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Introduction to Macroeconomics
Semester 2, 2012-2013
Lecture 1. Measuring a nationsincome
Pham Thi Thu Tra, Ph.D
21 Feb 2013
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Microeconomics vs. Macroeconomics
Microeconomics is the study of how individual households
and firms make decisions, interact with one another in
markets
Macroeconomics is the study of the economy as a whole.
Macroeconomics focuses on the determinants of total
national income
Deals with aggregates such as aggregate consumptionand investment, and looks at the overall level of prices
instead of individual prices.
Its goal is to explain the economic changes that affect
many households, firms, and markets at once.
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Quiz 1
Which of the following pictures are
related to Vietnams economy2012? Provide a brief explanation
to each.
Can you make a story out of these
ictures!
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Macroeconomics answers questionslike the following
How does the economy work? Why do some national economies grow faster than
other national economies?
Why do economies have good times and bad times? What determines productivity? What is the role of savings and investment? What causes inflation? How do changes in the money supply affect the
economy? How do changes in government spending and taxes
affect the economy?
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The main participants in the macro-economy
1. Households
2. Firms.
Households and firms together make up the private sector
3. Government (the pub l ic sector)
4. The rest of the world (the in ternational/foreignsector)
How do these participants interact?
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Rules of the game Lecturer:
PhmTh Thu Tr [email protected] Teaching Assistants:
NguynTh Hong Hiu [email protected] NguynVnh An [email protected]
Course Materials:
Textbook- Principles of Economics, 5e/6e by N. G. Mankiw
Syllabus, lecture slides, reading assignments and all otherrelevant information available on Blackboard
Visit the IT department (A312 Mr. Cuong) to activate youraccount if you have not done so.
Sources of macroeconomic data and reports for Vietnam:
www.gso.gov.vn
www.imf.org
www.worldbank.org/vietnam
www.adb.org/vietnam
mailto:[email protected]:[email protected]:[email protected]://www.gso.gov.vn/http://www.imf.org/http://www.worldbank.org/vietnamhttp://www.adb.org/vietnamhttp://www.adb.org/vietnamhttp://www.worldbank.org/vietnamhttp://www.imf.org/http://www.gso.gov.vn/mailto:[email protected]:[email protected]:[email protected] -
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Rules of the game (cont.)
Assessmentdetails:
Mid-term exam 30% (semi-closed book exam)Assignment 20%
Two class tests (10%)
Homework (10%)
Final exam 50% (closed-book exam)
Class participation: Compulsory and subject to university regulations
Minimum attendance requirement: 80% of the classes
Active participation: bonus up to 10% of the score of one test
Homework (End-of-chapter) problems
Submitted in hard copy (hand-writing) every two weeks from week 3.
Late submission NOT accepted
Three to four homeworks will be randomly selected for counting inthe final result.
Tutorial Classes: Four Classes
Check your Blackboard for schedule
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Lecture Topic Reading
Week 18 23 Feb Measuring a nations income Chap 10 (6e)
25 Feb 2 Mar Measuring the cost of living Chap 11 (6e)4 9 Mar Chap 12 (6e)
11 16 Mar Production and Growth Chap 12 (6e)
18 23 Mar Savings, Investment and the Financial System Chap 13 (6e)
25 - 30 Mar Unemployment Chap 15 (6e)1 6 Apr The monetary system Chap 16 (6e)
8 13 Apr Mid-term Exam
15 20 Apr Money Growth and Inflation Chap 17 (6e)
21- 27 Apr Open Economy Macroeconomics: Basic Concepts Chap 18 (6e)
29 Apr 4 May A Macroeconomic Theory of the Open Economy Chap 19 (6e)
6 11 May Aggregate Demand and Aggregate Supply Chap 20 (6e)
13 18 MayThe Influence of Monetary and Fiscal Policies on
Aggregate Demand Chap 21 (6e)
20 26 May Backup week & Review
Class Schedule
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TodayChapter 10. Measuring a nations income
We begin our study of macroeconomics with the
countrys total income and expenditure.
What is Gross Domestic Product (GDP)?
How is GDP measured?
What are the components of GDP?
How is GDP corrected for changes in the pricelevel?
Does GDP measure societys well-being?
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What is GDP?
GDP is the most basic measure of how an economy isperforming.
GDP is the total market value of a countrys output. It isthe market value of all finalgoods and services producedwithin a countryin a given period of time.
GDP vs GNP (Gross National Product): Total value ofGoods and Services produced by all nationals of acountry (whetherwithin or outside the country)
GNP = GDP (+) total capital gains from overseasinvestment (-) income earned by foreign nationals
domestically
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Example: GDP in 4 countries 2010
Source: IMF
Note: PPP = Purchasing Power Parity
per capita = per person
GDP (Million
US dollars)
GDP (PPP)
(Million US
dollars)
GDP (PPP) per
capita
(US dollars)US 14,657,800 14,657,800 47,284
China 5,878,257 10,085,708 7,519
Vietnam 103,574 276,567 3,134
Thailand 318,850 586,877 9,187
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What is GDP? GDP is the Market Value . . .
