0

A
ΔG

ΔY
450
Y
Y0 Y1 181

5.2. Contractionary fiscal policy

 Contractionary fiscal policy relates to the

decrease in government purchases or increase
in taxes or the combination of both.
 Application: when the economy gets hot
growth rate. =>high inflation rate

182

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Figure 4: Mechanism of contractionary fiscal

policy

AE
450

AE0
A

AE1

ΔG B

ΔY
450
Y
Y1 Y0 183

5.2. Contractionary fiscal policy

 The influence of the change G and T leads to a

change in the output larger than the change in
G and T, called multiplier effect.
o Each dollar spent by the government can
raise the aggregate expenditure for goods
and services by more than a dollar.
underdog

184

EXERCISE

1. In a closed economy without Government:

C = 300 + 0.8(Y-T)
I = 200
a. Find expenditure multiplier and the equilibrium
output.
b. If investment increases extra 100, how does
the equilibrium output change?
a. Without G => T=0
m=1/(1-MPC)=5
The equilibrium output: Y=(C+I)m=2500

b. delta Y=m.delta I = 5.100 = 500 185

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 4/9/2020

EXERCISE

2. An open economy has:

C = 100 MPC = 0,8 I = 500 X = 300
MPM = 0,2 C G = 400 T = 100

a. Function of C, AE, Ye = ?
b. If ΔG = 100, ΔT= 200 , Ye’ = ?

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EXERCISE

3. In an open economy:
C= 10 MPC = 0,8 I = 5 X = 5 MPM = 0,14
G = 40 t = 20%.
C=10+0.8(1-0.2)Y
a. Function of C & AE? AE=10+5+40+5+0.8(1-0.2)Y-0.14Y
b. Autonomous expenditure of the economy? C+I+G+X
c. Ye = ? AE=Y

d. If ΔG = 20, ΔI = 5. Then Ye= ? delta Y = m*(delta G+delta I)

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