Đoàn Hồng Phát, MBA

[email protected]
 1
CHAPTER
INTRODUCTION

Phat Doan - Foreign Trade University

[email protected]
1. The Birth of Macroeconomics

Economics

Microeconomics
Microeconomics Macroeconomics
Macroeconomics

Scarcity
3
2. What is Macroeconomics?
2.1. Definition
• Macroeconomics is the study of economy-wide phenomena,
including inflation, unemployment and economic growth.

4
2.2. Its Study
• The whole economy

5
2.3. Contents for researching
• National yield
• Inflation
• Unemployment
• International transactions

6
3. Positive versus normative analysis
• Positive statements: are statements that attempt to describe the
world as it is.
oCalled descriptive analysis

7
3. Positive versus normative analysis
• Normative statement: are statements about how the world
should be.
oCalled prescriptive analysis

8
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

9
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

10
4. Macroeconomics vs Microeconomics

11
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

12
5. Macroeconomics System

Black
Box Outputs

(Paul. A. Samuelson)

13
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…

14
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…

15
6. Objectives and management tools
Effective

Fair GOALS Stable

Growth
16
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.
17
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.

18
 CHAPTER 2
MEASURING A NATION’S
INCOME
Phat Doan - Foreign Trade University
[email protected]
CONTENTS
1. Gross Domestic Product (GDP)
2. Consumer Price Index (CPI)

20
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

21
1. GROSS DOMESTIC PRODUCT (GDP)
• https://www.youtube.com/watch?v=hBqWRayc1kE

22
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.

23
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.

24
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

25
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.

26
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).

27
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.

28
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.

29
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.

30
Figure 1 The Circular-Flow Diagram

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

31
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
Nondurab
goods Services
le goods

33
 1.2. Measuring GDP
Expenditure Approach
• Investment (I):
∟Investment spending by businesses and households. Includes:
☞ 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.
☞ Inventory investment: The change in the value of all firms’
inventories.

34
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).

35
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

36
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?

37
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.

38
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.

39
EXERCISE
• In 2017, Vietnam had statistic data according to the territory as
following:
Gross Investment = 150 Consumption = 200
Net Investment = 50 Government purchase = 100
Wages = 230 Interests = 25
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. 40
 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

41
o I.I : Intermediate Inputs
 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.

• i: final item 1, 2.., n

• t: the year counting
• p: price of each item
• q: quantity of each item
43
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.

t = 0: base year

44
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

45
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.

46
 Vietnam’s GDPn and GDPr,
2010-2019
U n it: B illio n d o n g s

7000000 GDPn GDPr

6000000

5000000

4000000

3000000

2000000

1000000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Source: General Statistics Office of Vietnam, 2019)

47
Economic Growth rate in Vietnam from 2010-
2019
Economic Growth Rate in Vietnam, %
8
7.08 7.02
7 6.68 6.81
6.42 6.24 6.21
5.98
6
5.25 5.42
5

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Source: Globaleconomy.com)
49
 GDP Per Capita in the period
2010-2018
Unit: USD

2018 2566

2017 2365

2016 2192

2015 2085

2014 2030

2013 1886

2012 1735

2011 1525

2010 1317

0 500 1000 1500 2000 2500 3000

50
Singapore

Brunei

Malaysia

Thailand

Indonesia

Philippines

Laos

Vietnam

Cambodia

Myanma
51
Table 1 Real and Nominal GDP

52
Table 1: Real and Nominal GDP

53
Table 1 Real and Nominal GDP

54
 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

55
1.4. GNP Vs. GDP

A C

Vietnam Others
56
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.

57
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.
58
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

62
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

63
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

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Basket of G&S for CPI in Vietnam during the
period 2015-2020
Food & Beverage
Drink & tobaco 4% 3%
Texttile 6%
Housing 3%
Household applianes 36%
Medicine & health services 9%
Transport
Post & Telecommunication
Education 5%
Culture, entertainment &
travel 7%
Others 4%
16% 6%

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

66
Table 1 Calculating the Consumer Price Index and the Inflation Rate: An
Example

67
Table 1 Calculating the Consumer Price Index and the Inflation Rate: An
Example

68
Copyright©2004 South-
Table 1 Calculating the Consumer Price Index and the Inflation Rate: An
Example

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Table 1 Calculating the Consumer Price Index and the Inflation Rate: An
Example

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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.

