Vietnam Economics Olympiad 2022

MacroEconomics

Re-edit mainly from:

Mannig J. Simidian (Harvard University),
Presentation on theme: "PowerPoint -
Tutorial To Accompany Macroeconomics,
5th. ed. ® of N. Gregory Mankiw”
By:
Nguyen Thanh Tam (M.A)
 ALL REFERENCES
• N. Gregory Mankiw, Macroeconomics 5th edition
• N. Gregory Mankiw, Principles of Economics
• Sloman J., (2003), Economics, 5th ed
• Mannig J. Simidian (Harvard University), Presentation on theme:
"PowerPoint - Tutorial To Accompany Macroeconomics, 5th. ed. ®
of N. Gregory Mankiw“
• Hoàng Xuân Bình, Macroeconomics 1 Lecture Note, Foreign Trade
University
• IEOx Training Ground (2022), Training Materials
Introducing Our Author…
Prof. Mankiw in IEO 2021
 Learning objectives
What?
the issues macroeconomists study

How?
the tools macroeconomists use
Terms
some important concepts in macroeconomic
analysis
 Table of contents
01 Introduction
Basics

02 The Data of Macroeconomics

GDP, GNP

03 Aggregate Demand and Fiscal policy

04 Money and Monetary policy

05 Inflation and unemployment
CPI

06 Economic growth

07 The Open economy

Table of contents
01
Introduction
 Introduction
Everyone is concerned about macroeconomics lately. We wonder why some
countries are growing faster than others and why inflation fluctuates. Why?
Because the state of the macroeconomy affects everyone in many ways. It
plays a significant role in the political sphere while also affecting public
policy and social well-being.

Recently, there is much discussion of recessions - periods in which real GDP

falls mildly - and depressions, when GDP falls more severely.
Macroeconomists are also concerned about issues such as inflation,
unemployment, monetary and fiscal policies — all of which will be discussed
at length in Macroeconomics Modules.
 Macroeconomics answers

▪ Why does the cost of living keep rising?

▪ Why are millions of people unemployed,

even when the economy is booming?
▪ Why are there recessions?
Can the government do anything to combat
recessions? Should it??
Important issues in macroeconomics

▪ What is the government budget deficit? How

does it affect the economy?
▪ Why does one country have such a huge trade
deficit?
▪ Why are so many countries poor?
What policies might help them grow out of
poverty?
 Why learn macroeconomics?
1. The macroeconomy affects society’s well-being.
Unemployment and social problems
2. The macroeconomy affects your well-being.
Unemployment and earnings growth
Interest rates and mortgage payments

3. The macroeconomy affects politics & current

events.
Inflation and unemployment in election years
 VEO 2021
Which content below that Microeconomics
(one branch of economics) studies:
● a. the international economy
● b. all aspects of scarcity
● c. which choices that individuals and businesses make
● d. the nationwide economy
● c. which choices that individuals and businesses make
 Economists use models to understand what goes on in the economy.
Here are two important points about models: endogenous variables
and exogenous variables. Endogenous variables are those which the
model tries to explain. Exogenous variables are those variables that a model takes as given. In
short, endogenous are variables within a
model, and exogenous are the variables outside the model.
Price Supply

P * This is the most famous economic model. It describes

the ubiquitous relationship between buyers and sellers
in the market. The point of intersection is called an
equilibrium.
Demand

Q * Quantity
Market clearing is an alignment process whereby decisions between
suppliers and demanders reach an equilibrium. Here’s how it works.
Let’s say you begin with a demand and supply curve for CDs.
Remember that the demand curve slopes downward meaning that
as you increase the price (by moving along the demand curve), the
quantity demanded decreases. Conversely, the supply curve slopes
upward implying that as the price increases (by moving along the
supply curve), the amount supplied will increase.
P D D´ S The center point A is where market
B decisions reach an equilibrium.
P´ Now, suppose that there is a sudden
P* A
increase in the demand for CDs.
The increase in demand places
upward pressure on the price to point
B since the original price, P* no
Q* Q´ Q longer clears the market.
 S
P SHIFTS IN DEMAND: Suppose your income
rises? Your demand for a given product, say
Pho (noodle-soup) for example, will also increase.
This translates into a rightward shift in the
D'
demand curve from D to D'. Result:
D both price and quantity are higher.
Q S S'
P
SHIFTS IN SUPPLY: A fall in the price
of materials increases the supply of Pho
(noodle-soup) ; at any given price, sellers
find that the sale of Pho (noodle-soup) is
more profitable, and thus the supply of Pho D

