SMacroeconomics Part 1

Nguyen The Khang (Mr.
Khang)
• Academic Qualification:
 Master of Business Administration at RMIT Vietnam
 English Certificate at Churhchill House School in Spencer
Square, Ramsgate, Kent, England.
• Occupation:
Vice General Director at FARMEXCO II Ltd.
• Contact:
 Email: khangnguyenmba@gmail.com
 Cell: 0886 343434
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 No talking and eating in class
 Be on time
 Cell phones have to turn into meeting mode
 Feel free to go out for phone call or
natural need (just do not disturb your classmates)
 Feel free to stop and ask me when confused
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Overviews of macroeconomics
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Contents
 Concepts
 Macroeconomics issues
 Macro policies and objectives
 Models
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Concepts
What is economics?
The problem of scarcity
achieve the
most wants
with
given resources
at available
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Concepts
10 principles of economics
1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country's standard of living depends on its ability to produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run tradeoff between Inflation and unemployment.
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Concepts
Macroeconomics versus microeconomics
The study of economywide phenomena, The study of how households and
including inflation, unemployment, and firms make decisions and how they
economic growth interact in markets
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Concepts
Positive versus Normative EconomicsC
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Macroeconomics Issues
Economics growth
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Business cycle
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Employment and Unemployment
Employment (E): number of employed workers
Unemployment (U): jobless, looking for jobs,
available for works
Labor force (L): L = U + E
Unemployment rate = U/L *100
• natural unemployment (frictional &
structural unemployment)
• cyclical unemployment
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1. Which of the following about discouraged workers would
be correct? They are
a. counted in the labor force.
b. not counted in the labor force or unemployment
numbers.
c. counted in the labor force and the unemployment
numbers.
d. not counted in the labor force but are counted in the
unemployment numbers.
2. Workers temporarily unemployed but who normally find
jobs quickly are called
a. frictionally unemployed.
b. cyclically unemployed.
c. seasonally unemployed.
d. structurally unemployed.
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Inflation
Inflation: the price level (average level of price) rises
over the year
Deflation: the price level decreases over the year
Disinflation: the general price level slowly rises over the year
Price level: Average price of goods & services, based on
Price Index (CPI, PPI, OPI - GDP deflator)
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Inflation
Price index in 2007 is 160% and its 180% in 2008.
Rate of inflation in 2008 is
a. 112.5%
b. 20%
c. 12.5%
d. All wrong
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1. If the CPI is 109 one year and 112 the next, the annual rate of
inflation is measured by the CPI is approximately
a. 1.45%.
b. 2.75%.
c. 3.6%.
d. 4.9%
2. Inflation rate of last year and this year are 5% and 4 %
respectively, this case is
a. deflation.
b. disinflation.
c. inflation.
d. hyperinflation.
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The Exchange Rate and the Balance of Payments
The balance of payments is a systematic record of all economic
transactions between the members of the home country and
the rest of the world in an accounting year. These transactions
are largely, if not entirely, influenced by the exchange rate - It is
the rate at which a country’s economy is exchanged for another
currency (or gold).
1. Current account
BoP = 1 + 2 + 3
2. Capital account
1+2+3+4=0 3. Errors & Omissions
4. Reserves & Related Items
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The Exchange Rate and the Balance of Payments
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Macro policies and objectives

Fiscal policy: uses government spending and tax policies to
influence macroeconomic conditions
Monetary policy: laid down by the central bank. It involves management of
money supply and interest rate
Exchange rate policy: country manages its currency in respect to foreign
currencies and the foreign exchange market
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Models
The steps in the model-building process
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Models
More about models
• A model is a simplified view of reality.
• It sets out the relationship between variables; causes and
effects.
• A model is valid when it enables economists to forecast or
predict the results of various changes in variables.
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Models
Example: petrol consumption
• Identifying the problem
• Petrol consumption has fallen. Why?
• Developing a model
• Select variables  price of petrol, price of cars.
• Express them verbally, graphically or mathematically.
• Testing the model
• Gather data which tells us how well the model estimates
or predicts relationships.
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Models
Hazards of the economic way of thinking
• There are two potential problems to be aware of:

• the ceteris paribus assumption
• possible confusion of association and causation.
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Models
Ceteris paribus
• Ceteris (pronounced ‘keteris’) paribus is a Latin phrase
which means ‘other things remaining unchanged’.
• Economists use this method as it enables them to see how a
change in one variable affects the overall outcome.
• Imagine: if all the variables change at the same time, how
would we know which one caused the change?
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Models
Association vs. causation
• We cannot always assume that when one event follows another,
the first caused the second.
• For example, assume exports from Indonesia rose last month.
Two events might be associated:
• The hole in the ozone layer grew last month.
• Currency movements reduced the cost to Australians of
buying Indonesian goods.
• But are they both possible causes?
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Models
Revision: the law of demand
• There is an inverse relationship between the price of a good
and the quantity buyers are willing to purchase in a defined
time period, ceteris paribus.
• A demand schedule (table) shows the specific quantity of a
good or service that people are willing and able to buy at
different prices.
• The demand curve shows the relationship between price and
quantity demanded.
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Models
If price changes
• When price changes,

quantity demanded
changes.
• There is a movement
along the demand
curve.
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Models
If non-price factors change
• This is known as a change
in demand.
• That is, the demand curve
shifts.
• Rightward shift indicates
demand increasing.
• Non-price factors:
 number of buyers in the market
 tastes and preferences
 income
 expectations of buyers
 prices of related goods.
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Models
Revision: the law of supply
• There is a direct relationship between the price of a good and
the quantity sellers are willing to offer for sale in a defined
time period, ceteris paribus.
• The supply schedule (table) shows the quantity of a good or
service that firms are willing and able to offer for sale at
different prices.
• The supply curve depicts the relationship between price and
quantity supplied.
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Models
Changes in quantity supplied
• If the price changes,

quantity supplied
changes.
• This is a movement along
the supply curve.
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Models
Changes in supply
• A change in non-price
factors is known as a
change in supply; i.e., the
supply curve shifts.
• Rightward shift indicates
supply increasing.
• Non-price factors
 number of sellers in the market
 technology available
 input prices
 taxes and subsidies
 expectations of producers
 prices of other goods the firm could produce
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Models
Revision: Equilibrium
• A market condition that occurs at any price for which the
quantity demanded and the quantity supplied are equal.
• Equilibrium is the ‘point of balance’ between demand and
supply in the market.
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Models
Revision: price ceiling
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Models
Revision: price floor
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Overviews of macroeconomzics
Models
The Circular-Flow Diagram
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Overviews of macroeconomzics
Models
National Income Identities
I+G+X=M+S+T
Injections = Withdrawals
I = S + (T - G) + (M -X)
Investment = Savings
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Models
Aggregate Supply – Aggregate Demand model (AS-AD)
Aggregate Demand (AD)
AD = C + I + G + X - M
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Models
Aggregate Demand (AD): non-price factors
• Consumption spending ( C ): size of the population, consumer
confidence, interest rates, income, employment and wealth,
taxes
• Investment spending (I): interest rates, taxes, costs of inputs
• Export spending (X)
• Import spending (M)
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Models
Short-run Aggregate Supply (SRAS)
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Models
Factors affects Short-run Aggregate Supply (SRAS)
1.price of inputs - if there was a substantial increase in the price of resources such as
labor or energy, then there would be an increase in the costs of producing “stuff” and
that cost would be passed on as higher prices. This is seen as an inward shift in the
AS curve
2.quantity of inputs - if there was a substantial increase in the number of people
working then there would be an increase in the productive capacity of the country.
This would be seen as an outward shift in the AS curve.
3.productivity of inputs - if there was a substantial increase in productivity, then
there would be an increase in the productive capacity of the country. This would be
seen as an outward shift in the AS curve
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Models
Long-run Aggregate Supply (LRAS):
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Models
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SMacroeconomics Part 1

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SMacroeconomics Part 1

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Nguyen The Khang (Mr.

Macro policies and objectives

• There are two potential problems to be aware of:

• When price changes,

Changes in quantity supplied

• If the price changes,

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