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MACROECONOMICS
Lecturer: Doan Ngoc Thang

Chapter 1
The data of Macroeconomics

+
Reading materials

• Gregory Mankiw, Cengage

learning, Principle of
macroeconomics, 9th edition,
chapter 10,11,15

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+ COURSE OUTLINE
Part 1. Overview of economics

n Chapter 1. Ten principle of Economics

n Chapter 2. Macroeconomics data

Part 2. Real economy in long run

n Chapter 3. Production and Growth

n Chapter 4. Money and inflation

Part 3. Short run Fluctuation

n Chapter 5. Supply and Demand

n Chapter 6. IS – LM model

n Chapter 7. Open economy: Mundell Fleming and exchange rate

+
1. Measuring major macroeconomics Data
To understand the economy as a
To measure these data, we have
whole, we focus on three important
data statistics

Total income/ - Gross Domestic

national income Product (GDP);

The level of prices

Consumer Price
as a whole
Index (CPI)

Labor force and the

number of Unemployment rate
unemployed people

1.1. Measuring a Nation’s Income – Gross Domestic

+Product (GDP)
a. What is GDP?

When judging whether the economy is doing well or poorly, it is natural to look at
the total income that everyone in the economy is earning.
One of the most common measure of the output of an economy is Gross
Domestic Product (GDP)

GDP definition: GDP is the market value of all final goods and
services produced within an economy in a given period of time

GDP measure both income and expenditure of the economy as a

whole Why?

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Why an economy’ s total income equals its total expenditure?

+

Seller Transaction Buyer

Every currency unit of expenditure by a buyer

must become a currency unit of income to a seller

MINH

Important Features of GDP

+
1. Output is measured in currency terms (dollar, dong, euro…)

2. GDP includes all items produced in the economy and sold legally in markets. It
does not include items produced and sold illicitly.

3. GDP does not include items produced and consumed at home that never enter
the marketplace.

4. GDP includes tangible and intangible goods

5. GDP records only newly produced goods and services in a period of time

6. GDP records only the output of final goods. We want to“count” production only
once

7. GDP measures the value of production that occurs within a country’s borders,
whether done by its own citizens or by foreigners located there.

GDP Is… – (explain feature 1, 2, 3) 9

…the market value of all final goods and services produced within an
economy in a given period of time

n Goods are valued at their market prices, so:

n All goods measured in the same units
(e.g., dollars in the U.S.)
n Things that don’t have a market value are excluded, e.g., housework you do
for yourself.

n GDP includes all items produced in the economy and sold legally in markets. It
does not include items produced and sold illicitly, such as illegal drugs,
robbed painting..

n GDP does not include items produced and consumed at home that never enter
the marketplace.

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GDP is … – (feature 4) 10

…the market value of all final goods and services produced within an
economy in a given period of time

n GDP includes tangible goods

(like food, mountain bikes, beer)
n and intangible services
(dry cleaning, concerts, haicuts).

10

GDP is (feature 5) 11

…the market value of all final goods and services produced within an
economy in a given period of time

n GDP includes currently produced goods,

not goods produced in the past.

11

+Example 1.“GDP records only newly produced

goods and services in a period of time “

M r. Huy M r. M inh

Transfer

producers 80.000.000 dong consumers

When the Vespa Vietnam company makes a motor and sells it to mr. Huy for
80 millions Dong, that 80 millions Dong is added to GDP.
The sale of used
But when Mr. Huy re-sell that motor to Mr. Minh for 65 millions, that 65
millions Dong is not part of GDP. goods is not
included as part
The sale of used motor reflect the transfer of asset, not an addition to the
economy’s income. of GDP

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GDP is … – (feature 6) 13

…the market value of all final goods and services produced within an
economy in a given period of time

n Final goods: intended for the end user

n Intermediate goods: used as components
or ingredients in the production of other goods
n GDP only includes final goods
n They already embody the value of the intermediate
goods used in their production.

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Example 2“GDP records only the output of final

+ Is GDP
added up by
goods” 95.000 vnd
Or 65.000
vnd?
3.000
VND

2.000
VND

2.000
VND

20.000
VND 65.000
VND
3.000
VND

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+
ACTIVE LEARNING 1

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GDP is … – feature 7 16

…the market value of all final goods and services produced within an
economy in a given period of time

n GDP measures the value of production that occurs within

a country’s borders, whether done by its own citizens or
by foreigners located there.

