Introduction Plus Macroeconomic Measurements

BMAK - Basic
Macro
Dr. Ha L.V.
SESSION 1
BMAK - Basic Macro
A qualifying course for second year B.sc. students

Program: Economics and Business Administration
Dr. Ha L.V.
SESSION 1
Vietnamese - German University
Binh Duong, April 18th , 2022.
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Outline: Introduction to BMAK
BMAK - Basic
Macro
Dr. Ha L.V.
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Can you guess what the color pattern on this
map indicates?
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BMAK - Basic
Macro
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It’s all about happiness!
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BMAK - Basic
Macro We hold these truths to be self-evident, that
Dr. Ha L.V.
SESSION 1 all men are created equal, that they are
endowed by their Creator with certain
unalienable Rights, that among these are
Life, Liberty and the Pursuit of Happiness.
Hỡi Đồng bào cả nước, tất cả mọi người đều
sinh ra có quyền bình đẳng. Trong những
quyền ấy có quyền được sống, quyền tự do,
và quyền mưu cầu hạnh phúc.
Except for very few cases, we all pursue
happiness!
Am I right?
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BMAK - Basic
Macro
Happiness is an all-inclusive concept which is still a subject
Dr. Ha L.V. of intense research.
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It is difficult to list all determinants of happiness. However,
there has been reliable studies linking happiness to income.
And the fact is:
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BMAK - Basic
Macro
Dr. Ha L.V. Within each country, higher income is also associated with
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more life satisfaction.
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BMAK - Basic
Macro And therefore, BMAK is devoted to exploring how rich
Dr. Ha L.V. countries become rich and why poor countries stay poor!
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Recall from on OVWL course:
Microeconomics is the study of how households and firms make
decisions and how they interact in specific markets. This is the
subject of BMIK that you guys love so much.
Macroeconomics is the study of economy-wide phenomena, which is
the subject of this course.
Economy-wide phenomena include:
Income: of which GDP is the most important measure!
Employment/unemployment
The interest rate, the inflation rate
Government spending cuts/expansion
...
All of these issues will be discussed in details with the
aims of understanding how the economy works, and what
we can do to maximize our income, thus hopefully,
improving the quality of our life (i.e. life satisfaction).
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BMAK - Basic
Macro
Let’s have a look at the distribution of gdp per capita for
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SESSION 1 193 countries as of 2017.
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BMAK - Basic
Macro ... and another look at the income distribution in the last
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1000 years.
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BMAK - Basic
Macro Income per capita across countries only started to diverge
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about 400 years ago.
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The US since its independence:
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The UK since the year 1000:
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Vietnam since 1800:
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Vietnam has performed very well in the last 30 years or so.
Dr. Ha L.V. On the World Bank’s website, Vietnam is considered as
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the leading example of economic success.
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BMAK - Basic
Macro However, we are still a very poor country in relative GDP
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per capita:
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Macro
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And, we are also just a tiny country in terms of GDP:
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BMAK - Basic
Macro
Stories of economic development sometimes sounds like
Dr. Ha L.V. biographies of soccer stars. Some are really considered as
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the super stars.
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BMAK - Basic
Macro Some turn out to be doomed starlet who fail to live up to
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the expectation, known as the growth disaster, such as
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BMAK - Basic
Macro Some turn out to be doomed starlets who fail to live up to
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the expectation, known as the growth disaster, such as
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The failure can be highlighted by graphing the GDP per
Dr. Ha L.V. capita of Venezuela with that of a successful growth story
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such as the UK.
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BMAK - Basic
Macro
Dr. Ha L.V. Strictly speaking, all countries have exhibited some