74
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.

76
 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?

77
 4.1. Dollar Figures from Different Times

• Do the following to convert (inflate) Babe Ruth’s wages in 1931 to

dollars in 2001:

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Table 3 The Most Popular Movies of All Times, Inflation Adjusted

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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.

80
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.

81
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%

82
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.

83
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

84
 CHAPTER 3
AGGREGATE DEMAND AND
AGGREGATE SUPPLY

Phat Doan - Foreign Trade University

[email protected]
CONTENTS
1. Aggregate demand curve.
2. Aggregate supply curve.
3. The short – run equilibrium.
4. The long – run equilibrium.
5. Economics fluctuation.

86
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.

87
 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

88
Figure 1: The Aggregate-Demand Curve...

Pric
e
Leve
l

P2

1. A Aggregat
in the
decrease edeman
level . .
price d
.
0 Y Y2 Quantity
of Output
2. . . . increases the quantity
goods
of and services
demanded.
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1.1. Why AD Curve Slopes Downward

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.

90
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.

91
1.1.2. The Interest-Rate Effect (P and I)
• Suppose P falls
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.

92
 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.

93
 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.

94
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.

95
1.2. Shifts in the AD Curve
Pric
Leve
e
l

P1

D2
Aggregate
demand, D1

0 Y1 Y2 Quantity
of Outpu 96
1.2. Why AD Curve Might Shift
• Changes in C
oStock market boom/ crash
oTax hikes/cuts
• Changes in I
oFirms buy new factories, equipment.
oExpectations, optimism/pessimism. Monetary policy, interest
rates.

97
1.2. Why AD Curve Might Shift
• Changes in G
oState & local spending, e.g., roads, schools
• Changes in NX
oBooms/recessions in countries that buy our exports.
oDepreciation of CNY

98
 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.

99
 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.

100
Figure 2: The Long-Run Aggregate-Supply Curve

Price
Level

Long-run
aggregate
supply

P2
2. . . . does not affect
1. A the quantity of goods
in the
change and services supplied
level . .
price in the long
. run.
0 Natural rate Quantity of
of output Output

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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.

102
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*.

103
 2.1.2. Why the LRAS Curve Might Shift ?

• Any event that changes any of the determinants of Y* will shift

LRAS.

104
2.1.2. Why the LRAS Curve Might Shift ?
• Changes in L
o Immigration (VN)
o Baby boomers retire (Japan)

• Changes in K
o Investment in factories, equipment

• Changes in T
o The invention of computer helps increase the
productivity.
105
BABY BOOMERS RETIRE IN JAPAN
• Population: 126.645.723 persons (UN, 2019)
• Natural population increase: -411.581 persons
• Male: 61.832.149
• Female: 64.813.574
• Old population: 65%
• Highest rate of ages: 40-50 years old
• Decrease each year: 20.000 persons

106
BABY BOOMERS RETIRE IN JAPAN
• Be seriously lack of labors
• 60% firms closed due to no successor
⇒Policies Gov recommend:
o Give birth (award JPY 10millions/ the first child
o New married couple receives 600.000JPY
(5.700USD) for establishing new life (< 40 year old)
o Support kindergarten system freely
o Attract foreign labors
o Raise retiring age

108
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.

109
 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

110
 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)

111
 2.2. SHORT – RUN AGGREAGTE SUPPLY
CURVE (SRAS)
• The SRAS curve is upward sloping.
∟ P --> AS

112
Figure 3 The Short-Run Aggregate-Supply Curve

Pric
e
Leve
l

Short-
aggregat
run
e suppl
P y

P2
1. A 2. . . . reduces the
in the
decrease of goods and
quantity
level . . .
price supplied in the short
services
run.
0 Y2 Y Quantity
of Output
113
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2.2.1. Why the SRAS Slopes Upward?

114
 2.2.1.1. The Sticky-Wage Theory

• Nominal wages are sticky in the short run, they adjust

sluggishly.
oDue to labor contracts
• Firms and workers set the nominal wage in advanced based on
PE - the price level they expect to prevail.

115
 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.