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Example.
n Is the profit of Honda company located in Vietnam counted to
Vietnam’s GDP or Japan’s GDP

n Is the profit of Vietnam airline invested in Laos counted to Vietnam’s

GDP or Laos GDP

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Computing GDP
Expenditure approach

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Computing GDP
+
In real economy, the gross product is computed by adding up the value
of all good and services

uExpenditure Approach:

Total expenditure on domestically-produced final goods and

services.

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+
Sum the total expenditures of the economy as a whole
Foreign
Households businesses government
sector

Total expenditure of goods and services

u GDP (Y) is the sum of:

o Consumption of households (C)
o Private Investment (I)
o Government Purchases (G)
o Net Exports (NX)

GDP = C + I + G + NX
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+
uConsumption (C):
Is the spending by households on goods and services
ve.g. buying clothing, food, movie tickets, education
spending…

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uInvestment (I):
+ Is the purchases of capital equipment and structures of
firms and household
ve.g. factory, machinery, equipment, software,
building…etc.

Investment includes inventories

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+
uGovernment Purchases (G):
Includes spending on goods and services by the
governments (e.g. roads, parks, police, etc.).
Government Purchase does
not include Transfer payments.
Transfer payments include
Social Security and other types
of assistance to retired people,
welfare payments to poor
people, and unemployment
compensation to people who
have lost their jobs.

Transfer payments do not require the recipient to produce a

good or service in order to receive them. Therefore, they do
not count in a nation’s GDP, because they do not reflect the
production of a good or service.

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+
uNet Exports (NX):
Nx = Ex - Im
Ex: Export - Sales of a country’s goods and services to
buyers in the rest of the world
Im: Import - purchases of foreign-produced goods and
services by a country’s residents during a period

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Active learning 2

26

Real GDP versus Nominal GDP

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Real versus Nominal GDP

+
GDP is the total market value of the economy’s production
The year of 2009
GDP = (2009 Price of Apple x 2009 Quantity of Apple) + (2009 Price of rice x 2009 Quantity of
rice) + …

The year of 2010

GDP = (2010 Price of Apple x 2010 Quantity of Apple) + (2010 Price of rice x 2010 Quantity of
rice) + …

? If GDP of 2010 higher than GDP of 2009. Should we believe that the
economy had produced more quantities of goods and services?
No, because this data affected by quantities and prices

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Real versus Nominal GDP

+
GDP is the market value of the economy’s current production,
referred to as Nominal GDP

Nominal GDP measures the current

production in a given year.

A better measure of economic well-being years by years is real GDP

Real GDP measures any given year’s total output in

“constant” prices
The year of 2009
GDP = (2009 Price of Apple x 2009 Quantity of Apple) + (2009 Price of rice x 2009 Quantity of
rice) + …
The year of 2010
GDP = (2009 Price of Apple x 2010 Quantity of Apple) + (2009 Price of rice x 2010 Quantity of
rice) + …

Real GDP varies from year to year only if the quantities produced vary

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EXAMPLE : Calculating nominal GDP 30

Compute total spending (nominal GDP) in each year:

Pizza Chocolate
year P Q P Q
2019 $15 300 $2.50 1,000
2020 $16 400 $3.00 1,200
2021 $17 500 $3.50 1,300

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EXAMPLE 1: Calculating real GDP 31

Compute real GDP in each year (base year 2019):

Pizza Chocolate
year P Q P Q
2019 $15 300 $2.50 1,000
2020 $16 400 $3.00 1,200
2021 $17 500 $3.50 1,300

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EXAMPLE : Correcting for inflation 32

year Nominal GDP Increase: Real GDP Increase:

2019 $7,000 $7,000
2020 $10,000 $9,000
2021 $13,050 $10,750

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The GDP Deflator 33

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EXAMPLE : Calculate the GDP deflator

34

Compute the GDP deflator and inflation in each

year:
Nominal Real GDP
year Inflation rate
GDP GDP deflator
2019 $7,000 $7,000 100.0
2020 $10,000 $9,000 111.1
2021 $13,050 $10,750 121.4

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Active learing 3

35

2. Measuring the Cost of living –

Consumer Price Index (CPI)

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+ a. What is the CPI

In determining the cost of living, Statistics first identifies a
“market basket” of goods and services that consumers buy.
What ’ s in the CPI ’ s Basket?

