CHAPTER 1: INTRODUCTION

TO MACROECONOMICS
OVERVIEW
 Scope and nature of macroeconomics
 Macroeconomic data
 Total
output and its measurement
 Measuring price level and inflation
 Unemployment
WHAT IS MACROECONOMICS?
 Macroeconomics studies the aggregate behavior of the
economy. Macroeconomics seeks to obtain an overview
or general outline of the structure of the economy and
the relationships of its major aggregates.
 Macroeconomics deal with major issues of
 Current output and long run economic growth
 Inflation
 Unemployment
 The effect of globalization upon the domestic economy
MEASUREMENT OF TOTAL OUTPUT
 Gross domestic product (GDP) is a measure of the total
output of an economy.
 How to measure GDP?
 Outputmethod
 Expenditure method
 Income method
MEASUREMENT OF GDP BY OUTPUT
METHOD

 GDP is measured as the total market value of all final goods

and services produced within a country in a given period of
time.
 The value of the final goods already includes the value of the
intermediate goods, so including intermediate goods in GDP would
be double-counting.
 Use value added method to exclude intermediate goods.
 Value added is the market value of a firm’s output minus the value
of the intermediate goods the firm used to produce that output.
 GDP = value of final goods produced
= sum of value added at all stages of production
VALUE ADDED METHOD
Stage of Sales Value of Value Added
Production Materials or Product
Firm A, sheep ranch $120 $120
Firm B, wool processor $180 $60
Firm C, suit manufacturer $250 $70
Firm E, retail clothier $350 $100
Total value added $350
 GDP = $350
MEASUREMENT OF GDP BY
EXPENDITURE METHOD
 GDP is measured as the total expenditure on
domestically produced final goods and services.
 GDP =  C + I + G + NX
 C: Household consumption
 I: Gross private domestic investment
 G: Government spending
 NX: Net exports = X - M
MEASUREMENT OF GDP BY
EXPENDITURE METHOD
 Household consumption expenditures (C) is total
spending by households for goods and services.
 Durable consumer goods: last a long time
ex: cars, home appliances …
 Nondurable consumer goods: last a short time
ex: food, clothing …
 Consumer expenditures for services: work done for
consumers
ex: dry cleaning, entertainment, air travel …
MEASUREMENT OF GDP BY
EXPENDITURE METHOD
 Gross private domestic investment (I) is spending on
goods bought for future use including:
 Fixed investment expenditures:
 Business fixed investment: spending on plant and equipment
that firms will use to produce other goods & services.
 Residential fixed investment: spending on housing units by
consumers and landlords.
 Inventories investment: changes in the value of all firms’
inventories.
MEASUREMENT OF GDP BY
EXPENDITURE METHOD
 Government spending (G) is government consumption
and gross investment.
 Government consumption: Expenditures for goods and
services that government consumes in providing public
services.
 Government investment: Expenditures for social capital
which have long lifetimes.
 Note: Government transfer payments are excluded from
government spending because they are not made in exchange
for currently produced goods or services.
MEASUREMENT OF GDP BY
EXPENDITURE METHOD
 Net exports (NX) is the difference between exports and
imports
 Exports (X): are domestically produced goods and services
that are sold abroad.
 Imports (M): are foreign produced goods and services that
are consumed domestically.
NX = X – M
MEASUREMENT OF GDP BY INCOME
METHOD
 GDP is measured as the total income earned by
domestically located factors of production. 
 GDP = Compensation of employees + Rents + Interests +
Proprietors’ income + Corporate profits + Indirect business
taxes + Depreciation – Receipts of factor income from
overseas + Payments of factor income to foreigners
 Labor: wages and salaries
 Capital: interests

