group assignment the relationship between gdp growth and inflation rate

The reason why GDP and inflation varies...2The relationship between inflation rate and GDP...7Policy of the two countries to control inflation...8Current inflation situation in Vietnam..

GROUP ASSIGNMENT: THE RELATIONSHIP BETWEEN GDP GROWTH AND

INFLATION RATE

Group name: Pon’k 4 phương

Student name:

Đỗ Đăng Khoa - SS170693

Tạ Thị Bích Diễm – SS171321 Nguyễn Trương Quỳnh Như – SS170772 Phạm Thị An Thư – SS171196 Nguyễn Hưng Tịnh Nhi – SS171151 Nguyễn Thị Bích Ngọc – SS160863

Unit name: ECO121 – IB1711 - Group 1

Lecturer name: Tạ Thị Thắm – thamtt@fe.edu.vn

Due date: 4 August 2022th

The reason why GDP and inflation varies 2

1 Definition of GDP 2

1.1 Nominal GDP 2

1.2 Real GDP 2

1.3 Nominal GDP versus real GDP 2

2 Definition of inflation 3

GDP and inflation for the two periods 2001-2010 and 2011-2020 of the United States and Vietnam 4

1 Period 2001-2010 4

1.1 Viet Nam 4

1.2 United States 5

1.3 Comparison 6

2 Period 2011-2020 6

2.1 Viet Nam 6

2.2 United States 7

2.3 Comparison 7

The relationship between inflation rate and GDP 7

Policy of the two countries to control inflation 8

1 US policy 8

2 Vietnam policy 8

2.1 Period 2001-2006 8

2.2 Period 2010-1017 9

2.3 Period 2018-2020 9

2.4 Period 2020-2022 9

Current inflation situation in Vietnam 10

Inflation outlook in the coming time 10

Conclusion 11

References 12

Appendix 13

Viet Nam and The United States GDP growth and inflation rate 13

In economic development, the biggest challenge as well as difficulty, is the harmonious combination of economic growth and inflation control Therefore, one of the important goals of economic managers and executives in any country in the world is to create a stable macroeconomic environment with high and sustainable economic growth along with low inflation For decades, researchers have used various econometric models in countries around the world to study the relationship between inflation and growth in the short run or in the long run In fact, depending on the situation of each country, the relationship between inflation and growth can be either positive or negative

Through this report, we will provide you with the most basic definitions and the relationship between GDP and inflation through the same period data for Vietnam and the US The policies of the two countries

in each period of inflation growth in the two countries, as well as the inflation trend in Vietnam in the near and far future

The reason why GDP and inflation varies

1 Definition of GDP

Gross domestic product (GDP) is the market value of all final goods and services produced within a

country in a given period Goods must be priced according to the market price of that country so all goods must be measured in the same unit to calculate GDP (Example: VND in Vietnam) Things that do not have market value are excluded from GDP such as do-it-yourself household chores, e.g We can only calculate GDP when the goods are produced in the economy and must be legal by state laws GDP includes only final goods - They already include the value of intermediate goods Tangible goods (like DVDs, laptops ) and intangible services (Like dry cleaning, phone service ) will also be included in GDP And GDP does not count products produced in the past, products produced must be within a country's borders to be included

in GDP

In Vietnam, the authorities publish annual GDP estimates for all financial sectors and supplement them for the calendar year Vietnam's GDP is calculated according to the income method, which is calculated and announced every 5 years when collecting information to prepare an inter-sectoral balance sheet for the entire economy 4 factors involved in calculating GDP according to the method used by Vietnam include government consumption, private consumption, accumulation, and export minus import

Y (GDP) = C + I + G + NX That's an overview of GDP but it doesn't simply stop there, it's just the starting point From GDP we can know where part of the decisions behind a country come from And GDP is also divided into nominal and real GDP and we will also learn about Nominal GDP versus real GDP below

1.1 Nominal GDP

Nominal GDP is a measure of economic output that includes modern-day fees in its calculation In other words, it does not take into account inflation or the rate at which fees are growing, both of which may inflate the amount of the increase All items and services included in nominal GDP are worth the fees charged for them in that year Nominal GDP is measured in both local foreign currency and US dollars at foreign currency market change quotes to examine nations' GDPs in straightforward economic terms When analysing separate quarters of output in the same year, nominal GDP is utilised Actual GDP is used to evaluate the GDP of or additional years This is because in absence of the influence of inflation allows the contrast of different years to be the total volume