rises. Q
This translates into a rightward shift in supply
from S to S' .Result: price falls, quantity rises.
Economists typically assume that the market will go into an
equilibrium of supply and demand, which is called the
market clearing process. This assumption is central to the
Pho example on the previous slide. But, assuming that
markets clear continuously is not realistic. For markets to
clear continuously, prices would have to adjust instantly to
changes in supply and demand. But, evidence suggests that
prices and wages often adjust slowly.

So, remember that although market clearing models assume

that wages and prices are flexible, in actuality, some wages
and prices are sticky.
 Microeconomics is the study of how households and firms
make decisions and how these decision makers interact in the
marketplace. In microeconomics, a person chooses to
maximize his or her utility subject to his or her budget constraint.

Macroeconomic events arise from the interaction of many

people trying to maximize their own welfare. Therefore, when
we study macroeconomics, we must consider its
microeconomic foundations.
 Macroeconomics system

Inputs Black box: AS+AD Outputs

Exogenous variables: Aggregate Demand Yield, employment,
weather, politics, Aggregate Supply Average price,
population, technology Inflation,interest,budget,
and patents or know-how

Endogenous variables: Trade balance and

direct impacts-fiscal balance of International
policy,monetary policy, payment,
Key Concepts of Topic 1
Macroeconomics
Recession
Depression
Models
Macroeconomic system
Inputs
Outputs

Endogenous variables
Exogenous variables
Market clearing
 VEO 2021
Which content below that Microeconomics (one branch of
economics) studies:

● a. the international economy

● b. all aspects of scarcity
● c. which choices that individuals and businesses make
● d. the nationwide economy
● c. which choices that individuals and businesses make
 VEO 2021
Which are the contents that Macroeconomics studies:
● a. Variables of the whole economy.
● b. Consumers' choices between fish and beef. .
● c. What a strike by the United Auto Workers affects General
Motors
● d. The decision that government makes relating to supports for
price of lychee
● a. Variables of the whole economy.
 02
Data of
macroeconomics
 Gross domestic products-GDP

Gross Domestic Product (GDP) is the

market value of all final goods and
services produced within an economy
in a given period of time.
 Rule 1 for computing GDP
To compute the total value of different goods and services, the national income accounts
use market prices.
Thus, if

$0.50 $1.00
GDP = (Price of apples Quantity of apples) + (Price of oranges Quantity of oranges)
= ($0.50 4) + ($1.00 3)
GDP = $5.00
 Rule 2 for computing GDP

Used goods are not included in the calculation of GDP.

 Rule 3 for computing GDP
The treatment of inventories depends on if the goods are
stored or if they spoil. If the goods are stored, their value
is included in GDP.
If they spoil, GDP remains unchanged. When the goods
are finally sold out of inventory, they are considered used
goods (and are not counted).
 Rule 4 for computing GDP
Intermediate goods are not counted in GDP– only the
value of final goods. Reason: the value of intermediate
goods is already included in the market price.

Value added of a firm equals the value of the firm’s

output less the value of the intermediate goods the firm
purchases.
 Rule 5 for computing GDP

Some goods are not sold in the marketplace and

therefore don’t have market prices. We must use their
imputed value as an estimate of their value. For example,
home ownership and government services.
 VEO 2021
If the real GDP (gross domestic product) of Vietnam has
increased, but the production of goods has remained the
same, then the production of services has:

● a. Increased.
● b. Decreased.
● c. Remained the same.
● d. Fluctuated.
● a. Increased.
 VEO 2021
GDP does not count illegally produced and sold items and
those produced and consumed at home because
● a. Their quality is too low to contribute value to GDP
● b. These items are not listed in income tax forms
● c. The production and consumption of these items are not
encouraged by the government.
● d. It is not easy to measure them
● d. It is not easy to measure them.
 VEO 2021
GDP (Gross Domestic Product) comprises of
approximate value calculations of which of the
following non-market goods or services?