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economic growth in the last 200 years.
However, some have been successful in sustaining their
achievement and their citizens enjoy relatively high living
standards.
Others have experienced serious down-turns which reverse
all the achievements attained in history.
We will spend quite some time during this course to
discern the mechanisms behind such successes and
failures: Part II: The macroeconomy in the long run.
Capital, human capital and technological progress will be
important to explain these long - run developments.
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BMAK - Basic
Macro
It seems that over a relatively long period of time,
Dr. Ha L.V. countries often grow a long a linear path with respect to
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time.
Even though the relationship is not perfect.
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BMAK - Basic
Macro Equally important, the slope of the strend line might
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change from one period to the next.
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Or more recently.
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Dr. Ha L.V. The changes in the trend of growth for the case of
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Vietnam is very interesting.
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BMAK - Basic
Macro Intuitive though the trend line may be, it is more precise
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to use the concept of potential GDP.
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Intuitive though the trend line may be, it is more precise
Dr. Ha L.V. to use the concept of potential GDP, the level of output
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that an economy can produce at a constant inflation rate.
Although an economy can temporarily produce more than
its potential level of output, that comes at the cost of
rising inflation.
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BMAK - Basic
Macro
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The message becomes clearer if we examine the pattern of
SESSION 1 real GDP vs. its potential level in a shorter period.
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BMAK - Basic
Macro
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The message becomes clearer if we examine the pattern of
SESSION 1 real GDP vs. its potential level in a shorter period.
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There are periods during which an economy is producing
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SESSION 1 more that it potentially could with full capacity utilization.
There are periods during which an economy is
under-performing relative to itself.
Such alternation has been known as the business cycle.
A major part of this course is devoted to understand the
driving forces of volatility and what can the government
do to limit such movements: Part III: The
macroeconomy in the short run AND Part IV: The
macroeconomy in the medium run
Economists might disagree with policy prescription, and
sometimes with how the economy works, but they all agree
that the economy should operate at its potential level.
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Measuring GDP
BMAK - Basic
Macro GDP is the market value of all final goods and services
Dr. Ha L.V. produced within a country in a given period of time.
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All goods and services produced by an economy must be
bought by someone, either at home or abroad.
Each transaction must have a buyer and a seller, and
therefore, GDP could be compiled using:
P
Data from buyers: Total expenditure, known as the
expenditure approach.
P
Data from sellers: Total production, known as the
product approach.
Another approach to measure GDP is the income
approach: The added value by a firm will be divided
among claimants: labor and capital owner, government
(taxes), interest expense, etc.
All three approaches will be discussed in details.
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Measuring GDP
BMAK - Basic
Macro
Dr. Ha L.V. Recall from our OVWL course.

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Measuring GDP: The expenditure approach
BMAK - Basic GDP = sum of all expenditures by ultimate purchasers of

Macro new goods and services.
GPD = Y = | C } + | {z I } + | {z {z } − | IM
G } + | EX
Dr. Ha L.V.
SESSION 1 {z {z }
Consumption: Investment (Gross cap- Government exports imports
total spending ital formation): to- expenditure:
by private tal spending by private total spending | {z }
households households and by firms by public
on services sector on exports - imports =
on goods and services goods and trade balance:value of
and on
(durable and that add to the stock services, not goods and services ex-
of capital (households including ported minus goods and
non-durable)
and firms:investment in transfer services imported
goods housing, firms: invest- payments
ment in plant and equip-
ment as well as inven-
tory investment; not in-
cluded: spending on fi-
nancial assets per se)
Note that government services and purchases are not sold