1.2 Real GDP

When analysing separate quarters of output in the same year, nominal GDP is utilised Actual GDP is used to evaluate the GDP of or additional years This is because, in fact, the absence of the influence of inflation allows the contrast of different years to be totally aware of volume

Real GDP is a macroeconomic statistic that accounts for inflation and estimates the worth of goods and services produced by an economy over a certain time period In general, it measures economic output growth after compensating for price fluctuations Governments use both nominal and real GDP as metrics for analysing economic growth and buying power over time This was calculated using the GDP price deflator (also known as the implicit price deflator) It forecasts price changes for all goods and services produced in a specific region

Real GDP= Nominal GDP÷GDP deflator 1.3 Nominal GDP versus real GDP

GDP is one of the most important measures for evaluating an economy's economic activity, stability, and product and service expansion; it is typically analysed from two perspectives: nominal and real The nominal GDP, often known as current dollar GDP, is a macroeconomic measure of the value of goods and services at current prices Real GDP includes adjustments for inflationary increases This means that when inflation is strong, real GDP falls below nominal GDP, and vice versa Positive inflation raises nominal GDP considerably without adjusting for real GDP Economists utilise the BEA's real GDP headline statistics for macroeconomic study and central bank planning The inclusion of inflation is the basic difference between nominal and real GDP No inflation adjustments are required since nominal GDP is estimated using current

prices This makes calculating and analysing comparisons from quarter to quarter and year to year more easier, albeit less useful

As a result, real GDP outperforms nominal GDP as a measure of long-term economic performance To show GDP on a per-quantity basis, real GDP is derived using a GDP price deflator If we didn't have real GDP in the economy, it would be impossible to know if the output is truly expanding or if it's just a result of increased per-unit pricing

Inflation is defined as a difference between nominal and real GDP, and deflation is defined as a difference between the two To put it another way, inflation occurs when the nominal value surpasses the actual value, and deflation occurs when the real value exceeds the nominal value

2 Definition of inflation

Inflation is the gradual loss of a currency's purchasing power The increase within the average price level

of a basket of selected goods and services in an economy over time can be used to produce a quantitative approximation of the rate at which purchasing energy falls A rise within the typical level of charges, generally expressed as a percentage, indicates that a unit of money now buys significantly less than it did previously Deflation, on the other hand, occurs when the purchasing power of money rises while prices decline

Inflation is a term used to explain the overall effect of rate changes over a wide range of goods and services, and it provides a single cost depiction of the upward impetus within the rate stage of goods and services in a financial system over time Prices rise as a currency loses value, and it may purchase fewer goods and services This decrease in purchasing power has an impact on the overall cost of living for the general public, resulting in a slowdown in economic growth Chronic inflation happens when a country's cash distribution grows faster than its financial growth, according to economists

To combat this, a country's economic authority, which includes the central bank, takes the necessary actions to change the flow of cash and credit in order to keep inflation within acceptable bounds and the economy running smoothly It is not uncommon for monetary speculation to explain the relationship between inflation and an economic system's cash delivery Following the Spanish conquest of the Aztec and Inca empires, large sums of gold and metal, primarily silver, came into the Spanish and various European economies The cost of cash has decreased since cash delivery has multiplied rapidly, resulting

in rapidly rising prices

The link between inflation and economic output (GDP) is essentially identical, with almost no difference GDP is a percentage-based indicator that reflects the overall price level of all products and services produced in the country Inflation is defined as an economy's general progressive increase in the prices of goods and services

Inflation and GDP have a pretty balanced connection It doesn't take much to upset that equilibrium The widespread consensus is that a little inflation is beneficial Annual GDP growth is crucial for stock market participants Businesses can only raise profits if economic output increases, which is the main driver of stock performance However, excessive GDP growth is risky because it is accompanied by growing inflation When inflation exceeds interest rates, real returns are negative People spend more money when inflation grows because they know it will become worthless in the future In the short term, this leads to more GDP growth, which leads to more price hikes If this continues for an extended period of time, it will result in savings This devaluation means that the value of money in the future will be lower than it is today

