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International School of Management and Economics

BBAE Programme, K63

Macroeconomics:

The Science of Macroeconomics

By

Bach Ngoc Thang

thangbn@neu.edu.vn

Hanoi, 2023
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Learning Objectives

This chapter introduces you to

▪ the issues macroeconomists study
▪ U.S. macroeconomic data
▪ the tools macroeconomists use
▪ some important concepts in macroeconomic
analysis
▪ Vietnam vs. China macroeconomic data

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Important issues in
macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
▪ Why does the cost of living keep rising?
▪ Why are millions of people unemployed,
even when the economy is booming?
▪ What causes recessions?
Can the government do anything to combat
recessions? Should it?

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Important issues in
macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
▪ What is the government budget deficit?
How does it affect the economy?
▪ Why does the U.S. have such a huge trade
deficit?
▪ Why are so many countries poor?
What policies might help them grow out of
poverty?

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U.S. Real GDP per capita

(2009 dollars)

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U.S. inflation rate

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U.S. unemployment rate

(% of labor force)

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Why learn macroeconomics?

1. The macroeconomy affects society’s well-being.

Each one-point increase in the unemployment rate

is associated with:
▪ 920 more suicides
▪ 650 more homicides
▪ 4000 more people admitted to state mental
institutions
▪ 3300 more people sent to state prisons
▪ 37,000 more deaths
▪ increases in domestic violence and homelessness

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Why learn macroeconomics?

2. The macroeconomy affects your well-being.
5
In most years, wage growth falls 5

percent change from 12 mos earlier

4 when unemployment is rising.
change from 12 mos earlier

3
3
1
2

1 -1

0
-3
-1
-5
-2

-3 -7
1965 1970 1975 1980 1985 1990 1995 2000 2005
unemployment rate inflation-adjusted mean wage (right scale) slide 8

Why learn macroeconomics?

3. The macroeconomy affects politics.
Unemployment & inflation in election years
year U rate inflation rate elec. outcome
1976 7.7% 5.8% Carter (D)
1980 7.1% 13.5% Reagan (R)
1984 7.5% 4.3% Reagan (R)
1988 5.5% 4.1% Bush I (R)
1992 7.5% 3.0% Clinton (D)
1996 5.4% 3.3% Clinton (D)
2000 4.0% 3.4% Bush II (R)
2004 5.5% 3.3% Bush II (R)
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Economic models

…are simplified versions of a more complex reality

▪ irrelevant details are stripped away
…are used to
▪ show relationships between variables
▪ explain the economy’s behavior
▪ devise policies to improve economic
performance

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Example of a model:
Supply & demand for new cars
▪ shows how various events affect price and
quantity of cars
▪ assumes the market is competitive: each buyer
and seller is too small to affect the market price
▪ Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
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The demand for cars

demand equation: Q d = D (P,Y )

▪ shows that the quantity of cars consumers
demand is related to the price of cars and
aggregate income

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Digression: functional notation

▪ General functional notation
shows only that the variables are related.
A list of the
Q d = D (P,Y )
variables
▪ A specific functional form shows that affect Q d
the precise quantitative relationship.
▪ Example:
D (P,Y ) = 60 – 10P + 2Y

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The market for cars: Demand

demand equation: P
Price
Q d = D (P ,Y ) of cars

The demand curve

shows the relationship
between quantity D
demanded and price, Q
other things equal. Quantity
of cars

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The market for cars: Supply

supply equation: P
Price
Q s = S (P , Ps ) of cars S

The supply curve

shows the relationship
between quantity D
supplied and price, Q
other things equal. Quantity
of cars

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The market for cars: Equilibrium

P
Price
of cars S

equilibrium
price
D
Q
Quantity
of cars
equilibrium
quantity

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The effects of an increase in income

demand equation: P
Q d = D (P ,Y ) Price
of cars S

An increase in income
increases the quantity P2
of cars consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantity
the equilibrium price of cars
and quantity.

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The effects of a steel price increase

supply equation: P S2
Q s = S (P , Ps ) Price
of cars S1

An increase in Ps
reduces the quantity of P2
cars producers supply P1
at each price…
D
…which increases the Q
Q2 Q1
market price and Quantity
of cars
reduces the quantity.

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Endogenous vs. exogenous

variables
▪ The values of endogenous variables
are determined in the model.
▪ The values of exogenous variables
are determined outside the model:
the model takes their values & behavior
as given.
▪ In the model of supply & demand for cars,
endogenous: P , Qd , Qs
exogenous: Y , Ps
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Now you try:

1. Write down demand and supply
equations for wireless phones;
include two exogenous variables
in each equation.
Demand equation: i-Phone 14
1. Draw a supply-demand graph
for wireless phones.
2. Use your graph to show how a
change in one of your exogenous
variables affects the model’s
endogenous variables.

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1. Draw a supply-demand graph

for wireless phones.
2. Use your graph to show how a change in one of
your exogenous variables affects the model’s
endogenous variables.

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A multitude of models

▪ No one model can address all the issues we

care about.
▪ e.g., our supply-demand model of the car
market…
▪ can tell us how a fall in aggregate income
affects price & quantity of cars.
▪ cannot tell us why aggregate income falls.

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A multitude of models

▪ So we will learn different models for studying

different issues (e.g., unemployment, inflation,
long-run growth).
▪ For each new model, you should keep track of
▪ its assumptions
▪ which variables are endogenous,
which are exogenous
▪ the questions it can help us understand,
and those it cannot

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Prices: flexible vs. sticky

▪ Market clearing: An assumption that prices are
flexible, adjust to equate supply and demand.
▪ In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand. For example,
▪ many labor contracts fix the nominal wage
for a year or longer
▪ many magazine publishers change prices
only once every 3-4 years

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Prices: flexible vs. sticky

▪ The economy’s behavior depends partly on

whether prices are sticky or flexible:
▪ If prices are sticky, then demand won’t always
equal supply. This helps explain
▪ unemployment (excess supply of labor)
▪ why firms cannot always sell all the goods
they produce
▪ Long run: prices flexible, markets clear,
economy behaves very differently

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Group discussion: Vietnamese

data
▪ See the data in the following slides and discuss
relevant issues.
▪ Discussion questions:
▪ Why there might be differences between
Vietnam and China in terms of:
▪ Economic growth, inflation, interest rates
▪ Per capital income
▪ Labor force participation rates
▪ Can Vietnam catch up with China overtime?

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Vietnam and China:

GDP growth rate (%)
14.0

12.0

10.0

8.0

6.0

4.0

2.0

Vietnam China

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Vietnam and China:

per capital GDP (US$)
20,000

18,000

16,000

14,000
12,556
12,000

10,000

8,000

6,000
3,756
4,000

2,000

China Vietnam China, PPP Vietnam, PPP

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Vietnam and China: Labor force

participation rate for ages 15-24, total (%)
70.0

65.0

60.0

53.5
55.0

50.0
48.1

45.0

40.0

China Vietnam

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Vietnam and China:

Inflation, consumer prices (y.o.y., %)
25.00

20.00

15.00

10.00

5.00

0.00

-5.00

China Vietnam

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Vietnam and China:

Deposit interest rate (%)
16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

China Vietnam

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USD/VND: recent 5 years

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USD/CNY: recent 5 years

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