The US’s CPI basket

Source: GSO Source: the US Labor Department

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A consumer price index (CPI) measures changes in the

+ level of a basket of consumer goods and
price
services purchased by households
- The Consumer Price Index (CPI) is used to monitor changes in the
cost of living. When the CPI rises, consumers have to spend more
money to maintain the same standard of living.

- CPI reports the movement of prices not in currency amounts, but with
an index number.

CPI in that unit of time = (Cost of basket in that unit of time / (Cost of basket in base unit of time) x100

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39

n Consumer price index (CPI)

Measure of the overall cost of goods and services bought by a typical
consumer. Change in CPI reflex changes in the cost of living over
time

n Core CPI
A measure of the overall cost of consumer goods and services
excluding food and energy

n Producer price index (PPI)

A measure of the cost of a basket of goods and services bought by
firms

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How the CPI Is Calculated 40

1. Fix the basket

n Determine what’s in the typical consumer’s
“shopping basket.”
2. Find the prices
n Collects data on the prices of all the goods in
the basket.
3. Compute the basket’s cost
n Use the prices to compute the total cost of the
basket.
4. Choose the base year and calculate CPI

40

EXAMPLE : Market basket: 10 pizzas, 5 shirts 41

Price of Price of
year Cost of basket
pizza shirts

2017 $12 $18

2018 $14 $20
2019 $16 $22

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b.
+ CPI and the Inflation Rate
Inflation is a sustained increase in the price level.
• Inflation deals with the increase in the average of prices and not just
significant increases in the price of a few goods.

• CPI is one of the most popular index to represent the average of prices.

• The inflation rate is calculated as the percentage change in the price

index from the preceding period

Inflation rate = [(CPIthis year– CPIlast year)/CPIlast

year] x100

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EXAMPLE : Market basket: 10 pizzas, 5 shirts 43

Price of Price of
year Cost of basket
pizza shirts
2017 $12 $18
2018 $14 $20
2019 $16 $22

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Active Learning : Calculate CPI & inflation rate 44

CPI basket: Price of Price of

year
10 lbs of beef, beef chicken
2017 $3 $3
20 lbs of chicken
2018 $4 $4
Base year: 2017 2019 $8 $5

A. Calculate CPI for all years

B. What was the inflation rate from 2018-
2019?

44

Active Learning: A new basket, CPI & inflation rate

Price of Price of
year
beef chicken
2017 $3 $3
2018 $4 $4
2019 $8 $5

The price of beef increased

CPI basket: sharply

10 lbs of beef,
20 lbs of chicken ? What would
consumers do?
Base year: 2017

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Active Learning: A new basket, CPI & inflation rate 46

Price of Price of
New CPI basket for 2019: year
beef chicken
5 lbs of beef,
25 lbs of chicken 2017 $3 $3
Base year: 2017 2018 $4 $4
2019 $8 $5

A. Calculate cost of the new basket for 2019 and the CPI for 2019.
B. What’s the new inflation rate from 2018-2019?

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c. Problems in using the CPI to Measure The Cost of Living

+

- The CPI is not a perfect measure of the“cost of

living.”
Three reasons/problems:
– Introduction of new goods
– Unmeasured quality change
– Substitution Bias

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Substitution Bias
+
The CPI uses fixed weights, so it cannot reflect consumers’s ability to substitute
toward goods whose relative prices have fallen.

How is consumer
reaction to changing
relative prices?

The Uber taxi is

relatively cheaper than
the bus ticket.
Therefore, many
people decide using
Uber taxi in substitute
5.000/km of bus
7.000/ticket
The way home is 4km far
By bus, it costs 7000 dong
By uber taxi, it costs 20.000 dong; third more expensive than using bus
If the bus ticket increase to 10.000/ticket
By bus, it costs 10000 dong
By uber taxi, it costs 20.000 dong; twice more expensive than using bus

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+
Subtitution Bias
•Consumers substitute toward goods that have become

relatively less expensive.

•This influences the CPI basket. For example, a selected
good is bought by consumers and it is therefore included in
the CPI basket, but when an increase in price of that
selected good occurs customers may buy a cheaper
substitute, while the CPI basket does not change.
•Substitution Bias cannot be correctly measure by CPI.