As a result, stock market gains are eroded due to decreasing profitability and currency purchasing power

If inflation is not soon brought under control, it will escalate to hyperinflation (poor GDP growth + double-digit inflation), at which time it will become a self-reinforcing feedback loop In addition, the effect of inflation

is not linear The impact of 10% inflation is not just double that of 5% inflation, but it is also significantly larger

GDP and inflation for the two periods 2001-2010 and 2011-2020 of the United States and

Vietnam

GDP growth (%) Inflation rate (%) GDP growth (%) Inflation rate (%)

1 Period 2001-2010

1.1 Viet Nam

Our nation has exited the category of poor nations and into the group of developing nations with medium income thanks to consistent economic growth at a respectable rate The financial and monetary crisis that hit the area in 1997 and in recent years continued to have a severe effect on our nation's economy as the ten-year socioeconomic development strategy 2001–2010 was put into action

The worldwide economic recession that began in 2008 and the ensuing financial crisis had a significant impact on the Strategy's execution But in the ten years from 2001 to 2010, our nation's economy consistently experienced a respectable growth rate (in 2001, it increased by 6.89%; in 2002, it did so by 7.08%; in 2003, it did so by 7.34%); in 2004, it did so by 7.79%; in 2005, it did so by 8.44%; in 2006, it did

so by 8.23%; in 2007 it did so by 8.46%; in 2008, it did so by 6.31%; and in 2009 The 5-year socio-economic development plan 2001-2005 increased by 7.51%/year, and the 5-year socio-socio-economic development plan 2006-2010 increased 7.01%/year According to calculations, the average gross domestic product increased by 7.26% every nine years in the ten years from 2001 to 2010

The economy has grown greatly in comparison to the years 1991 to 2000, both in absolute terms of 1% and in terms of average annual growth rate, which is still 7.26%, or around 7.56% per year of the Strategy for Socio-Economic Stability and Development 1991–2000 Vietnam has had such rapid growth over the past 10 years that, when compared to other nations in the area, it is only second to China and India and much superior than Korea, Thailand, Singapore, Indonesia, Malaysia, and the Philippines

Inflation: Stable at the low in the period from 2001 to 2003, increased again in 2004 at the rate of 9.5% -much higher than the target of 6% set by the Government due to the currency/credit correlation and inflation: As currency/credit increases, inflation also increases

Our country's inflation rate, as mentioned above, is also significantly higher than that of other countries in the region And the contemporary inflationary situation has many causes Rising global market prices and other adverse international conditions clearly have an impact on our country's prices and inflation However, persistently high inflation and a large disparity in inflation between our country and the rest of the region, including countries with more open economies, demonstrate that the internal causes remain the same

The growth model and how we use it to achieve the growth goal are the deepest, most comprehensive, and fundamental causes of the current state of inflation So far, our growth has been primarily based on increased investment, but investment in general, state investment in particular, has been inefficient Total social investment has consistently been at a high level of 40-42 percent of GDP for many years; return on investment capital (ICOR) is high and tends to rise Between 2006 and 2010, the public sector's coefficient was 10.2, the foreign-invested sector's was 9.7, and the domestic private sector's was 5 (1)

In the preceding period, capital accounted for approximately 65 percent of growth; other factors such as technological innovation, knowledge and skills, organisational and management methods, and so on did not make a significant contribution As a result, the price or cost to pay for a growth unit is very high and continues to rise Although the model and method of growth have lost their prestige, we continue to rely on them to achieve our growth objectives In the short term, the main way to achieve growth is to increase investment As a result, credit expansion, total payment means, increasing fiscal deficit, increasing balance

of payments deficit All of these are intrinsic causes of inflation In recent years has always been at a high level and much higher than that of other countries

