BÀI GIẢNG KINH TẾ VĨ MÔ (MACROECONOMICS I)

So, remember that although market clearing models assume that wages and prices are flexible, in actuality, some wages and prices are sticky... Macroeconomics RecessionDepression Models

FOREIGN TRADE UNIVERSITY

CHAPTER I:

Introduction Lecture programme

or outflows of capital The course also draws

on the debates in real economy and tries to use both old and new theories to understand them.

Introduction

Module aims and objectives:

1.To familiarise the students with some of the most important macroeconomic variables in the economy, for example GDP,GNP,CPI,PPI…

2.To introduce students to some important macroeconomic policies including fiscal and monetary policies.

3.To examine some different cases in term of using macroeconomic policies to develop economy.

Introduction Learning outcomes

By the end of this module it is expected that students:

1.will have an understanding of how important macroeconomic variables are interacting in the economy.

2.will be able to interpret such variables and events as GDP,GNP,CPI or inflation,unemployment… and relate them to changes of other variables and events in the economy.

3.will be ready to explain significant events in real economy by using economic theories.

4.will be familiar with current debates on economy and able to make a critical assessment of the various arguments which are put forward.

open-Teaching and learning methods:

In class contact hours there will be lectures, discussions and assistance with students’assignment work,reading and using books During the seminars the students will be expected to discuss the provided topics

on the problems of real economy.

Assessment methods:

There is a written assignment and final examination

It is worthy 30% and 60% respectively Class participation is 10%

Suggested Supplementary Reading

Mankiw, Principles of Economics

Mankiw, Macroeconomics 5th ed ,

Sloman J., (2003), Economics, 5th ed

Lecture programme

Chapter: Introduction lecture programme

Chapter2:The Data of Macroeconomics

Chapter4:Money and Monetary policy

Chapter5:Inflation and unemployment

Chapter6:Economic growth

Chapter 7: The Open economy

Chapter3:Aggregate Demand and Fiscal policy

Presentation assignment

Revision

Everyone is concerned about macroeconomics lately We wonder why some countries are growing faster

than others and why inflation fluctuates Why?

Because the state of the macroeconomy affects

everyone in many ways It plays a significant

role in the political sphere while also affecting

public policy and social well-being.

Economists use models to understand what goes on in the economy Here are two important points about models: endogenous variables and exogenous variables Endogenous variables are those which the

model tries to explain Exogenous variables are those variables that

economic model It describes the ubiquitous relationship between buyers and sellers in the market The point of intersection is called an

equilibrium.

Economists typically assume that the market will go into

an equilibrium of supply and demand, which is called the market clearing process This assumption is central

to the Pho example on the previous slide But, assuming that markets clear continuously is not realistic For markets to clear continuously, prices would have to adjust instantly to changes in supply and demand But, evidence suggests that prices and wages often adjust slowly.

So, remember that although market clearing models assume that wages and prices are flexible, in actuality, some wages and prices are sticky

Microeconomics is the study of how households and firms

make decisions and how these decision makers interact in the

marketplace In microeconomics, a person chooses to

maximize his or her utility subject to his or her budget constraint.

Macroeconomic events arise from the interaction of many

people trying to maximize their own welfare Therefore, when

we study macroeconomics, we must consider its

microeconomic foundations.

II Research aims and research methods:

1 Aims and objectives of macroeconomics

Yield, Economic growth, unemployment, inflation, budget, Balance of Payments,

2 Research method

- Mathematics, general equilibrium, Walras

methods (equilibrium in all market…

III Macroeconomics system

1 Inputs

+ Exogenous variables : weather, politics, population, technology and patents or

know-how

impacts-fiscal policy,monetary policy, external

economic policy

2 Black box: AS+AD

2.1 Aggregate Demand

2.2.Aggregate Supply

*Related factors: Price, Income, Expectation…

* Related factors: Price,production cost,

potential output (Y*)

Y*: maximization of output which economy can produce, with full-employment and no inflation.