● a. the estimated rental monetary worth of owner-occupied homes

● b. the monetary worth of unpaid housework
● c. the monetary worth of vegetables and other foods that people grow
in their gardens
● d. All of the above are included in GDP.
● a. the estimated rental monetary worth of owner-occupied homes
The value of final goods and services measured at current prices is called
nominal GDP. It can change over time either because there is a change in
the amount (real value) of goods and services or a change in the prices of
those goods and services.

Real GDP is the value of goods and services measured using a constant set
of prices.

This conversion from nominal to real units allows us to eliminate the

problems created by having a measuring stick (dollar value) that essentially
changes length over time, as the price level changes.
Let’s see how real GDP is computed in our apple and orange economy.
For example, if we wanted to compare output in 2002 and output in 2003,
we would obtain base-year prices, such as 2002 prices.
Real GDP in 2002 would be:
(2002 Price of Apples  2002 Quantity of Apples) +
(2002 Price of Oranges  2002 Quantity of Oranges).
Real GDP in 2003 would be:
(2002 Price of Apples  2003 Quantity of Apples) +
(2002 Price of Oranges  2003 Quantity of Oranges).
Real GDP in 2004 would be:
(2002 Price of Apples  2004 Quantity of Apples) +
(2002 Price of Oranges  2004 Quantity of Oranges).
Nominal GDP measures the current dollar value of the output of the
economy.

Real GDP measures output valued at constant prices.

The GDP deflator, also called the implicit price deflator for GDP,
measures the price of output relative to its price in the base year. It
reflects what’s happening to the overall level of prices in the
economy.
GDP Deflator = Nominal GDP
Real GDP
 VEO 2021
From year 2019 to year 2020, suppose the nominal GDP
of country Vietnam increased from 3,421 USD to 3,521
USD, while the GDP Deflator rose from 262 to 270.
Nominal GDP changed by A %, the GDP Deflator changed
by B %, and real GDP changed by C %.
● a. 2.92, 3.05, negative 0.13
● b. 100, 8, positive 92
● c. 2.92, 8, negative 5.08
● d. 100, 3.05, positive 92
● a. 2.92, 3.05, negative 0.13 A: (3521-3421)x100-100; B: 270/262x100-
100; C: C2019 and C2020
 Income, Expenditure
And the Circular Flow
There are 2 ways Total income of everyone in the economy
of viewing GDP Total expenditure on the economy’s
output of goods and services
Income $
Labor
Households Firms
Goods

Expenditure $
For the economy as a whole, income must equal expenditure.
GDP measures the flow of dollars in this economy.
 Methods of computing GDP
1. Expenditure approach

2. The Factor Incomes Approach

3. The output approach

 Y = C + I + G + NX

Total demand Investment

for domestic is composed spending by
output (GDP) of businesses and
households Net exports
or net foreign
Consumption Government demand
spending by purchases of goods
households and services
 The Factor Incomes Approach

It measures GDP by adding together all the incomes

paid by firms to households for the services of the
factors of production they hire. According to this
approach, GDP is the sum of incomes in the economy
during a given period
GDP = w + r + i +  + D +Te
W: wage, r :rent fixed capital, i: interest,  profit, D:
Depreciation, Te: indirect tax
 The output approach

Total Value added = Total Revenues – Total

Cost
GDP =  Value added in all
industries
=> GDP = VAT. 1/Value added tax
 Gross national products-GNP

Definition:
GNP is the market value of all final goods and services
produced by domestic residents in a given period of
time.
Computing methods:

GNP = GDP + Tn
Tn: net Income from Abroad
 Key Concepts of Topic 2
Gross domestic product (GDP)
Consumer Price Index (CPI)
Nominal versus real GDP
GDP deflator
National income accounts
Consumption-Investment-Government Purchases - Net
Exports
Labor force
 MORE LESSONS OF TOPIC 2
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GIVE AWAY MATERIALS FOR STUDENTS