•Because of its effect on consumption, substitution bias can

cause inflation to be over-estimated.

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Two measures of inflation, 1965–2019 50

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GDP Deflator vs. CPI 51

n Imported consumer goods:

n Included in CPI but excluded from GDP deflator
n Capital goods:
n Excluded from CPIbut included in GDP deflator (if
produced domestically)
n The basket:

n CPI: fixed basket; prices of all goods and services

bought by consumers
n GDP deflator: pricesof all goods and services
currently produced domestically

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ACTIVE LEARNING 4

52

Currency Figures From Different Times 53

53

EXAMPLE : Grandpa’s salary 54

Your Grandpa’s first full time job was as a car

mechanic in 1963, and he was earning
$310/month.
CPI in 1963: 30.9
CPI in 2019: 256.6
nHow much great grandpa’s earnings are in
current dollars?

54

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ACTIVE LEARNING 5

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Real and Nominal Interest Rates 56

nThe nominal interest rate:

n Interest rate not corrected for inflation
n Rate of growth in the dollar value of a deposit or
debt

nThe real interest rate:

n Corrected for inflation
n Rate
of growth in the purchasing power of a
deposit or debt

Real interest rate = (nominal interest rate) –

(inflation rate)

56

Example : Real vs. nominal interest rates 57

Amir received a $1,000 end-of-year bonus at his job.

He deposits the $1,000 in his savings account for one
year. The nominal interest rate is 9%. During that
year, inflation is 3.5%.
n At the end of the year, is Amir able to buy more or
fewer goods with his money? How much?

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Measuring Unemployment

58

How Is Unemployment Measured? 59

Population is divided into 3 groups:

n Employed: paid employees, self-employed, and
unpaid workers in a family business
n Unemployed: people not working who have looked
for work during previous 4 weeks
n Not in the labor force: everyone else

n Labor force = Employed + Unemployed

n The total
number of workers

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+ Measuring Unemployment

nThe Unemployment Rate is:

U = [B/(A+B)] x 100
n “U” is the unemployment rate
n “B” is the number of unemployed persons
n “A” is the number of employed persons
n “A+B” is the labour force

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• The Labour-Force Participation Rate is the fraction of

the population that participate in the labour market.

• The Labour-Force Participation Rate is:

PR = [(A+B) / Population] x 100

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+
Example. Computing labor statistics

U.S. adult population by group, May 2012

Number employed = 142.3 million
Number unemployed = 12.7 million
Adult population = 243.0 million

Use the above data to calculate

§ the labor force
§ the number of people not in the labor force
§ the labor force participation rate
§ the unemployment rate 62

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+
Active learning 5

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Unemployment 64

n Natural rate of unemployment

n The normal rate of unemployment around which the unemployment
rate fluctuates

n Cyclical unemployment
n The deviation of unemployment from its natural rate

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Why Are Always Some People Unemployed? 65

nFrictional unemployment
n Occurs when workers spend time searching for the
jobs that best suit their skills and tastes
n Short-term for most workers

nStructural unemployment
n Occurs when the number of jobs available in some
labor markets is insufficient to provide a job for
everyone who wants one
n Usually longer-term

65

Explaining structural unemployment 66

Structural
unemployment occurs unemployment
when there are not W S
actual
enough jobs to go W1
wage
around.
WE

n Occurs when wage

is kept above
equilibrium.
D
L

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LF participation rates of men and women, 1948–2019

67

LFPR men

LFPR women

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

67

Active Learning: Limitations of the u-rate

68

In each of the following, what happens to the u-rate? Does the

u-rate give an accurate impression of what’s happening in the
labor market?

A.Hailey lost her job and begins looking for a new one.

B.Josiah, a
steelworker who has been out of work since his mill
closed last year, becomes discouraged and gives up looking
for work.

C.Karim, sole earner in his family of 5, just lost his $80,000 job
as a research scientist. Immediately, he takes a part-time job
at McDonald’s until he can find another job in his field.

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Limitation of the Unemployment Rate 69

nThe u-rate:
n Not a perfect indicator of joblessness or the health of the labor
market
n It excludes discouraged workers.
n It does not distinguish between full-time and part-time work, or
people working part time because full-time jobs not available.
n Some people misreport their work status
n Still a very useful barometer of the labor market & economy.

© 2021 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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