116
2.2.1.3. The Sticky-Price Theory
• Many prices are sticky in the short run.
oDue to menu costs
oExamples: cost of printing new menus
• Firms set sticky prices in advance based on PE.

117
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

118
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.

oThese misperceptions induce suppliers to decrease the
quantity of goods and services supplied.

119
2.2.2. Why the SRAS Curve Might Shift
• Everything that shifts LRAS shifts SRAS, too (L, K, R & T)
• Also, PE shifts SRAS:
oIf PE rises, workers & firms set higher wages.
oAt any given actual P, production is less profitable, Y falls =>
SRAS shifts left.

120
 3. THE SHORT-RUN EQUILIBRIUM
Price
Level

Aggregate
suppl
y

Equilibriu
mprice
level

Aggregate
demand

0 Equilibriu Quantity of
m output Output
121
Copyright © 2004 South-
Figure 4: The Short-Run Equilibrium, CASE 1

Price
Level LRAS

AS

A
D

0 Quantity of
Y* Y
Output
122
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Figure 5: The Short-Run Equilibrium, CASE 2

Price
Level LRAS

AS

A
D

0 Quantity of
Y=
Output
Y* 123
Copyright © 2004 South-
Figure 6: The Short-Run Equilibrium, CASE 3

Price
Level LRAS

AS

A
D

0 Y Quantity of
Y*
Output
124
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 4. THE LONG – RUN EQUILIBRIUM
Price
Level
Long-run
aggregate
Short-run
suppl
aggregate
y
suppl
y

Equilibriu A
m price

Aggregate
demand
0 Natural rate Quantity of
of output Output
125
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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

126
5.1. The Effects of a Shift in AD
• Event: stock market crash
1. Affects C, AD curve.
2. C falls => AD shifts left.
3. SR eq’m at B. P and Y lower, unemployment higher.
4. Over time, PE falls, SRAS shifts right, until LR eq’m at C. Y and
unemployment back at initial levels.

127
Figure 7: A Contraction in Aggregate Demand

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

Pric
e
Leve
l 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
4. . . . and output returns of Output
to its natural rate.
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Copyright © 2004 South-
5.2. The Effects of a Shift in SRAS
• Event: oil prices rise (assume LRAS constant)
1. Increase costs, shifts SRAS.
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.

129
 Figure 8: An Adverse Shift in Aggregate Supply

1. An adverse shift in the short-

run aggregate-supply curve . . .
Pric
e
Leve
l LRAS

AS2
AS1

B
P2
A
P1
3. . . . and
the price
level to
rise. AD
0 Y2 Y* Quantity
of Output
2. . . . causes output to fall . . .
130
Copyright © 2004 South-
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.

131
 Figure 9: An Adverse Shift in Aggregate Supply

1. An adverse shift in the short-

run aggregate-supply curve . . .
Pric
e
Leve
l 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 Output
2. . . . causes output to fall . . .
132
Copyright © 2004 South-
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

133
Figure 10: Accommodating an Adverse Shift in Aggregate Supply

1. When short-run aggregate

supply
Pric falls . . .
e
Leve
l LRAS
AS2
AS1

P3 C 2. . . . policymakers can
P2 B accommodate the shift
A by expanding aggregate
3. . . . which P demand . . .
causes
price level
the
to rise 4. . . . but keeps output AD2
further . . at its natural rate.
. AD1
0 Y* Quantity
of Output
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Copyright © 2004 South-
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.
2. Florida orange groves suffer a prolonged
period of below-freezing temperatures.
3. Increased job opportunities overseas cause
many people to leave the country.

135
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.

136
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.

137
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.

138
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.

139
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.

140
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.

141
 CHAPTER 4
AGGREGATE DEMAND AND FISCAL POLICY

Phat Doan - Foreign Trade University

[email protected]
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.

143
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.

144
1. KEYNESIAN MODEL
P

A B
P1 AS

AD2

AD1
Y

145
 1.1. AGGREGATE EXPENDITURE

• Aggregate expenditure (AE) refers to aggregate planned expenditure

on consumption, Investment, public G&S and net export.

• AE curve shows the relationship between aggregate expenditure and

aggregate income of all members in the economy.

146
1.1. AGGREGATE EXPENDITURE
AE

AE

147
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.