1.2 United States

The US economy is the world's largest economy with powerful industry, modern agriculture, and is the world's commercial and financial centre Real GDP grew by 3.9% over the four quarters of 2004 This growth was driven by revenues in consumer spending, business fixed investment, housing investment and government spending Net exports remained steady for the four quarters of 2004 In 2005 US GDP was estimated at $12.36 trillion, per capita GDP was $41,800 Statistics show that US GDP grew 3.2% in the last quarter of 2010, after growing 2.6% in the previous quarter However, this growth rate is still lower than analysts' previous expectations Most experts expect the US economy to grow by 3.5% in the fourth quarter

of 2010

The US economy went through a crisis in 2001 because the Fed's continuous increase in interest rates from 1% to 5.25% put mortgage buyers at risk of defaulting on their debt, even having to sell their home (or

be forced to sell their home) foreclosure); House construction companies also reduce construction because they can't be sold when finished, making the housing market, mortgage credit under preparation for a crisis, having a strong impact on the financial market, the stock market does not only of the US but of most countries in the world along with an unprecedented slow recovery in employment as employment did not return to February 2001 levels until January 2005 raised the risk of inflation

In 2008, the inflation rate reached 3.84% - the highest ever as the financial crisis of 2007-2009 sent the

US into the worst recession since the Great Depression Under the leadership of Presidents Bush (2001-2009) and Obama (2009-2017), financial relief programs and economic growth stimulus packages named Keynesian were applied through large expenditures from the government budget at the same time the Federal Reserve maintains a policy of loans with almost zero interest rates The above measures have restored the economy as households have almost fully paid off their debts in the period 2009-2012 The last recession of the US economy fell in 2001 and the growth period has also lasted for 5-6 years

To combat the recession and stimulate economic growth after the 2001 recession, the US Federal Reserve (FED) has 11 consecutive cuts of interest rates from 6.75% to 1% It is the interest rate after being cut to such a very low level that makes American consumers comfortable to borrow money to consume and buy mortgaged houses; banks were comfortable lending to invest in building houses for sale and lending to buy subprime houses When the economy recovered and the risk of inflation appeared, the Fed continuously raised interest rates from 1% to 5.25% When interest rates go up, homebuyers run the risk of defaulting on their debt, or even having to sell their home (or have it foreclosed on); House construction companies also reduce construction because they can't be sold when finished, making the housing market, mortgage credit under preparation for a crisis, having a strong impact on the financial market, the stock market does not only in the United States, but in most countries in the world

The US financial crisis 2007-2009 was a crisis in many financial sectors (credit, insurance, securities) that took place from 2007 to 2009 This crisis originated from the home credit crisis secondary, and in itself the direct source of the 2007-2008 global financial crisis In August 2007, a number of US credit institutions such as New Century Financial Corporation had to file for bankruptcy Others fell into the state of their

stocks falling sharply, like Countrywide Financial Corporation Many depositors at these credit institutions were afraid and came to withdraw their money, causing a sudden surge in deposit withdrawals that made it even more difficult for those institutions The risk of credit scarcity is formed The real financial crisis officially broke out The bursting of the housing bubble caused many home investment bank borrowers to default, leading to foreclosure But falling house prices make foreclosures unable to cover bank loans, putting banks in trouble

1.3 Comparison

Vietnam The economy continued to grow at a relatively good rate, helping to bring the country out of

underdeveloped status and into the group of middle-income developing countries Specifically, Vietnam has set out to implement a strong strategy to help the economy go up, which is shown year by year with an increased growth rate On average, every 9 years from 2001 to 2010 the gross domestic product increased

by 7.26%, of which the socio-economic development plan period for 2006-2010 was an increase of 7.01%

America The GDP of the US economy belongs to the group of developed countries and accounts for a

proportion of the total GDP of the world However, during this period, the US GDP fell to 23.79% from 2001-2008

Inflation rate in Vietnam fluctuated strongly while in the US it was almost stable at less than 5% during this period However, the common point of both here is that both reached the highest level of inflation in

2008 and both reduced inflation at the end of 2009 due to strong impacts from the global financial crisis in the period 2007-2009 Besides, we can see that the inflation rate in the US is always stable and lower than

in Vietnam

2 Period 2011-2020

2.1 Viet Nam

The world and the region are in a more challenging state than anticipated as the 10-year socioeconomic development strategy for 2011-2020 gets started The global economy recovered more slowly, the public debt problem in many nations worsened, the dangers in the international financial and monetary markets rose, and trade protectionism has escalated in many nations recently The global Covid-19 outbreak had a major negative influence on the international economy in the final year of the Strategy era, which was unparalleled in many decades The repercussions persisted for many years