on the market. And therefore, G is valued at the
production costs.
Inventory includes unfinished, and finished but not sold
products, which are classified as part of the same period’s
GDP. When inventories are sold, disinvestment occurs,
which does not affect GDP. Only the added values
associated with selling the inventory are added to future
GDP. 33 / 73
Measuring GDP: The product and income
approaches
BMAK - Basic
Macro
Dr. Ha L.V.
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GDP for the year 2018
=
value of all goods and services newly produced by firms
during the year 2018, minus the value of all goods and
services purchased as inputs by firms during the year 2018
=
Sum of value added produced by firms during the year
2018
GDP for the year 2018
=
Sum of all incomes received by the producers of new
goods and services during the year 2018
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Measuring GDP: Example 1 & 2
BMAK - Basic
Macro
Place each of the following transactions in one of the four
Dr. Ha L.V.
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government purchases, and net exports.
Boeing sells an airplane to the U.S. Air Force.
Boeing sells an airplane to American Airlines.
Boeing sells an airplane to Air France.
Boeing sells an airplane to Amelia Earhart.
Boeing builds an airplane to be sold next year.
A farmer grows a bushel of wheat and sells it to a miller
for $1. The miller turns the wheat into flour and then sells
the flour to a baker for $3. The baker uses the flour to
make bread and sells the bread to an engineer for $6. The
engineer eats the bread. What is the value added by each
person? What is the bread’s contribution to GDP?
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Measuring GDP: Example 3
BMAK - Basic
HAGI is a firm specializing in dairy and meat production. HAGI currently owns
Macro 300 farms across the country of Neverland. The farms grow elephant grass and
legumes and other forage to raise their cattle. In 2017, HAGI produced an
Dr. Ha L.V. amount of hay and forage worth $8 million. They also bought an amount of hay
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worth $16 million from contracting farmers. All of these hay, grass and forage
were employed to produce 8 thousand tons of meat and 1 million gallons of milk.
HAGI exported 4 thousand tons of meat and 500,000 gallons of milk to the
country of Aridland at the price of $25 million, it sold the rest of the meat and
milk to ARIEL, a food processing and distributor at the price of $18 million. Via
its supermarket chain, ARIEL distributed to the consumers of Neverland 3
thousand tons of meat at the price of $8 per kg, and 375,000 gallons of milk at
the price of $5 per gallon. ARIEL imported 5 thousand tons of flour at the price
of $0.5 per kg, 2 thousand tons of sugar on which it paid $4 million. ARIEL
employed the imported sugar and flour and the remaining meat and milk to
produce several processed products part of which it sold to the Neverland’s
households and earned $15 million, part of which it sold to the government of
Neverland at the price of $10 million. The government used the products to
support the poor in the form of free distribution.
Also in 2017, HAGI spent $18 million in employee compensation and pay 6 million
in dividends. It also retained $1 million to upgrade the farming technology in
2018, and paid $2 million in the form of taxes. ARIEL paid $22 million to its
employees, 2 million in dividends and $2,375,000 in taxes.
Self-employed persons (farmers) pay 10% of their revenue in taxes, while
employees pay 15% of their compensation in personal income taxes. Compile the
GDP for the Neverland country using three different approaches.
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Day 1: Exercise 1
BMAK - Basic
In the year 2016, Kiel-based Pausenlos produces 50,000 lawn mower
Macro engines. The market value of each lawn mower engine is 50 Euro. In
Dr. Ha L.V.
producing these 50,000 lawn mower engines, Pausenlos incurs the following
SESSION 1 costs of production for each lawn mower engine produced: labor cost: 10
Euro; imported components from Vietnam: 5 Euro; interest payment on
debt: 5 Euro. Pausenlos sells 35,000 of the lawn mower engines it
produced to Rostock-based Grünland and 5,000 of these lawn mower
engines to private customers in Sweden. Finally, Pausenlos places the
remaining 10,000 lawn mower engines it produced into its inventory.
In the year 2016, Grünland produces 35,000 lawn mowers. The market
value of each lawn mower is 150 Euro. In producing these 35,000 lawn
mowers, Grünland incurs the following costs of production for each lawn
mower produced: labor cost: 25 Euro; imported components from
Slovakia: 20 Euro; lawn mower engines purchased from Pausenlos: 50
Euro; tax payments: 5 Euro. Grünland sells 25,000 of the lawn mowers it
produced to private customers in Germany and 5,000 to private customers
in Denmark. Finally, Grünland places the remaining 5,000 lawn mowers it
produced into its inventory.
Suppose that in the year 2016 there are no further transactions of
relevance in the German economy comprising the two firms Pausenlos and
Grünland. Using the income and expenditure approaches, calculate the
year 2016 GDP of the German economy. 37 / 73
Day 1: Exercise 2
BMAK - Basic For this problem, consider two companies: Noisy Music GmbH (which is located in country
Macro
Sunny), and Plain Pictures AG (which is located in country Windy).
Dr. Ha L.V. Noisy Music enters the year 2016 with a capital stock worth 2,000,000 Euro. During 2016,
SESSION 1 Noisy Music produces 30,000 headphones. Noisy Music’s costs for the production of each
headphone are as follows: cost of labor from workers who are nationals of Sunny: 15 Euro;
cost of labor from workers who are nationals of Windy: 15 Euro; depreciation of capital
stock: 5 Euro. Noisy Music in 2016 sells 25,000 headphones at a price of 100 Euro per
headphone (of the 25,000 headphones sold, 15,000 are sold to private households in Sunny,
5,000 to private households in Windy and 5,000 to private households in a third country,
Rainy). Finally, Noisy Music places the remaining 5,000 headphones produced but not sold in
2016 into its inventory. Also during 2016, the owners of Noisy Music on the stock exchange
of Windy purchase 6,000 newly issued shares of the stock of Plain Pictures AG, at a price of
10 Euro per share.
Plain Pictures enters the year 2016 with a capital stock worth 5,000,000 Euro. During 2016,
Plain Pictures produces 50,000 blu ray players at a cost of 100 Euro each (imported
components from Rainy: 20 Euro; cost of labor from workers who are nationals of Windy, 50
Euro; cost of labor from workers who are nationals of Sunny, 20 Euro; depreciation of capital
stock: 10 Euro). Plain Pictures sells 25,000 of the blu ray players it produced in 2016 at a
price of 200 Euro each to private households in Windy; it sells 10,000 of the blu ray players
produced in 2016 at a price of 250 Euro each to private households in Sunny; and puts all
remaining 15,000 blu ray players produced but not sold in 2016 into its inventory. Those
workers of Plain Pictures who are nationals of Windy transfer 25,000 Euro of their 2016
income to private households in Sunny. Suppose that in 2016 there are no further
contributions involving Noisy Music or Plain Pictures to the GDP, national saving and/or
national wealth of Sunny and/or Windy. Using the product approach, calculate the year 2016
contributions of Plain Pictures to the GDP of Windy.
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Measuring GDP: Limitations
BMAK - Basic
Macro Even though GDP is the best available measure of
Dr. Ha L.V.
SESSION 1 economic well being, it is not perfect. It suffers from two
broad issues:
Measurement issues:
Some goods and services, for example home production,
are not transacted and are thus not captured in GDP.
Some goods and services are not officially transacted, for
example informal or illegal activities, and are thus difficult
to capture as part of GDP.
Changes in the quality of products are often ignored,
especially for services, and may be difficult to capture.
Conceptual issues:
Some GDP components may be viewed as "regrettables":
GDP does not take into account factors other than income
that are important for the well-being of society.
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Measuring GDP: Limitations
BMAK - Basic
Macro
Conceptual issues (cont’d): Alternatives add very little,
Dr. Ha L.V. even after we has spent quite
SESSION 1 Value of health
some money to hire top-tier
Value of leisure time
expensive economists to de-
Value of the environment.
vise a better gauge! !,
For example: the "Human Development Index" (HDI),
calculated by the United Nations. The HDI takes into
account information on health (such as life expectancy at
birth) and education (such as years of schooling), in
addition to that on GDP, in aiming to measure the
"quality of life". Despite the existence of such alternative
measures, GDP continues to be the main measure used in
practice for comparing the standard of living achieved
across time periods and countries.
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GNP: Gross National Product
BMAK - Basic
Macro
GNP = GDP + Net Factor Income From Abroad (NFIA)
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NFIA = Values of (exports - imports) of factor services
Export of factor services:
A Vietnamese person working in Japan on a labor export
contract for 3 years who earns an annual income of 10,000
USD.
Viettel Group invests in Myanmar and made a profit of 10
million USD in 2017.
Import of factor services;
Dr. Michel Toulouse, a Canadian, working at VGU as the
coordinator of the Computer Science program. His income
is an example of the import of labor (a factor of
production of education service).
Samsung Vietnam posted 5 billion USD in profit from their
smart phone business in Vietnam in 2017.
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BMAK - Basic
Macro
For Vietnam, what is your opinion about the relationship
Dr. Ha L.V. between GNP and GDP?
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BMAK - Basic
Macro What is your expectation for the case of Japan?
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BMAK - Basic
Macro What is your expectation for the case of the USA?
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BMAK - Basic
Macro
For Vietnam, let’s have a deeper look at the sustainability
of our income sources:
Dr. Ha L.V.
SESSION 1 Every year, inward remittance is more than 10 billion USD.
GNP is still about 8.4 billion smaller than GNP.
That means we are paying to other countries about 18-20
billion USD in terms of factor income: capital (external
debt, FDI, FII); and foreign expat (FDI employees,
especially the management level).
In a globalized world, it seems to be normal.
However, if this trend continues, we will have to spend a
substantial part of our GDP paying the "high-paid" foreign
factors.
Capital: It’s hard to change in the short run as we need
foreign capital to increase the capital stock of the country
(more latter).
Labor: The situation could be improved if we can produce
high quality employees who can take over important 45 / 73
GNDP: Gross National Disposable Product
BMAK - Basic
Macro
Dr. Ha L.V.
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GNDP = GNP + Net Unilateral Transfer from Abroad