148
What will decide the equilibrium
output in the short- run when the
economy still has unused resources?

149
1.2. The income – output identity

GDP ≡ National Income ≡ Y

150
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.

151
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.

152
Figure 1: The macroeconomics equilibrium
in the short-run based on the AE model

AE

UI >0
AE
A

UI <0

450
Y
Y2 Y0 Y1 153
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

154
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.

155
2. THE EQUILIBRIUM OUTPUT IN THE SIMPLE
ECONOMY
• A simple economy includes:

Households Firms

AE = C + I
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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…)

157
 2.1. Consumption - C

158
2.1. Consumption - C

• 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 ?

159
2.1. Consumption - C
•

160
Saving - S
•

161
2.2. Investment - I
•

162
2.3. The equilibrium output in the simple
economy
•

163
2.3. The equilibrium output in the simple
economy
• Expenditure multiplier reflects changes in yield
when autonomous expenditure changes in 1 unit.

164
 3. THE EQUILIBRIUM OUTPUT IN A
CLOSED ECONOMY WITH GOVERNMENT
• A closed economy with government includes:

AE = C + I + G
165
3.1. The role of Government
•

166
3.1. The role of Government
•

167
3.2. The equilibrium output in a
closed economy with government
•

168
3.2. The equilibrium output in a
closed economy with government
•

169
4. THE EQUILIBRIUM OUTPUT IN AN OPEN
ECONOMY
• An open economy includes:

170
4.1. International trade
•

171
4.2. The equilibrium output in an
open economy
•

172
4.2. The equilibrium output in an
open economy
•

173
Figure 2: The short-run equilibrium based on
expenditure approach

AE
450

AE = C+I+G+X
A

450
Y
Y0 174
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

175
5. HOW FISCAL POLICY INFLUENCES
AGGREGATE DEMAND

FISCAL POLICY

EXPANSIONARY CONTRACTIONARY

176
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

177
5.1. Expansionary fiscal policy
• Mechanism:
G -> AE -> Y
T -> YD -> C -> AE -> Y

ΔY = m x ΔG
With ΔG:

178
Figure 3: Mechanism of expansionary fiscal policy

AE
450

AE1
B

AE0

A
ΔG

ΔY
450
Y
Y0 Y1 179
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.

180
Figure 4: Mechanism of contractionary fiscal policy

AE
450

AE0
A

AE1

B
ΔG

ΔY
450
Y
Y1 Y0 181
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.

182
FISCAL POLICY TO FIGHT AGAINST COVID-19
IN VIETNAM
• Stimulate fiscal package through tax reduction, tax and rent
deferments, increase in public expenditure worth up to VND150.000
billions.
• Support the unemployed, the poor, the underdogs.
• Reduce the price of pork, don’t increase the price of basic services.
• EVN reduce the price of electricity worth of VND 11.000 billions.

183
FISCAL POLICY TO FIGHT AGAINST COVID-19
IN AUSTRIA
• Total fiscal package announced on March 15: 38 billion
euros (about 9% GDP).
• Financing includes:
o 4 billion euros for the healthcare system, short-time work,
and to compensate self-employed, family-and-micro-
business for the loss of earnings related to sickness.
o 9 billion euros in guarantees to companies, including
exporters and tourism industry.
o 10 billion euros for the deferral of personal and corporate
income taxes (for 2020), social security contribution (3
months) and VAT payments (until end-Sep 2020).
(IMF) 184
FISCAL POLICY TO FIGHT AGAINST COVID-19
IN AUSTRIA
• Under the General Civil Code, working hours may be reduced up to
10%, at 80 to 90% of regular pay.
• Employers will only pay hours worked, the rest will be paid from the
budget.
• From April 2, households may delay rent payments to landlords until
end-2020.
• Households & SMEs may delay their debt servicing by 3 months.
(IMF)

185
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?

186
EXERCISE
2. An open economy has:
= 100 MPC = 0,8 = 500 = 300
MPM = 0,2 = 400 = 100

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

187
EXERCISE
3. In an open economy:
= 10 MPC = 0,8 = 5 = 5 MPM = 0,14
= 40 t = 20%.
a. Function of C & AE?
b. Autonomous expenditure of the economy?
c. Ye = ?
d. If ΔG = 20, ΔI = 5. Then Ye= ?

188