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 03
Aggregate Demand
& Fiscal policy
This topic will introduce an analysis of the
economy as originally described by the
economist John Maynard Keynes. His theory of
how the macroeconomy works will help us
explain how the economy’s income (GDP) is
determined

Source: Forex Club

 Why AD?
The economy was caught in a vicious cycle.
People–s spending was low because their income
was low; their income was low because wages and
employment were low; wages and employment were
low because production was low; production was
low because consumer spending was low: there was
no point in firms producing any more because it
could not be sold. Thus this analysis shows that it is
important to understand how AD is determined.
AGGREGATE DEMAND - DEFINITION

Demand for an individual good is defined as the

quantity
that is bought at any given price.
'Aggregate' in economics means a 'total' or 'added
up' amount.
Aggregate demand is the total of all
demands or expenditures in the economy
at any given price.
 THE 4 COMPONENTS OF AD
National expenditure is one of the three ways of calculating
national income, usually measured as GDP. It is made up of four
components:

$
Consumptio Government Net Investment
n (C) spending exports (I)
(G) (X - M)
This is spending by Current spending, Foreigner spend This is spending by
households on goods ex. on money
s on goods firms on
and services. salaries and wages; produced in the investment
Investment goods, ex. domestic goods.
new roads and economy.
 THE CALCULATION OF AD
National expenditure or aggregate demand can be
(AD) calculated using the following formula:

AD = C+I+G+(X-M)

C: Consumers’ expenditure on goods and

services;
I:Capital investment;
G: Government Spending;
X: Export of goods and services;
M: Import of goods and services.
 AGGREGATE DEMAND CURVE
The aggregate demand curve shows the relationship between the
price level and the level of real expenditure in the economy.

Price level

AD
P1 Real output
0 Y2 Y1
 SHIFTS IN THE AD CURVE
● An increase in consumption, investment, government
spending or net exports, given a constant price level, will lead
to a shift in the aggregate demand curve from AD1 to AD2.

● Price level

● P

● AD2
AD1

0 Real output
Y1 Y2
 Fiscal policy
Government use taxation and
consumption to regulate aggregate
demand.
Expansionary fiscal
policy
Increase Consumption
Decrease Tax

Contractionary fiscal
policy
Decrease Consumption
Increase Tax
Topic 4. Money and
monetary policy
What is
Money?
Money is any commodity or
token that is generally
acceptable as the means of
payment
 The Functions of Money
Medium of Exchange: it is an object that is generally accepted
in exchange for goods and services. Money acts as such a
medium
Unit of Account (A Means of Evaluation): a unit of account is
an agreed measure for stating the prices of goods and services. It
allows the value of one good to be compared with another
Store of Value: any commodity or token that can be held and
exchanged later for goods and services is called a store of value.
Money acts as a store of value.
 VEO 2021
At the end of this school year, you need to help your parents
to estimate your total learning cost for the following school
year. When you calculate the total expenses for the next
academic year, which function of money do you apply?

● a. A medium of exchange.
● b. A store of value.
● c. A measure of value.
● d. All of the above.
● c. A measure of value.
 Types of Money Depen on
Depen on Value
Liquidity
Fiat Money
In the Banks

Cash

Commodity
Deposit Money
 Functions of Central Bank
*To Issue Notes: the Central Bank is the sole issuer
of banknotes. The amount of banknotes issued by
Central Bank depends largely on the demand for
notes from the general public
For example, BOE issues banknotes in England and
Wales (in Scotland and Northern Ireland retail
banks issue banknotes).
 Functions of Central Bank
*It Acts as a Bank
● +To the Government: the government deposits its revenues from
taxation in the central bank and uses CB in order to borrow money
from the market
● +To other Recognised Banks: all banks licensed by CB hold
operational balances in the CB. These are used for clearing
purposes between the banks and to provide them with a source of
liquidity
● +To Overseas Central Banks: these are deposits in sterling held by
overseas authorities as part of their official reserves and/or
purposes of intervening in the foreign exchange market in order to
influence the exchange rate of their currency.
 Functions of Central Bank
*It Manages the Government’s Borrowing Programme: whenever the
government runs a budget deficit (it spends more than what it
receives in taxes) it will have to finance that deficit by borrowing. It
can borrow by using bonds (gilts), National Savings certificates or
Treasury bills. The CB organises this borrowing