Output is valued at market prices.
. . . Of All Final . . .
It records only the value of final goods, not intermediate goods(the value is counted only once).
. . . Goods and Services . . .
It includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor visits). . . . Produced . . .
It includes goods and services currently produced, nottransactions involving goods produced in the past.
. . . Within a Country . . .
It measures the value of production within the geographicconfines of a country.
. . . In a Given Period of Time.
It measures the value of production that takes place within aspecific interval of time, usually a year or a quarter (threemonths).
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GDP-related concepts
Final Goods and Services
Those goods and services that are not produced for either resale or
for use in the production of other goods; produced for consumption.
Intermediate Goods and Services
Those goods and services that are produced by one firm for use byanother firm to produce a final good (or another intermediate good);produced for further production.
Value added (VA)
The difference between the value of the total goods and services andthe value of the intermediate goods.
What Is Not Counted in GDP?GDP includes all items produced in the economy and sold legallyin markets.
GDP excludes most items that are produced and consumed at home and thatnever enter the marketplace.
It excludes items produced and sold illicitly, such as illegal drugs.
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How GDP is measured?
Three approaches:
1. The Expendi ture Approach: GDP equals to totalexpendi tureon the economys output of goods andservices.
2. The Income Approach: GDP equals toto tal incomeofeveryone in the economy (wages and salaries, rent,interest, and profits ...)
3. The Value-added App roach: GDP equals to the sum ofvalue addedof all producers.
For the economy as a whole,
incom e equals expendi ture, because
every dollar of expenditure by a buyer
is a dollar of income for the seller.
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The Value-added Approach to MeasuringGDP
Production Generated Added
Farmer harvest wheat $100 $100
Miller makes into flour 200 100
Baker makes into bread 300 100
$600 $300
GDP counts only the $ valueof the final good
This is the same as the value-added.
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The Circular-Flow Diagram
It is a simple depiction of the macroeconomy.
It illustrates GDP as spending, revenue, factorpayments, and income.
First, recall that:
Factors of product ionare inputs like labor, land,
capital, and entrepreneur.
Factor paymentsare payments to the factors ofproduction (e.g., wages, rent).
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FIGURE 1: The Circular-Flow Diagram
Markets forFactors of
Production
HouseholdsFirms
Income (=GDP)Wages, rent,profit (=GDP)
Factors ofproduction
Labor, land,capital
Spending (=GDP)
G & Sbought
G & Ssold
Revenue (=GDP)Markets forGoods &Services
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What This Diagram Omits
The government
collects taxes
purchases goods and services (g&s)
The financial system
matches savers supply of funds with borrowersdemand for loans
The foreign sector trades g&s, financial assets, and currencies with the
countrys residents
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The Expenditure Approach:The Components of GDP
Recall: GDP is total spending.
GDP has four com ponents:
Consumption (C)
Investment (I) Government Purchases (G)
Net Exports (NX)
These components add up to GDP (denotedY):
Y = C + I + G + NX
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The components of GDP
Consumpt ion(C):
The spending by households on goods and services, with theexception of purchases of new housing.
Investment(I):
The spending by firms and householdson go ods that wi l l beused in the future to produc e more goods:
capital equipment (e.g., machines, tools)
structures (factories, office buildings, houses) Change in inventories (goods produced but not yet sold)
Government Purch ases(G):
The spending on g&s by local and central governments.
Does NOTinclude transfer payments because these paymentsrepresent transfers of income, not purchases of goods &service.
Net Expo rts(NX): Exports minus imports.
Question: the purchase of financial assets like stocks and bonds
included in Investment?
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Net Exports (NX)
NX = exports imports
Exports represent foreign spending on the
economys g&s.
Imports are the portions of C, I, and G
that are spent on g&s produced abroad.
Adding up all the components of GDP gives:
Y = C + I + G + NX
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Vietnam GDP and Its Components 2010
billions VND % of GDPper capita
(thous. VND)
Y 1,980,914 100 22,788
C 1,317,588 66.51 15,157
I 737,560 37.23 8,485
G 129,313 6.53 1,488
NX (203,547) -10.28 (2,342)
Source: GSO
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Quiz 1: GDP and its components
In each of the following cases, determine how much GDP andeach of its components is affected (if at all).
A. Ms. Hanh spends 2mil VND to buy her boyfriend dinner
at the finest restaurant in district 1.
B. Mr. Trung spends 15mil VND on a new laptop to use in
his publishing business. The laptop was built in China.
C. Ms. Trang spends 3.7mil VND on a REETECH air
conditioner to use in her office. She got last years model onsale for a great price from the local manufacturer REE.
D. Honda Vietnam builds 500 bil VND worth of motorbikes,
but consumers only buy 470 bil VND worth of them.