(NUT), where:
NUT = value of income transfer receive - value of income
transfer given
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GNP, GNDP: Problem 1
BMAK - Basic
Macro
Tina is the sole owner of Tina’s Lawn Mowing, Incorporated (TLM).
Dr. Ha L.V. In one year, TLM collects $ 1,000,000 from customers to mow their
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lawns. TLM’s equipment depreciates in value by $ 125,000. TLM
pays $ 600,000 to its workers, who pay $ 140,000 in taxes on this
income. Some of these workers are originally from Mexico and sent $
300,000 of their after tax income to their home country. TLM pays $
50,000 in corporate income taxes and pays Tina a dividend of $
150,000. Tina pays taxes of $ 60,000 on this dividend income. She
sent $ 20,000 to support her nephew who is studying abroad. TLM
retains $75,000 of earnings in the business to finance future
expansion. How much does this economic activity contribute to each
of the following?
GDP
GNP
GNDP
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2. Saving and Wealth
BMAK - Basic
Macro
Besides income, wealth is also an important determinant
Dr. Ha L.V. of a country’s economic well-being. This section discusses
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the measurement of wealth and the connection between
national saving and national wealth.
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2. Saving and Wealth: Problem 2
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2. Saving and Wealth: Problem 3
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3. Balance of Payment
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3. Balance of Payment: Problem 4
BMAK - Basic
Macro
Dr. Ha L.V.
SESSION 1 How do the following transactions enter the current year’s
balance of payments accounts for Germany?
A Nigerian guest worker sends money to his home country
by bank transfer.
A German investor receives an interest ow from an
investment project in Singapore.
A porcelain collector in San Francisco buys a precious, old
porcelain vase from a collector in Dresden.
A fashion store in Frankfurt buys t-shirts from a Chinese
textile producer.
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3. Balance of Payment: Problem 5
BMAK - Basic
Macro
Dr. Ha L.V.
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Explain why the Current Account and the Financial