 Land: rents

 Entrepreneurial skills: profits

REAL VS. NOMINAL GDP
 Nominal GDP measures the value of all final goods and
services produced using current prices.
 Real GDP measures the value of all final goods and
services produced using the prices of a base year.
 Changes in nominal GDP can be due to
 changes in prices
 changes in quantities of output produced
 Changes in real GDP can only be due to changes in
quantities, because real GDP is constructed using
constant base-year prices.
GDP, GNP AND GNI
 Gross Domestic Product (GDP) measures the value of output
produced in a country.
 Gross National Product (GNP) measures the value of output
produced by the domestic residents-owned economic resources
regardless of where they are domiciled.
GNP = GDP + Net foreign factor incomes
= GDP + (Receipts of factor income from overseas
– Payments of factor income to foreigners)
 Gross National Income (GNI) measures the total income earned by
a nation’s residents.
GNI = Compensation of employees + Rents + Interests +
Proprietors’ Income + Corporate Profits
GDP AND GNI IN VIETNAM (IN CURRENT USD),
2020
SOURCE: WORLD BANK

 GDP: 271.16 billion USD

 GNI: 256.92 billion USD

 Population: 97.34 million

 GDP per capita: 2,786 USD

 GNI per capita: 2,639 USD

GDP PER CAPITA (IN CURRENT USD) IN ASEAN,
2020
SOURCE: WORLD BANK

Vietnam 2786

Thailand 7189
59798
Singapore

Philippines 3299

Myanmar 1400

Malaysia 10402

Lao PDR 2630

Indonesia 3870

Cambodia 1513

Brunei Darussalam 27466

0 10000 20000 30000 40000 50000 60000

REAL GDP IN VIETNAM (IN BILLION 2010 USD)
SOURCE: WORLD BANK

250.00

206.69
200.86
200.00
187.69
175.28
164.10
154.51
150.00 144.83
136.66
129.63
123.17
115.93
108.93
103.36
100.00 97.82
91.31
85.35
79.36
73.80
69.04
61.15 64.93

50.00

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Real GDP
INFLATION
 Inflation exists when there is a sustained increase in the price
level.
 Inflation rate is the percentage change in the price level from
the previous period.
Pt  Pt 1
t   100%
Pt 1
 If the inflation rate is positive: price level increases → inflation.
 If the inflation rate is negative: price level decreases →
deflation.
 If the inflation rate is zero: stale price level.
 Disinflation occurs when the inflation rate decreases.
MEASURING THE PRICE LEVEL
 The price level refers to the overall price of all goods
and services in the economy.
 The consumer price index CPI and GDP deflator are
used as a measurement for the price level.
 The CPI measures the overall cost of the fixed market
basket of goods and services bought by a typical consumer.
 GDP deflator is an index of price changes for goods and
services included in GDP.
CPI AND GDP DEFLATOR
 How to calculate CPI
𝑛

𝐶𝑡
∑ 𝑃 𝑖𝑡 𝑄 𝑖
𝑖=1
𝐶𝑃𝐼 𝑡 = × 100 = × 100
𝐶0 𝑛

∑ 𝑖
𝑃 0 𝑄𝑖
𝑖=1

 How to calculate GDP deflator

𝑛

𝐺𝐷𝑃
𝑁 ∑ 𝑃 𝑖𝑡 𝑄𝑖𝑡
GDP deflator t =
𝑡 𝑖=1
𝑅
× 100 = 𝑛
× 100
𝐺𝐷𝑃 𝑡
∑ 𝑃
𝑖
0 𝑄
𝑖
𝑡
𝑖 =1
EXAMPLE: HOW TO CALCULATE THE CPI
 The market basket contains 20 pizzas and 10 compact discs.
Year Price of pizza Price of CDs
2010 $10 $15
2020 $15 $21
2021 $16 $22
 Take 2010 as the base year

𝐶 20 20 $ 15 ×20+ $ 21 ×10
𝐶𝑃𝐼 20 20 = ×100= ×100=145.71
𝐶 2010 $ 10 × 20+ $ 15 ×10
𝐶 20 21 $ 16 × 20+ $ 22 ×10
𝐶𝑃𝐼 20 21 = × 100= × 100=154 .28
𝐶 2010 $ 10 × 20+$ 15 ×10

