Chapter 1

THE MACROECONOMIC
PERSPECTIVE
NGUYEN BICH DIEP, PhD
nguyenbichdiep@vnu.edu.vn
 INTRODUCTION TO THE
MACROECONOMIC PERSPECTIVE
Goals

 Three primary macroeconomic goals:

 High and sustainable economic growth
 Low unemployment
 Low inflation
Frameworks and tools

 Frameworks: theories of aggregate demand (AD) and aggregate supply (AS)

 Two main policy tools:
 Fiscal policy (government spending and taxes)
 Monetary policy (money supply and interest rates)
MEASURING THE SIZE OF THE
ECONOMY: GDP
GDP

 The size of a nation’s overall economy is typically measured by its gross domestic
product (GDP), the market value of all final goods and services produced within
a country in a given period of time.
GDP

 Market value: Because market prices measure the amount people are willing to
pay for different goods, they reflect the value of those goods.
 Of all: GDP includes all items produced in the economy and sold legally in
markets.
 Final: GDP includes only the value of final goods, and not that of intermediate
goods, because the latter is already included in the former.
 Goods and services: GDP includes both tangible goods and intangible services.
GDP

 Produced: GDP includes goods and services currently produced. It does not
include transactions involving items produced in the past.
 Within a country: GDP measures the value of production within the geographic
confines of a country.
 In a given period of time: GDP measures the value of production that takes place
within a specific interval of time, usually a year or a quarter (three months).
Measuring GDP

 Three ways to measure GDP:

 Expenditure approach
 Production approach
 Income approach
Expenditure approach

GDP = C + I + G + NX
 C: consumption
 I: investment
 G: government purchases
 NX: net exports
Expenditure approach

 Consumption is spending by households on goods (both durable and nondurable) and

services, with the exception of purchases of new housing.
 Investment is the purchase of goods that will be used in the future to produce more
goods and services. It is the sum of purchases of capital equipment, inventories, and
structures. Investment in structures includes expenditure on new housing.
 Government purchases include spending on goods and services by local and central
governments. It includes the salaries of government workers as well as expenditures on
public works.
 Net exports equal the foreign purchases of domestically produced goods (exports)
minus the domestic purchases of foreign goods (imports).
Exercise

 Which components (if any) of GDP would each of the following

transactions affect?
a. A family buys a new refrigerator.
b. Aunt Jane buys a new house.
c. Ford sells a Thunderbird from its inventory.
d. You buy a pizza.
e. Quebec repaves Highway 50
f. Your parents buy a bottle of French wine.
g. Honda expands its factory in Alliston, Ontario.
Vietnam’s GDP components, 2016
US’ GDP components, 2022
Production approach

 Components of GDP on the supply side:

 Durable goods
 Nondurable goods
 Services
 Structures
 Inventories
US’ GDP components, 2020
Income approach

 The total value of a nation’s output is equal to the total value of a nation’s
income.
 Wages and salaries for labor
 Interest and dividends for capital
 Rent for land
 Profit to the entrepreneur
 …
The problem of double accounting

 To avoid double accounting, i.e. counting output more than once as it travels
through the production stages, only the value of final goods and services in the
chain of production that are sold for consumption, investment, government, and
trade purposes. Intermediate goods, which are goods that go into producing
other goods, are excluded from GDP calculations.
 The sales of used goods are not included because they were produced in a
previous year and are part of that year’s GDP.
What else is not included in GDP

 The underground economy of services paid “under the table” and illegal sales
should be counted, but is not, because it is impossible to track these sales.
 Transfer payments, such as payment by the government to individuals, are not
included, because they do not represent production.
 Also, production of some goods, such as home production, is not counted
because these goods are not sold in the marketplace.
Other ways to measure the economy

 Gross National Product (GNP) measures what a country's citizens and firms
produce, wherever they are located.
 Net National Product (NNP) equals GNP minus depreciation
 Gross National Income (GNI) is the value of all goods and services produced by
people from a country—whether in the country or not. Unlike the other
methods, GNI essentially measures the wealth of a nation because it focuses on
income, not output.
Adjusting nominal values to real values

 The nominal value of any economic statistic are the statistic measured in terms
of actual prices that exist at the time.
 The real value refers to the same statistic after it has been adjusted for inflation.
 Generally, it is the real value that is more important.
Adjusting nominal values to real values

 In order to see how much production has actually increased, we need to extract
the effects of higher prices on nominal GDP. We can easily accomplish this using
the GDP deflator.
 The GDP deflator is a price index measuring the average prices of all final goods
and services included in the economy.
Nominal, real
GDP and GDP
deflator: An
example
Exercise

Product 2020 2021 2022

P Q P Q P Q
Cakes 15 10 22 14 25 16
Apples 3 20 4 22 6 25
Gasoline 20 55 24 55 23 60

 Calculate nominal GDP for each year

 Use 2020 as the base year, calculate real GDP for each year
 Calculate GDP deflator for 2021 and 2022
US’ nominal and real GDP, 1960 - 2010
Tracking real GDP over time
Comparing GDP among countries

 Comparing GDP between two countries requires converting to a common

currency using exchange rates
 Market exchange rates: vary on a day-to-day basis depending on supply and demand
in foreign exchange markets.
 Purchasing power parity (PPP) equivalent exchange rates: provide a longer run
measure of the exchange rate.
 If we are trying to compare standards of living across countries, we need to
calculate GDP per capita by dividing GDP by population.
Top countries by GDP
How well GDP measures the well-being of
society

“…Gross National Product counts air pollution and cigarette advertising, and ambulances to
clear our highways of carnage. It counts special locks for our doors and the jails for the people
who break them. It counts the destruction of the redwood and the loss of our natural wonder
in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the
police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the
television programs which glorify violence in order to sell toys to our children.
Yet the Gross National Product does not allow for the health of our children, the quality of
their education or the joy of their play. It does not include the beauty of our poetry or the
strength of our marriages, the intelligence of our public debate or the integrity of our public
officials. It measures neither our wit nor our courage, neither our wisdom nor our learning,
neither our compassion nor our devotion to our country, it measures everything in short,
except that which makes life worthwhile.”
Robert Kennedy