Account are typically of a similar magnitude but have
different signs.
Compare the component values of the Current Account of
Malta to those of Denmark and interpret them.
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Real vs. Nominal GDP
BMAK - Basic
Macro Before discussing these measures, just have a some brief
Dr. Ha L.V. look at these statistics:
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In the year 1985, a lunch portion similar to that at the
VGU canteen cost about 4 VND. Now you pay about
20,000 VND.
In the same year 1985, the lunch would cost 0.4 USD. Now
you pay roughly 0.78 USD.
X
(Nominal GDP)t = p . q ,
| {zit } | {zit }
t price of quantity of
good/service good/service
i in year t i in year t
When comparing values of nominal GDP across different years,

this generally involves both changes in quantities and prices,
and thus does not allow to infer about changes in the standard
of living. To allow for such inference, real GDP as traditionally
measured adjusts for price changes and reflects the sum of the
value added produced by all firms in the country in terms of
only one set of prices, namely those of the so-called base year.
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BMAK - Basic
Macro
The Laspeyres approach to computing real GDP involves
Dr. Ha L.V. using initial year prices as the base-year prices:
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N
GDP)Laspeyres YtLaspeyres
X
(Real t = = pi0 ×qit , t = 0, 1, . . . , T
i=1
implying the growth rate of real GDP:

N
P
pi0 × qit
i=1
1+ gYLaspeyres
t
= N
, t = 0, 1, . . . , T ,
P
pi0 × qi,t−1
i=1
The main problem with the Laspeyres approach is that as one moves
from the initial year (t = 0) to the final year (t = T), Laspeyres-based
real GDP over-states more and more the contribution to GDP of
goods and services that are becoming less and less expensive.
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BMAK - Basic
Macro
The Paasche approach to computing real GDP involves
Dr. Ha L.V. using final year prices as the base-year prices:
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N
(Real GDP)Laspeyres = YtLaspeyres =
X
t piT ×qit , t = 0, 1, . . . , T
i=1
implying the growth rate of real GDP:
N
P
piT × qit
i=1
1+ gYLaspeyres
t
= N
, t = 0, 1, . . . , T ,
P
piT × qi,t−1
i=1
The main problem with the Paasche approach is that as, starting in
the final year (t = T), one moves back in time towards the initial
year (t = 0), Paasche-based real GDP over-states more and more the
contribution to GDP of goods and services for which the price is
continuously rising from the initial year to the final year. 66 / 73
BMAK - Basic
The Annual Chain Weight approach aims to overcome these (opposing) biases of
Macro the Laspeyres and Paasche approaches and computes real GDP using the
geometric average of results for the Laspeyres and Paasche approaches, with
Dr. Ha L.V. annually updated base years:
SESSION 1 v
u N N
u P P
u pi,t−1 × qit pi,t × qit
u i=1 i=1
1 + gYtAnnual Chain Weight
=u N
u × N ,
uP P
u pi,t−1 × qi,t−1 pi,t × qi,t−1
t i=1
| {z } |i=1 {z }
Annual Laspeyres Annual Paasche
t = 0, 1, . . . , T .
To start with,
N
X
(Real GDP)0 Annual Chain Weight
= Y0 Annual Chain Weight
= pi0 × qi0
i=1
and,
Yt Annual Chain Weight
= (1 + gYt Annual Chain Weight
) × Yt−1Annual Chain Weight
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Problem 5
BMAK - Basic
Macro
Dr. Ha L.V.
SESSION 1 In the country Sol, the following number of (newly produced)
chicken wraps and smart phones were sold in 2014, 2015 and
2016 (no other goods or services were produced or sold):
2014 2014 Price 2015 2015 Price 2016 2

Quantity (Euro) Quantity (Euro) Quantity
Chicken Wraps 4000 2.5 4000 2.55 4000 2
Smart Phones 3 650 6 600 9 5
Calculate nominal and real GDP (the latter using the Laspeyres,
Paasche and Annual Chain Weight approaches) in Sol for 2014,
2015 and 2016. What explains the differences, if any, between
the real GDP numbers under the three different approaches?
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Problem 6
BMAK - Basic
Macro In the country Simpleland, the following number of (newly
Dr. Ha L.V.
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produced) chicken wraps and smart phones were sold in 2014,
2015 and 2016 (no other goods or services were produced or
sold):
2015 2015 Price 2016 2016 Price 2017 2017 Price

Quantity (Euro) Quantity (Euro) Quantity (Euro)
Chicken Wraps 2000 2 2500 2.4 2800 2.5

Smart Phones 5 450 6 500 10 550
Calculate nominal and real GDP (the latter using the