*It Supervises the Financial System: it advises banks on good

banking practice. It discusses with government about polices and
reports back to the government. It requires banks to maintain
adequate liquidity: this is called prudential control.
 Functions of Central Bank
*It Provides Liquidity to Banks – Lender of Last Resort: it ensures
that there is always an adequate supply of liquidity to meet the
legitimate demands of depositors in recognised banks

*It Operates the Government’s Monetary and Exchange Rate Policy

+Monetary Policy: the CB manipulates the interest rate in the

economy and influence the size of the money supply

+Exchange Rate Policy: the CB manages the country’s gold and

foreign currency reserves
 Money creation of commercial bank

Banks are the Financial Intermediaries. They are

private firms licensed by the Central Bank under
the Banking Act to take deposits and make loans
and operate in the economy.

1 Central Bank/country
Many Commercial Banks/country
The creation of Money by commercial
banks
The Creation of Money: banks create
money. However this does not mean that
they have smoke-filled back rooms in
which counterfeiters are busily working.
Notice that most money is deposits, not
currency. What banks create is deposits
and they do so by making loans. But the
amount of deposits they can create is
 Tools to create Money

● Fractional-Reserve Banking
● Reserve Ratios
● Required Reserve Ratio
 VEO 2021
If all banks offer the reserve ratio of 25 percent, then
new reserves of 3 million VND (Vietnamese Dong) can
generate:

● a. 6 million VND of new money in the economy.

● b. 750,000 VND of new money in the economy.
● c. 12 million VND of new money in the economy.
● d. 7.5 million VND of new money in the economy.
● c. 12 million VND of new money in the economy. The new money in the
economy is: 3 : 25% = 12.
 The Supply of Money
● *Definition of Money Supply: the quantity of money
available is called the money supply. In an economy
that uses fiat money, such as most economies today,
the government controls the supply of money: legal
restrictions give the government a monopoly on the
printing of money
● *Monetary Policy: the control over the money supply is
called monetary policy
 The Central Bank's Policy Tools
● *Reserve Requirements: these are regulations by the central bank that impose on banks a
minimum reserve-deposit ratio. An increase in reserve requirements raises the reserve-deposit
ratio and thus lowers the money multiplier and the money supply
● *Discount Rate: it is the interest rate that the central bank charges when it makes loans to
banks. Banks borrow from the central bank when they find themselves with too few reserves
to meet reserve requirements. The lower the discount rate, the cheaper are borrowed reserves
and the more banks borrow at the central bank’s discount window. Hence a reduction in the
discount rate raises the monetary base and the money supply. This type of monetary policy
does not focus directly on money supply but instead targets the interest rate
● *Open-Market Operations: they are the purchases and sales of government bonds by the
central bank.
When the central bank buys (sells) bonds from (to) the public, the pounds it pays (receives) for the
bonds increase (decrease) the monetary base and thereby increase (decrease) the money supply.
 Monetary policy:
● 1. Expansionary monetary policy

Increase Money supply

● 2.Contractionary monetary policy

 05
Inflation and
Unemployment
 Unemployment

Unemployment is the number of people of working

age who are without work, but who are available
for work at current wage rates. If the figure is to be
expressed as a percentage, then it is a percentage of
the total labour force.
 Labour force
The labour force is The labour force doesn’t
defined as: those in include people who are
employment (including out of working age,
the self-employed, those students, pupils,
in the armed forces and invalids. People who
those on government are at working age but
training schemes) plus unwilling to work
those unemployed. doen’t belong to labour
force
 Labour force

Labour employment
force
In
unemployment
Working
Populat age
ion Out of
labour force

Out
 Computing unemployment rate
u - Unemployment Rate: to be expressed by fraction
of unemployment with the total labour force. It can
be expressed by percentage as the formula below:
U (Unemployed): L (Labour Force):

U
u =  100%
L
Unemployment is a problem for the economy because:

Output and incomes are lost.