Domestically, the economy faced several hazards in the early years of the Strategy period, including high inflation, a quick rise in public debt, a high rate of bad debt, climate change, natural catastrophes, and diseases The Covid-19 epidemic has badly damaged most businesses and fields, particularly in 2020, and has halted economic and social activity The rate of economic growth is kept at a respectably high level GDP growth rates ranged from 5.9% per year on average between 2011 and 2015 to 6.8% per year between 2016 and 2019 before declining in 2020 as a result of the Covid-19 outbreak The growth rate is projected to be over 2%, with an average annual growth rate of roughly 5.9% from 2016 to 2020 From 116 billion USD in 2010 to 268.4 billion USD in 2020, the GDP scale expanded by 2.4 times From 1,331 USD in

2010 to nearly 2,750 USD in 2020, the GDP per person grew

Inflation increased sharply in the 2010-2011 period (11.75%-18.13%) foreign inflation

In the period 2011-2015, thanks to the synchronous application of tight fiscal and monetary policies, while promoting production, increasing exports and controlling trade deficit, inflation tends to decrease and hit a record low of 0.63% in 2015 In the period from 2016 to 2020, Vietnam's inflation rate has always been kept stable at 4%

Vietnam's inflation rate has fluctuated dramatically between 2010 and 2020, rising from double digits in

2011 to single digits in 2016 and remaining stable at 4% in 2020

Inflation tended to fall between 2011 and 2015 as a result of the synchronised application of tight fiscal and monetary policies aimed at promoting production, increasing exports, and controlling the trade deficit

In 2015, it reached a record low of 0.63 percent

In the period from 2016 to 2020, Vietnam's inflation rate remained constant at 4%

The State Bank of Vietnam actively and flexibly operated monetary policy instruments from 2011 to 2015 Close coordination with fiscal policy has played an important role in controlling and reducing inflation from a high of 23% in August 2011 to 6.81% in 2012, 6.04% in 2013, 1.84% in 2014, and 0.6% year on year 2.2 United States

Annual GDP growth in the first quarter of 2016 in the US increased by only 0.8% - the lowest quarterly increase since the first quarter of 2014 (up 0.9%) and much lower than the increase of 1.4 % in the fourth quarter of 2015 as well as the forecast of 0.7% increase by experts Most US industries and sectors recorded weak growth, except for the only bright spot that was the housing market

The GDP of the United States in 2020 is $20,936.60 billion according to the latest figures from the World Bank Accordingly, the US GDP growth rate is -3.49% in 2020, down 5.65 points from the 2.16% increase in

2019 US GDP in 2021 is expected to be 20,517.87 billion USD if the economy is The United States still maintains the same GDP growth rate as last year

Inflation: Gradually decreased from 3.16% to 0.12% in the period 2011-2015 For the whole year of

2014, the core inflation index of the US economy only increased by 1.6% In 2015, the inflation rate dropped to a record of 0.12% due to a number of factors negatively affecting economic stability such as the complicated and unpredictable fluctuations of the international monetary and financial markets, Fed began

to tighten through raising the basic interest rate, which made the euro depreciate against the dollar and pushed the euro exchange rate down to 1.05 USD/euro at one point more especially is the deep decrease

in oil and raw material prices On the other hand, falling oil prices have also increased household purchasing power and slowed inflation in some countries, particularly in Europe and the US In the

2016-2020 period, the inflation rate will remain stable below 3%

The US economy grew at a rate of 3.2% in the last quarter of last year, according to a Commerce Department report released on January 28 For the whole year 2010, GDP of the world's No 1 economy According to the US Department of Commerce, the factor that created the strong growth momentum of GDP in the fourth quarter of 2010 was due to the growth in consumer spending and exports Household spending, which accounts for 70 percent of the economy, grew by 4.4 percent year-on-year in 2009, the highest growth rate since the first quarter of 2006 If the economy doesn't grow faster, the unemployment rate won't fall fast enough to create jobs for millions of Americans, experts warn More than 8 million Americans lost their jobs during the recession that lasted from late 2007 to mid-2009

2.3 Comparison

Vietnam According to the General Statistics Office, GDP in the first nine months of 2020 was estimated

to increase by 2.12% over the same period last year, which is the lowest increase in the period 2011-2020 GDP scale increased 2.4 times, from 116 billion USD in 2010 to 268.4 billion USD in 2020 GDP per capita increased from 1,331 USD in 2010 to about 2,750 USD in 2020 Economic growth gradually depends on resource exploitation, credit expansion step by step based on the application of science, technology and innovation