 Inflation rate: 𝐶𝑃𝐼 2021 −𝐶𝑃𝐼 2020 154.28−145.71

𝜋 2021= ×100% = ×100%=5.88%
𝐶𝑃𝐼2020 145.71
EXAMPLE: HOW TO CALCULATE THE GDP
DEFLATOR

Good 2010 2020 2021

Quantity Price Quantity Price Quantity Price

A 25 $2 30 $3 40 $4

B 50 $5 60 $6 65 $6

C 40 $10 50 $11 60 $12

EXAMPLE: HOW TO CALCULATE THE GDP DEFLATOR
 Take year 2010 as a base year
 Nominal GDP in 2010 = Real GDP in 2010
→ GDP deflator in 2010 = 100
 Year 2020
 Nominal GDP = $3 × 30 + $6 × 60 + $11 × 50 = $1000
 Real GDP = $2 × 30 + $5 × 60 + $10 × 50 = $860
 GDP deflator in 2020 = ($1000 / $860) × 100 = 116.28

 Year 2021
 Nominal GDP = $4 × 40 + $6 × 65 + $12 × 60 = $1270
 Real GDP = $2 × 40 + $5 × 65 + $10 × 60 = $1005
 GDP deflator in 2021 = ($1270 / $1005) × 100 = 126.37

 Inflation rate in 2021

126.37 −116.28
𝜋 2021= ×100 %=8.68 %
116.28
TWO MEASURES OF INFLATION IN VIETNAM
SOURCE: WORLD BANK

25.0
23.1
22.7
21.3

20.0 18.7
18.8

15.0

12.1 10.9
9.6
10.0 8.4 9.2 9.1
8.7 8.8 8.6 8.3
8.3
7.8 6.7
7.3 7.1
6.6 6.6
5.7 5.7 7.4
6.2
4.7 4.8
5.0 4.1 4.1 4.1
3.8 3.7 3.5 3.5
3.2 3.4 3.2 3.4 3.2
2.6 2.7 2.8
1.8
1.1 1.3
-0.2 0.6
-1.7 -0.4
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

-5.0

Percentage change in CPI Percentage change in GDP deflator

UNEMPLOYMENT
 The total population is divided into 3 groups:
 Children.
 Adult population
 Not in labor force: adults who are unable or unwilling to work.
(E.g. full-time students, retirees, persons with mental disabilities,
armed forces, prisoners, discouraged workers…)
 Labor force: adults who are able and willing to work.
HOW TO MEASURE UNEMPLOYMENT?
Labor force = Employed + Unemployed
 Employed: people who have jobs (employees and self-
employed workers)
 Unemployed: people who have no jobs but actively seeking
for job (new entrants, re-entrants, lost job, quit job, laid
off).
Labor force participation rate =
(Labor force / Total adult population) × 100%
Unemployment rate =
(Unemployed / Labor force) × 100%
LABOR FORCE PARTICIPATION RATE AND
UNEMPLOYMENT RATE IN VIETNAM
SOURCE: WORLD BANK
90.0

80.0 76.7 76.6 76.6 76.5 76.4 76.3 76.2 76.1 76.0 76.0 76.3 76.5 76.8 77.7 77.9 78.0 77.5 77.6 77.7 77.4
75.6

70.0

60.0

50.0

40.0

30.0

20.0

10.0
2.3 2.8 2.1 2.3 2.1 2.1 2.1 2.0 1.8 1.7 1.1 1.3 1.3 1.9 1.9 1.9 1.2 2.0 2.3
1.0 1.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Unemployment rate (% of total labor force)

Labor force participation rate (% of total population age >15)
 LABOR STRUCTURE BY ECONOMIC SECTOR IN
VIETNAM, 2018
SOURCE: GSO

Foreign investment; 5.6

State; 9.6

Private; 12.4

Collective; 0.1

Individuals/
Individual
business
households;
72.2