Human capital depreciates.
Crime may increase.
Human dignity suffers.
 Types of unemployment
Natural unemployment
In long term, even at equilibrium labor market

Cyclical Unemployment
In each period, due to sticky wage, disappear in long term

Demand-deficient Unemployment
Aggregate demand is lower than full-employment
aggregate demand
Classical Unemployment
A wage in excess of the equilibrium wage rate
 Natural unemployment
Frictional unemployment
The problem is that information is imperfect

Structural Unemployment
arising because there is a mismatch of skills and job opportunities when the
pattern of demand and production changes
HOW
MUCH?
 Prices of a bowl of Phở
In 2000
5,000 VND

In 2010
15,000-20,000 VND

In 2022
35,000-40,000VND
Inflation
Inflation is a rise in the average
price of goods over time.
The inflation rate is the percentage
change in the price level

Deflation
The term deflation is used to describe a fall in the
average price of goods over time.
Deflation is very rare, but when it occurs it can
cause serious problems in the economy.
Computing inflation
 Computing inflation
Actually, P is difficult to compute, we can compute inflation as below:
Where CPI is the consumer price index and t is time. The consumer price
index measures how much more a basket of goods that represents goods
purchased by the average householder costs today compared with some
previous time period.
k

P Q i
t
i
0

CPI = i =1
k

P Q
i =1
i
0
i
0
 VEO 2021
We calculate the consumer price index (CPI) in order to:

● a. Control changes in the level of wholesale prices in the economy.

● b. Monitor changes in the cost of living over time.
● c. Observe changes in the level of real GDP over time.
● d. Supervise changes in the stock market.
● b. Monitor changes in the cost of living over time.
Computing inflation
Causes of inflation
Demand-pull inflation is caused by
continuing rises in AD in the economy. The
increase in AD may be caused by either
increases in the money supply or increases
in G-expenditure when the economy is close
to full employment. In general, demand-pull
inflation is typically associated with a
booming economy.
 Causes of inflation

Cost-push inflation is associated

with continuing rises in costs. Rises
in costs may originate from a number
of different sources such as wage
increases and other higher costs of
production (e.g. raw materials).
Structural (demand-shift) inflation arises when the pattern of demand (or
supply) changes in the economy which results I n some industries
experiencing increased demand whilst others experience decreased
demand. If prices and wage rates are inflexible downwards in the
contracting industries, and prices and wage rates rise in the expanding
industries, the overall price and wage level will rise. The problem will be
made worse, the less elastic is supply to these shifts.
Expectations are crucial determinants of inflation.
Workers and firms take account of the expected
rate of inflation when making decisions. Generally,
the higher the expected rate of inflation, the higher
will be the level of pay settlements and price rises,
and hence the higher will be the resulting actual
rate of inflation.
 06
Economic
growth
 Economic growth
An increase on
potential output

Economic growth
><
Developments?
Computing of economic growth
*Computed by % changes in real GDP
Yt − Yt −1
gt =  100%
Yt −1
+gt: according to real GDP
*gpct : by GDP per capita ( in case
population increases faster than GDP)
yt − yt −1
g pct =  100%
yt −1
 Sources of economic growth

1.Human capital
2. Capital accumulation
3. Natural resource
4.Technological knowledge
 VEO 2021
What is the variable which takes the the most significant
role in accounting for huge differences in standards of
living all over the world:
● a. Productivity.
● b. Population.
● c. Preferences.
● d. Prices.
● a. Productivity.
 Theories of economic growth

1. Classical theory of Adam Smith and Malthus

2. Economic growth theory of Keynes
3. Neo-classical economic growth theory
Solow model or Solow-Swan Model
 07
The Open Economy
 Y = C + I + G + NX

Total demand Investment

is composed spending by Net exports
for domestic
of businesses and or net foreign
output
households demand
Consumption Government
spending by purchases of goods
households and services
Notice we’ve added net exports, NX, defined as EX-IM. Also, note that
domestic spending on all goods and services is the sum of domestic
spending on domestics goods and services and on foreign goods and
services.
In the next few slides, we’ll learn about the foreign
exchange market, exchange rates and much more!
The exchange rate between two countries is the price at which
residents of those countries trade with each other.
 -relative price of the currency of two countries
-denoted as e

-relative price of the goods of two countries

-sometimes called the terms of trade
-denoted as e
 Thanks!

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