American The US GDP from 2011-2018 increased in phases, but in 2019-2020, the crisis caused by

the covid epidemic caused difficulties for the US economy and was recorded as the sharpest decline since the crisis 2007-2009

Inflation: Both have the same trend: decrease in the first half of the period then increase slightly and remain stable Moreover, the ratio gap between the two countries is also gradually narrowing

The relationship between inflation rate and GDP

The relationship between inflation and economic output (GDP) has a very large impact on each other Annual GDP growth is critical for stock market participants Most businesses will be unable to grow earnings if general economic activity declines or remains stable However, excessive GDP growth is risky since it will almost certainly be accompanied by an increase in inflation, which would erase stock market gains by making our money less valuable Most economists currently think that 2.5 to 3.5 percent GDP growth per year is the maximum that our economy can sustain without creating negative consequences And many people would think the overall growth rate should be increased to reduce unemployment, but unfortunately, this relationship begins to break down when employment is very low, or near full employment

Extremely low unemployment has been shown to cost more than it is worth because an economy operating

at near full employment will do two things:

Aggregate demand for goods and services will increase faster than supply, causing prices to rise As a result of the tight labour market, businesses will have to hike salaries As the corporation seeks to maximise profits, this increase is frequently passed on to consumers in the form of higher pricing

GDP growth creates inflation over time If inflation is not controlled, it has the potential to become hyperinflation This is because, in an inflationary environment, people will spend more money because they expect it to be less valuable in the future This promotes further short-term rises in GDP, resulting in further price increases

Most advanced economies have learnt these lessons via experience In the United States, it only takes around 30 years to find a prolonged period of high inflation, which was only fixed by going through a painful period of high unemployment and lost productivity as potential capacity lay idle

Policy of the two countries to control inflation

1 US policy

Inflation is no longer a strange issue in recent years, especially in 2021, the impact of the Covid-19 pandemic has caused complicated developments in domestic and international market prices As CNET points out, high inflation means the dollar has less purchasing power, making everything American consumers buy more expensive

In June 2021, US inflation increased by the most in 13 years when the economic recovery process after the Covid-19 pandemic and consumer demand increased, the cost of transportation or goods services increased rapidly Gasoline prices also hit a recorded average of $4.31 a gallon last month, with grocery prices also following, posting their highest increase since April 2020

According to the Wall Street Journal, the US Department of Labour announced that the consumer price index in the US in June 2021 increased by 0.9% over the previous month, the strongest increase in a month and increased by 5.4% over the same period last year, the highest level in about 13 years The core consumer price index, which excludes food and energy prices, increased 4.5% year-on-year

Federal Reserve Chairman Jerome Powell said: “Inflation is too high and the key move to combat it is to raise interest rates on credit cards, mortgages, and other loans One of the main tenets of the Fed is to promote price stability and keep inflation at 2%

To combat soaring inflation, the Fed raised the federal funds rate by 0.5%, helping to slow the economy

as it became more expensive to lend As a result, consumers, investors and businesses pause to invest, leading to reduced economic demand and an impact on prices Therefore, supply and demand are balanced

Policy reforms that reduce housing, labour, trade, food and energy prices could reduce the record inflation currently affecting American homes and businesses without artificially distorting markets

2 Vietnam policy

2.1 Period 2001-2006

The CPI growth rate in the period 2001-2006 according to the data of the Statistics Office (GSO) ranged from 0.8% to 6.6% in 2006

According to the data report of the General Statistics Office (GSO), the average growth rate CPI (terminal CPI) in the period 2006-2010 was at 11.48%, and reached 18.13% by the end of December 2011, much higher than the increase in CPI of other countries years for the period 2001-2010 (if 2008 is excluded)

It can be seen that in the period 2005-2010, the growth rate of money supply (M2) and credit balance continuously maintained at a high level, averaging over 30%/year, accompanied by the growth rate of the index CPI in this period

The Government, through broadcasting messages on fiscal and monetary policy, keeps inflation low and stable for at least 6-7 months since inflation shows signs of decreasing to control inflation in the period (2001-2011)