1/8/2021

International School of Management and Economics

BBAE Programme, Intake 2, 2021

Principles of Macroeconomics:

The Science of Macroeconomics

By

Bach Ngoc Thang

[email protected]

Hanoi, January 2021

slide 0

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

slide 1

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?

slide 2

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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?

slide 3

U.S. Real GDP per capita

(2000 dollars)
40,000
9/11/2001

First oil
30,000
price shock
long-run upward trend…
20,000
Great
Depression Second oil
10,000
price shock

World War II
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
slide 4

U.S. inflation rate

(% per year)

25

20

15

10

-5

-10

-15
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

slide 5

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U.S. unemployment rate

(% of labor force)

30

25

20

15

10

0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

slide 6

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

slide 7

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

3
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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)
slide 9

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

slide 10

10

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)
slide 11

11

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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

slide 12

12

Digression: functional notation

▪ General functional notation
shows only that the variables are related.
Q d = D (P,Y )
▪ A specific functional form shows
the precise quantitative relationship.
A list of the
▪ Example:
variables
D (P,Y ) = 60 Q
that affect – d10P + 2Y

slide 13

13

The market for cars: Demand

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

The demand curve

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

slide 14

14

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The market for cars: Supply

supply equation: P
Price
s
Q = 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

slide 15

15

The market for cars: Equilibrium

P
Price
of cars S

equilibrium
price
D
Q
Quantity
of cars
equilibrium
quantity

slide 16

16

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.

slide 17

17

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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.

slide 18

18

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
slide 19

19

Now you try:

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

slide 20

20

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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.

slide 21

21

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

slide 22

22

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

slide 23

23

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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

slide 24

24

Group discussion: Vietnamese

data
▪ See the data in the following slides and discuss
relevant issues.

slide 25

25

Vietnam and China: Economic growth

(GDP, %)
14.0

12.0

10.0
9.3

8.0 8.2
7.5 7.5
6.8 6.9 7.0 7.1 6.8
6.4 6.2 6.7
6.0 6.2 6.3 6.0 6.2
5.8 5.7 5.4
5.2 5.4
4.8
4.0

GDP growth rate, China GDP growth rate, Vietnam

8/01/2021 26 26
slide

26

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Vietnam and China: GDP per capital

(US$)
16,000

14,000

12,000

10,000

8,000
6,172
6,000

4,000 2,692 2,343

2,000
403
-

GDP per capita, China GDP per capita, PPP, China

GDP per capita, Vietnam GDP per capita, PPP, Vietnam

8/01/2021 27 27
slide

27

Vietnam and China: Labor force

participation rate (aged 15-24, %)
80

75
69 69
70 68 68 67
67 66 66
66 65 65 66
64 64 63 63 63 63 64 64 64 63
65

60

55

50

45

40

LFPR (%), China LFPR (%), Vietnam

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slide

28

Vietnam and China: Inflation and

interest rate (%)
25.0
23.1

20.0
18.7

15.0

10.0
8.9 9.1
7.3 7.8 8.3 7.4 8.3 7.1 6.6
5.0 5.7
4.1 4.7
3.2 3.8 3.2 3.2 3.5
0.9
0.0 -0.4
-1.7

-5.0
CPI rate, China Lending interest rate, China
CPI rate, Vietnam Lending interest rate, Vietnam

8/01/2021 29 29
slide

29

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Vietnam: Exchange rate USD/VND,

2000-18
25,000 12.0%

10.0%
20,000
8.0%
15,000
6.0%
10,000
4.0%

5,000 2.0%

0 0.0%

USD/VND thay đổi USD/VND

8/01/2021 30 30
slide

30

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