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Quiz 1: What is/is not included in thecalculation of Vietnam GDP?
1. Money you spent at restaurants while touring Europe.
2. The cost of your newly purchased motorbike Honda.
3. The cost of tires purchased by Honda Vietnam to put on
your new motorbike.
4. Purchase of your first house from a contractor.
5. Purchase of your first house from the previous owner.
6. Wages earned by VN citizens while working in Malaysia.
7. Ms. Lan living in Thu Duc spends a day cleaning her
house, saving herself 100,000VND doing it herself instead
of hiring it out.
8. A Vietnamese businessman opens a restaurant in Sydney.
9. A Vietnamese businessman produces shoes in Long An
and sells these shoes to consumers in US.
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Real vs. Nominal GDP
Nom inal GDP
The GDP measured in current dollars (VND, EURO), theprices paid for goods and services today. But... prices maygo up without changing production.
Nominal GDP values the production of goods and servicesat current prices
Real GDP
Real GDPvalues the production of goods and services atconstant prices.
The Nominal GDP adjusted for changes in the price level.
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Example: Nominal GDP vs. Real GDP(Assume we are producing only two goods)
Compute nom inal GDPin each year:
2008: $10 x 400 + $2 x 1000 = $6,000
2009: $11 x 500 + $2.50 x 1100 = $8,2502010: $12 x 600 + $3 x 1200 = $10,800
Pizza Coffee
year P Q P Q
2008 $10 400 $2.00 1000
2009 $11 500 $2.50 1100
2010 $12 600 $3.00 1200
37.5%
% Change:
30.9%
Note: 30.9% = (10,800 / 8,250) 1 * 100
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Example (Continued):
Compute real GDPin each year,using 2008 as the base year:
Pizza Coffeeyear P Q P Q
2008 $10 400 $2.00 1000
2009 $11 500 $2.50 1100
2010 $12 600 $3.00 1200
20.0%
% Change:
16.7%
$10 $2.00
2008: $10 x 400 + $2 x 1000 = $6,0002009: $10 x 500 + $2 x 1100 = $7,200
2010: $10 x 600 + $2 x 1200 = $8,400
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Example (Continued)
How much would GDP (and hence everyones
income) have grown if there had been zero
change in the price level?
Again, the grow th rate of real GDPfrom one yearto the next is the answer to this question, and this
is why real GDPis corrected for changes in theprice level.
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Real vs. nominal GDP - The GDPdeflator
Nom inal GDPis total output measured at current prices. Real GDPis total output measured at constant prices
(2008 in this example).
Real GDPisNom inal GDPadjusted for changes in the price
level, using theGDP defl ator.
GDP deflator =Nominal GDP
Real GDP100
The GDP deflatormeasures the overall price level in aneconomy compared to some previous year.
Ittells us the rise in nominal GDP that is attributable to arise in prices rather than a rise in the quantities produced
It is the tool to convert Nominalinto Real GDP.
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Example (continued)
Compu te the GDP def lator in each year:
YearNominal
GDPRealGDP
GDPDeflator
2008 $6000 $6000 100.02009 $8250 $7200
2010 $10,800 $8400
2009: 100 x (8250/7200) = 114.6
114.6
2010: 100 x (10,800/8400) = 128.6
128.6
14.6%
12.2%
N i l d l GDP i Vi t 1995
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Nominal and real GDP in Vietnam 19952010
Bill dongs
Nominal GDP Real GDP atconstant price
1994
0
400000
800000
1200000
1600000
2000000
2400000
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GDP and Economic Well-being GDP is the best single measure of the economic
well-being of a society.
Real GDP per capitais the main indicator of the
average persons standard of living. Most economists, policymakers, social scientists, and
businesspersons use a countrys real GDP per capitaas the main indicator of the average persons
standard of living in that country.
But GDP is not a perfect measure of well-being
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GDP is not a perfect measure of well-being
Higher GDP per person indicates a higher standard ofliving.
GDP is not a perfect measure of the happiness or qualityof life. Why?
GDP does not value the quality of the environment.
GDP does not value leisure time.
GDP does not value non-market activity, such as thechild care a parent provides his/her child at home.
GDP does not value an equitable distribution ofincome.
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Then Why Do We Care About GDP?
Having a large GDP enables a country to affordbetter schools, a cleaner environment, healthcare, etc.
In short, GDP does not directly measure thosethings that make life worthwhile, but it does
measure our ability to obtain the inputs into a
worthwhile life.
Many indicators of the quality of life are positivelycorrelated with GDP. For example
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GDP and life satisfaction (Deaton, 2008)
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Summary Gross Domestic Product (GDP) measures a
countrys total income and expenditure.
The four spending components of GDP include:Consumption, Investment, Government
Purchases, and Net Exports. Nominal GDP is measured using current prices.
Real GDP is measured using the prices of aconstant base year, and is corrected for inflation.
GDP is the main indicator of a countrys economicwell-being, even though it is not perfect.