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..

Phạm Thị An Thư – SS171196Nguyễn Hưng Tịnh Nhi – SS171151Nguyễn 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

The relationship between inflation rate and GDP 7

Policy of the two countries to control inflation 8

Current inflation situation in Vietnam 10

Inflation outlook in the coming time 10

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

Through this report, we will provide you with the most basic definitions and the relationship betweenGDP and inflation through the same period data for Vietnam and the US The policies of the two countriesin each period of inflation growth in the two countries, as well as the inflation trend in Vietnam in the nearand far future.

The reason why GDP and inflation varies1 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 goodsmust be measured in the same unit to calculate GDP (Example: VND in Vietnam) Things that do not havemarket value are excluded from GDP such as do-it-yourself household chores, e.g We can only calculateGDP when the goods are produced in the economy and must be legal by state laws GDP includes onlyfinal 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 notcount products produced in the past, products produced must be within a country's borders to be includedin GDP.

In Vietnam, the authorities publish annual GDP estimates for all financial sectors and supplement themfor the calendar year Vietnam's GDP is calculated according to the income method, which is calculated andannounced every 5 years when collecting information to prepare an inter-sectoral balance sheet for theentire economy 4 factors involved in calculating GDP according to the method used by Vietnam includegovernment 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 canknow where part of the decisions behind a country come from And GDP is also divided into nominal andreal 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 otherwords, it does not take into account inflation or the rate at which fees are growing, both of which may inflatethe amount of the increase All items and services included in nominal GDP are worth the fees charged forthem in that year Nominal GDP is measured in both local foreign currency and US dollars at foreigncurrency market change quotes to examine nations' GDPs in straightforward economic terms Whenanalysing separate quarters of output in the same year, nominal GDP is utilised Actual GDP is used toevaluate the GDP of or additional years This is because in absence of the influence of inflation allows thecontrast 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 isused to evaluate the GDP of or additional years This is because, in fact, the absence of the influence ofinflation 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 andservices produced by an economy over a certain time period In general, it measures economic outputgrowth after compensating for price fluctuations Governments use both nominal and real GDP as metricsfor analysing economic growth and buying power over time This was calculated using the GDP pricedeflator (also known as the implicit price deflator) It forecasts price changes for all goods and servicesproduced in a specific region.

Real GDP= Nominal GDP÷GDP deflator1.3 Nominal GDP versus real GDP

GDP is one of the most important measures for evaluating an economy's economic activity, stability, andproduct and service expansion; it is typically analysed from two perspectives: nominal and real Thenominal GDP, often known as current dollar GDP, is a macroeconomic measure of the value of goods andservices at current prices Real GDP includes adjustments for inflationary increases This means that wheninflation is strong, real GDP falls below nominal GDP, and vice versa Positive inflation raises nominal GDPconsiderably without adjusting for real GDP Economists utilise the BEA's real GDP headline statistics formacroeconomic study and central bank planning The inclusion of inflation is the basic difference betweennominal 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 moreeasier, albeit less useful.

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

Inflation is defined as a difference between nominal and real GDP, and deflation is defined as adifference between the two To put it another way, inflation occurs when the nominal value surpasses theactual 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 levelof a basket of selected goods and services in an economy over time can be used to produce a quantitativeapproximation 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 didpreviously Deflation, on the other hand, occurs when the purchasing power of money rises while pricesdecline.

Inflation is a term used to explain the overall effect of rate changes over a wide range of goods andservices, and it provides a single cost depiction of the upward impetus within the rate stage of goods andservices in a financial system over time Prices rise as a currency loses value, and it may purchase fewergoods and services This decrease in purchasing power has an impact on the overall cost of living for thegeneral public, resulting in a slowdown in economic growth Chronic inflation happens when a country'scash 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 necessaryactions to change the flow of cash and credit in order to keep inflation within acceptable bounds and theeconomy running smoothly It is not uncommon for monetary speculation to explain the relationshipbetween inflation and an economic system's cash delivery Following the Spanish conquest of the Aztecand Inca empires, large sums of gold and metal, primarily silver, came into the Spanish and variousEuropean economies The cost of cash has decreased since cash delivery has multiplied rapidly, resultingin 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 servicesproduced in the country Inflation is defined as an economy's general progressive increase in the prices ofgoods and services.

Inflation and GDP have a pretty balanced connection It doesn't take much to upset that equilibrium Thewidespread consensus is that a little inflation is beneficial Annual GDP growth is crucial for stock marketparticipants Businesses can only raise profits if economic output increases, which is the main driver ofstock performance However, excessive GDP growth is risky because it is accompanied by growinginflation When inflation exceeds interest rates, real returns are negative People spend more money wheninflation grows because they know it will become worthless in the future In the short term, this leads tomore GDP growth, which leads to more price hikes If this continues for an extended period of time, it willresult 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 + digit inflation), at which time it will become a self-reinforcing feedback loop In addition, the effect of inflationis not linear The impact of 10% inflation is not just double that of 5% inflation, but it is also significantlylarger.

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

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

The worldwide economic recession that began in 2008 and the ensuing financial crisis had a significantimpact on the Strategy's execution But in the ten years from 2001 to 2010, our nation's economyconsistently experienced a respectable growth rate (in 2001, it increased by 6.89%; in 2002, it did so by7.08%; 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 didso 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-economicdevelopment plan 2006-2010 increased 7.01%/year According to calculations, the average gross domesticproduct 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 Strategyfor Socio-Economic Stability and Development 1991–2000 Vietnam has had such rapid growth over thepast 10 years that, when compared to other nations in the area, it is only second to China and India andmuch 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 andinflation: As currency/credit increases, inflation also increases.

-Our country's inflation rate, as mentioned above, is also significantly higher than that of other countries inthe region And the contemporary inflationary situation has many causes Rising global market prices andother 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 onincreased investment, but investment in general, state investment in particular, has been inefficient Totalsocial investment has consistently been at a high level of 40-42 percent of GDP for many years; return oninvestment capital (ICOR) is high and tends to rise Between 2006 and 2010, the public sector's coefficientwas 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 astechnological innovation, knowledge and skills, organisational and management methods, and so on did notmake a significant contribution As a result, the price or cost to pay for a growth unit is very high andcontinues to rise Although the model and method of growth have lost their prestige, we continue to rely onthem to achieve our growth objectives In the short term, the main way to achieve growth is to increaseinvestment As a result, credit expansion, total payment means, increasing fiscal deficit, increasing balanceof payments deficit All of these are intrinsic causes of inflation In recent years has always been at a highlevel 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 theworld's commercial and financial centre Real GDP grew by 3.9% over the four quarters of 2004 Thisgrowth was driven by revenues in consumer spending, business fixed investment, housing investment andgovernment spending Net exports remained steady for the four quarters of 2004 In 2005 US GDP wasestimated at $12.36 trillion, per capita GDP was $41,800 Statistics show that US GDP grew 3.2% in thelast quarter of 2010, after growing 2.6% in the previous quarter However, this growth rate is still lower thananalysts' previous expectations Most experts expect the US economy to grow by 3.5% in the fourth quarterof 2010

The US economy went through a crisis in 2001 because the Fed's continuous increase in interest ratesfrom 1% to 5.25% put mortgage buyers at risk of defaulting on their debt, even having to sell their home (orbe forced to sell their home) foreclosure); House construction companies also reduce construction becausethey 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 mostcountries in the world along with an unprecedented slow recovery in employment as employment did notreturn 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 theUS 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 namedKeynesian were applied through large expenditures from the government budget at the same time theFederal Reserve maintains a policy of loans with almost zero interest rates The above measures haverestored 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 tosuch a very low level that makes American consumers comfortable to borrow money to consume and buymortgaged houses; banks were comfortable lending to invest in building houses for sale and lending to buysubprime houses When the economy recovered and the risk of inflation appeared, the Fed continuouslyraised interest rates from 1% to 5.25% When interest rates go up, homebuyers run the risk of defaulting ontheir debt, or even having to sell their home (or have it foreclosed on); House construction companies alsoreduce construction because they can't be sold when finished, making the housing market, mortgage creditunder 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 itselfthe direct source of the 2007-2008 global financial crisis In August 2007, a number of US credit institutionssuch 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 institutionswere afraid and came to withdraw their money, causing a sudden surge in deposit withdrawals that made iteven more difficult for those institutions The risk of credit scarcity is formed The real financial crisisofficially broke out The bursting of the housing bubble caused many home investment bank borrowers todefault, 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 hasset out to implement a strong strategy to help the economy go up, which is shown year by year with anincreased growth rate On average, every 9 years from 2001 to 2010 the gross domestic product increasedby 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 2008.