Laspeyres, Paasche and Annual Chain Weight approaches) in
Simpleland for 2015, 2016 and 2017. What explains the
differences, if any, between the real GDP numbers under the
three different approaches?
69 / 73
PPP exchange rates - based GDP
BMAK - Basic
Macro
Other topics often included in a chapter on
Dr. Ha L.V. macroeconomic measurement are national wealth, the
SESSION 1
balance of payment (BoP), and purchasing power parity
exchange rate. BoP will be discussed later.
To complete the discussion, we now focus on the
Purchasing Power Parity Exchange Rate-Based GDP levels.
How to compare levels and growth rates of GDP per
capita across countries featuring different currencies? This
task is complicated by the fact that prices of traded goods
relative to those of non-traded goods tend to be sizably
higher in "poor" countries than in "rich" countries, and
that pricing of market exchange rates is more closely
related to the pricing of traded than of non-traded goods.
Purchasing power parity (PPP) exchange rates use a
standardized basket of traded and non-traded goods and
services across the countries in question. 70 / 73
PPP: An example
BMAK - Basic
Macro To illustrate the idea, let’s focus on a rather realistic
Dr. Ha L.V. example:
SESSION 1
As of today, the exchange rate USD/VND = 22,800
Traded good Non-traded good
(For example: Smart phone) (For example: Student room for rent)
Production per Price Production Price
Capita (Local currency) per Capita (Local currency)
USA 10 100 200 300
Vietnam 1 2,800,000 25 900,000
Using the current exchange rate, GDP per capita in

Vietnam is 2,800,000+25 × 1800,000 = 47,800,000
VND,or $2096.49, which is quite close to reality.
The GDP per capita for the US is:
100 × 10 + 200 × 300 = 61, 000 USD.
However, the market exchange rate reflect the price of
tradable goods, such as smart phones. Non - tradable
goods/services such as rental price might not have any
influence on the market exchange rate.
71 / 73
PPP: An example
BMAK - Basic
Macro To correct for this bias, let’s fix the basket at 1 smart phone and 25 rooms.
Dr. Ha L.V. The cost of this basket in Vietnam is 47,800,000 VND. The cost of this
SESSION 1 basket in the USA is 7,600 USD.
Vietnam’s PPP exchange rate is 47,800,000/7,600 = 6,289.47, which is

quite different from the current exchange rate of 22,800. Correcting for the
purchasing power parity, the GDP per capita is 7,600 PPP$. Which is quite
close to the reality.
72 / 73
Problem 7
BMAK - Basic
Macro
The table below presents the production per capita, and the
Dr. Ha L.V. corresponding price level in two simplified economies, rich and
SESSION 1
poor. The market exchange rate is 1 unit of the rich country’s
currency = 25,000 units of the poor country’s currency.
Cars Edcuation
Production Price Production Price
per capita (In local currency) per capita (In local currency)
Rich country 100 100 5000 20
Poor country 5 30,000,000 250 5,000
a) Compute the GDP per capita for each country in domestic

currencies.
b) What is the GDP per capita of the poor country in terms of
the rich country’s currency, using the available market
exchange rate.
c) Compute the GDP of the poor country using the purchasing
power parity (PPP) based method. Please provide the rationale
for this approach. First using a standard basket of 5 Cars and
250 Education. 73 / 73

Introduction Plus Macroeconomic Measurements

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Introduction Plus Macroeconomic Measurements

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BMAK - Basic

A qualifying course for second year B.sc. students

Vietnamese - German University

Binh Duong, April 18th , 2022.

Dr. Ha L.V. Strictly speaking, all countries have exhibited some

Dr. Ha L.V. Recall from our OVWL course.

BMAK - Basic GDP = sum of all expenditures by ultimate purchasers of

Note that government services and purchases are not sold

GNDP = GNP + Net Unilateral Transfer from Abroad

Explain why the Current Account and the Financial

When comparing values of nominal GDP across different years,

implying the growth rate of real GDP:

2014 2014 Price 2015 2015 Price 2016 2

2015 2015 Price 2016 2016 Price 2017 2017 Price

Chicken Wraps 2000 2 2500 2.4 2800 2.5

Calculate nominal and real GDP (the latter using the

Using the current exchange rate, GDP per capita in

Vietnam’s PPP exchange rate is 47,800,000/7,600 = 6,289.47, which is

a) Compute the GDP per capita for each country in domestic

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