Full-employment=population–outof

working age - invalids -(pupils + students) – servant-unwilling to work

Macroeconomics Recession

Depression Models

Macroeconomic system Inputs

Outputs

Endogenous variables Exogenous variables Market clearing

Flexible and sticky prices Microeconomics

Macroeconomics Recession

Depression Models

Macroeconomic system Inputs

Outputs

Endogenous variables Exogenous variables Market clearing

Flexible and sticky prices Microeconomics

CHAPTER II

Data of macroeconomics

I Gross domestic products-GDP

Gross Domestic Product (GDP) is the

market value of all final goods and services produced within an economy

in a given period of time.

There are 2 ways

Goods Expenditure $

For the economy as a whole, income must equal expenditure

GDP measures the flow of dollars in this economy.

Income, Expenditure And the Circular Flow

1) To compute the total value of different goods and services, the national income accounts use market prices

Thus, if

GDP = (Price of apples × Quantity of apples)

+ (Price of oranges × Quantity of oranges) = ($0.50 × 4) + ($1.00 × 3)

3) The treatment of inventories depends on

if the goods are stored or if they spoil If the goods are stored, their value is included in GDP.

If they spoil, GDP remains unchanged When the goods are finally sold out of inventory, they are considered used goods (and are not counted).

4) Intermediate goods are not counted in GDP… only the value of final goods Reason: the value of intermediate goods is already included in the market price

firm…s output less the value of the intermediate goods the firm purchases.

5) Some goods are not sold in the marketplace and therefore don’t have market prices We must

use their imputed value as an estimate of their

value For example, home ownership and government services.

The value of final goods and services measured at

current prices is called nominal GDP It can change

over time either because there is a change in the amount (real value) of goods and services or a change in the prices of those goods and services

Hence, nominal GDP Y = P × y, where P is the price level and y is real output– and remember we use output and GDP interchangeably

Real GDP or, y = Y÷P is the value of goods and services measured using a constant set of prices

Let’s see how real GDP is computed in our apple and orange economy.

For example, if we wanted to compare output in 2002 and

output in 2003, we would obtain base-year prices, such as 2002

prices

Real GDP in 2002 would be:

(2002 Price of Apples × 2002 Quantity of Apples) +

(2002 Price of Oranges × 2002 Quantity of Oranges).

Real GDP in 2003 would be:

(2002 Price of Apples × 2003 Quantity of Apples) +

(2002 Price of Oranges × 2003 Quantity of Oranges).

Real GDP in 2004 would be:

(2002 Price of Apples × 2004 Quantity of Apples) +

(2002 Price of Oranges × 2004 Quantity of Oranges).

Nominal GDP measures the current dollar value of the output

of the economy

Real GDP measures output valued at constant prices

The GDP deflator, also called the implicit price deflator for

GDP, measures the price of output relative to its price in the base year It reflects what’s happening to the overall level of prices in the economy.

GDP Deflator = Nominal GDP

Real GDP

In some cases, it is misleading to use base year prices that prevailed 10 or 20 years ago (i.e computers and

college) In 1995, the Bureau of Economic Analysis

decided to use chain-weighted measures of

real GDP The base year changes continuously over time This new chain-weighted

measure is better than the more traditional measure because it ensures that prices will not be

too out of date.

Average prices in 2001

and 2002 are used to measure

real growth from 2001 to 2002.

Average prices in 2002 and 2003

are used to measure real growth from

2002 to 2003 and so on These growth

rates are united to form a chain that is

used to compare output between any two

dates.

3 Methods of computing GDP

*Expenditure approach

GDP = C + I + G + (X-M)

Government purchases of goods and services

Government purchases of goods and services

Consumption spending by households

Investment spending by businesses and households

Investment spending by businesses and

or net foreign demand

Net exports

or net foreign demand

This is the called the national income accounts identity.

*The Factor Incomes Approach: it measures GDP by adding together all the incomes paid by firms to households for the services of the factors of production they hire According to this approach, GDP is the sum of incomes in the economy during a given period

GDP = w + r + i + Π + D +Te

profit, D: Depreciation, Te: indirect tax

3 The output approach

Total Value added = Total Revenues …

One firm gains value added is 80, 1000 firms is

80,000 80 = total revenues … total cost (production cost)

II.Gross national products)-GNP

4 Net Economic Welfare -NEW

GDP, GNP doesn…t compute some goods and services which aren…t sold, or illegal transactions or activities of black market, negative externality…

V 1 + Value of Rest

+ Value of goods and services which arent sold

+ Revenues from transactions in black market

resources,environment, such as noise traffic jam

…

NEW reflects welfare better than GNPm but it is very difficult to have enough data to compute NEW,therefore, economists still use GDP and GNP.