2001-Inflation rate in Vietnam fluctuated strongly while in the US it was almost stable at less than 5% duringthis period However, the common point of both here is that both reached the highest level of inflation in2008 and both reduced inflation at the end of 2009 due to strong impacts from the global financial crisis inthe period 2007-2009 Besides, we can see that the inflation rate in the US is always stable and lower thanin 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 socioeconomicdevelopment strategy for 2011-2020 gets started The global economy recovered more slowly, the publicdebt problem in many nations worsened, the dangers in the international financial and monetary marketsrose, and trade protectionism has escalated in many nations recently The global Covid-19 outbreak had amajor negative influence on the international economy in the final year of the Strategy era, which wasunparalleled in many decades The repercussions persisted for many years

Domestically, the economy faced several hazards in the early years of the Strategy period, including highinflation, a quick rise in public debt, a high rate of bad debt, climate change, natural catastrophes, anddiseases The Covid-19 epidemic has badly damaged most businesses and fields, particularly in 2020, andhas 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 yearbetween 2016 and 2019 before declining in 2020 as a result of the Covid-19 outbreak The growth rate isprojected to be over 2%, with an average annual growth rate of roughly 5.9% from 2016 to 2020 From 116billion USD in 2010 to 268.4 billion USD in 2020, the GDP scale expanded by 2.4 times From 1,331 USD in2010 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 andhit a record low of 0.63% in 2015 In the period from 2016 to 2020, Vietnam's inflation rate has always beenkept stable at 4%.

Vietnam's inflation rate has fluctuated dramatically between 2010 and 2020, rising from double digits in2011 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 fiscaland 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 ahigh 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 quarterlyincrease since the first quarter of 2014 (up 0.9%) and much lower than the increase of 1.4 % in the fourthquarter of 2015 as well as the forecast of 0.7% increase by experts Most US industries and sectorsrecorded 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 WorldBank Accordingly, the US GDP growth rate is -3.49% in 2020, down 5.65 points from the 2.16% increase in2019 US GDP in 2021 is expected to be 20,517.87 billion USD if the economy is The United States stillmaintains 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 of2014, the core inflation index of the US economy only increased by 1.6% In 2015, the inflation ratedropped to a record of 0.12% due to a number of factors negatively affecting economic stability such as thecomplicated and unpredictable fluctuations of the international monetary and financial markets, Fed beganto tighten through raising the basic interest rate, which made the euro depreciate against the dollar andpushed the euro exchange rate down to 1.05 USD/euro at one point more especially is the deep decreasein oil and raw material prices On the other hand, falling oil prices have also increased householdpurchasing 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 CommerceDepartment 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 ofGDP in the fourth quarter of 2010 was due to the growth in consumer spending and exports Householdspending, which accounts for 70 percent of the economy, grew by 4.4 percent year-on-year in 2009, thehighest growth rate since the first quarter of 2006 If the economy doesn't grow faster, the unemploymentrate won't fall fast enough to create jobs for millions of Americans, experts warn More than 8 millionAmericans 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 capitaincreased from 1,331 USD in 2010 to about 2,750 USD in 2020 Economic growth gradually depends onresource exploitation, credit expansion step by step based on the application of science, technology andinnovation

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 sincethe crisis 2007-2009

Inflation: Both have the same trend: decrease in the first half of the period then increase slightly andremain 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 growearnings if general economic activity declines or remains stable However, excessive GDP growth is riskysince it will almost certainly be accompanied by an increase in inflation, which would erase stock marketgains by making our money less valuable Most economists currently think that 2.5 to 3.5 percent GDPgrowth 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, butunfortunately, 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 operatingat near full employment will do two things:

Aggregate demand for goods and services will increase faster than supply, causing prices to rise As aresult of the tight labour market, businesses will have to hike salaries As the corporation seeks to maximiseprofits, 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 becomehyperinflation This is because, in an inflationary environment, people will spend more money because theyexpect it to be less valuable in the future This promotes further short-term rises in GDP, resulting in furtherprice increases.

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

Policy of the two countries to control inflation1 US policy

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

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

According to the Wall Street Journal, the US Department of Labour announced that the consumer priceindex in the US in June 2021 increased by 0.9% over the previous month, the strongest increase in a monthand increased by 5.4% over the same period last year, the highest level in about 13 years The coreconsumer 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 toraise interest rates on credit cards, mortgages, and other loans One of the main tenets of the Fed is topromote 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 economyas 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 arebalanced

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

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

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