TR

NI-National Income Yd-Disposal Income

TR (transfer)- Td: Direct tax

National income accounts Consumption Investment Government Purchases Net Exports Labor force

Gross domestic product (GDP)

Consumer Price Index (CPI)

CHAPTER III

Aggregate Demand

& Fiscal policy

Today…s lecture is the first in a series of four lectures aimed at analysing different (separate) markets in the economy This will then enable us to bring the various markets together and to analyse the behaviour of the whole economy (this is also

referred to as general equilibrium analysis) Today

we will introduce an analysis of the economy as originally described by the economist John Maynard Keynes His theory of how the macroeconomy works will help us explain how the economy…s income (GDP) is determined Today we analyse the model in its simplest form and we will assume that the economy does not have a government and that it does not trade with the rest

of the world We will relax these assumptions.

The Keynesian Theory of Income Determination: the theory that will be presented hereafter was developed by the Cambridge economist John Maynard Keynes in the wake of the 1920s Great Depression He argued that the cause of a low level of income (GDP) in the economy was given by the lack of AD.

John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods Confer

Personal and marital life

Born at 6 Harvey Road, Cambridge, John Maynard Keynes was the son of John Neville Keynes, an economics lecturer at Cambridge University, and Florence Ada Brown, a successful author and a social reformist His younger brother Geoffrey Keynes (1887…1982) was a surgeon and bibliophile and his younger sister Margaret (1890…1974) married the Nobel- prize-winning physiologist Archibald Hill.

Keynes was very tall at 1.98 m (6 ft 6 in).

In 1918, Keynes met Lydia Lopokova, a well-known Russian ballerina, and they married in 1925 By most accounts, the marriage was a happy one Before meeting Lopokova, Keynes's love interests had been men, including a relationship with the artist Duncan Grant and with the writer Lytton Strachey For medical reasons, Keynes and Lopokova were unable to have children, though both his siblings had children of note.

I Aggregate Planned Expenditure and Aggregate Demand

1.Assumptions: a model nearly always starts with the word –assume– or –suppose– This is an indication that reality is about to

be simplified in order to focus on the issue

at hand

*Prices, Wages and Interest Rate are

Constant

*The Economy Operates at less than full Employment: this implies that firms are willing to supply any amount of the good

at a given price P In other words, assume that the supply of goods is completely elastic at price P This assumption is generally valid only in the short run

*Closed Economy and No Government: we assume that the economy does not trade with the rest of the world so that both exports and imports are equal to zero (X=M=0) We also assume that there is no government in the economy so that government expenditures and taxes are equal to zero (G=T=0) This implies that aggregate demand is therefore reduced to the following expression:

AD ≡ C + I

APE reflects the total planned expenditure at each income, with assumption of given price.

1 Aggregate Planned Expenditure

*Households: Consumption  C = f(Yd):

the main determinant of consumption is

surely income, or more precisely

C = f 1 (Y)

-Firms: to create the demand through their

Yd MPC

C Y

f

*Determinants of Consumption:

+Autonomous Consumption (C): this is the

amount of consumption expenditure that would take place even if people had no current disposable income

+Induced Consumption: this is consumption expenditure that is in excess of autonomous consumption and that is induced by an increase in disposable income

C MPC

expenditures (DC) divided by the change

in disposable income (DYd) that brought it

about It gives the effect of an additional

consumption The MPC determines the slope of the consumption function

0 < MPC< 1 :This reflects the fact that

people are likely to consume only part of any increase in income and to save the rest

*Example The following is an example of

a consumption function:

C = 20 + 0.7xYd

Autonomous Consumption: 20

MPC = 0.7

However, given that there is no government

in our simple economy, T=0 and savings are equal to: S = Y - C

1.2.The Saving Function: the economy…s savings function can be derived by using the private savings expression and the consumption function: