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MACROECONOMICS

L Phng Tho Qunh


FACULTY OF INTERNATIONAL ECONOMICS
Mobile: 0987027398
Email: phuongthaoquynhle@yahoo.com.vn

UNIT ASSESSMENT
Participation

10%

Mid-term exam

30%

Multiple choices +
short answer

Final exam

60%

Theory + exercises

Note: Presentation is elective, + 0.5 to 1 point to mid-term


exam for doing presentation

TEXTBOOKS
Macroeconomics, Gregory Mankiw, 2009
Macroeconomics, Paul Krugman, 2012

LECTURE 1: OVERVIEW OF
MACROECONOMICS
I. Overview of economics
The word economy comes from A household and an economy
a Greek word for one who face many decisions:
manages a household.
- Who will work?
- What goods and how many
of them should be
produced?
- What resources should be
used in production?
- At what price should the
goods be sold?

SOCIETY AND SCARCE RESOURCES


Society and Scarce Resources.
- Scarcity. . . means that society has
limited resources and therefore:
- The management of
societys
resources
is
important
because
resources are scarce cannot produce
all the goods and services people wish
to have.

Economics is the study of how society manages its scarce resources.

TEN PRINCIPLES OF ECONOMICS


1.

People face trade-offs: To get one thing, we usually have to


give up another thing

PEOPLE FACE TRADE - OFFS

TEN PRINCIPLES OF ECONOMICS


2. The cost of something is what you give up to get it:
- The opportunity cost of an item is what you give up to obtain
that item.
- Decisions require comparing costs and benefits of alternatives.
3. Rational people think at the margin: Marginal changes are
small incremental adjustments to an existing plan of action.

TEN LESSONS FROM ECONOMICS


4. People respond to incentives. Eg: the increase in gas price
5. Trade can make everyone better off

6. Markets are usually a good way to organise economic activity:


Firms decide who to hire and what to produce.
Households decide what to buy and who to work for.

TEN LESSONS FROM ECONOMICS


7. Government can sometimes improve market outcomes
8. A country standard of living depends on its productivity
9. Prices rise when government prints too much money
10. In short-run, society faces the trade off between inflation and
unemployment

POSITIVE AND NORMATIVE ECONOMICS

Positive economics is the branch of economics that


concerns the description and explanation of economic
phenomena. It concerns what "is", "was", or "will be.

Normative economics (as opposed to positive economics)


makes prescriptions about the way the economy should work.

POSITIVE OR NORMATIVE ECONOMICS?


1.

2.
3.

4.

The government should invest in infrastructure for


better economic growth.
Inflation reduces the real income.
The interest rate should be decreased to stimulate
aggregate demand.
Recession leads to higher unemployment rate.

MICROECONOMICS AND MACROECONOMICS


Microeconomics: is the study of how individual households
and firms make decisions and how they interact with one
another in markets.

Interaction between individual buyers and sellers

The factors that influence the choices made by buyers and


sellers in individual markets (e.g. coffee industry).

MICROECONOMICS AND MACROECONOMICS

Macroeconomics:
Macroeconomics is the study of the economy as a whole
(the aggregate economy).

Examine economy-wide phenomena: unemployment,


national income, rate of growth, gross domestic product,
inflation and price levels.

Its goal is to explain the economic changes that affect


many households, firms, and markets at once.

MICROECONOMICS AND MACROECONOMICS

MICROECONOMICS OR MACROECONOMICS?

The economic growth rate in Vietnam is expected to be 5.8%


in 2014.

Iphone is gaining higher market share in Vietnam.

The government expenditure should be increased to stimulate


economic growth and reduce unemployment as a whole.

The government should adopt policies to make it easier for


low income students to afford college.

MACROECONOMICS IS RELATED TO POLITICAL?

Macroeconomics is inherently political because it raises


questions about the appropriate role of government.
a.

Conservative (or classical) economics: Adam Smith with


The invisible hand:
1) Primary value: individual freedom
2) Markets almost always work well
3) Government intervention into the
economy usually counterproductive

MACROECONOMICS IS RELATED TO POLITICAL?


b.

Liberal (or Keynesian) economics (The visible hand)


1) Primary value: social well-being
2) The market system can fail, sometimes catastrophically
3) Government intervention & economic management are
needed to promote stability & growth

MACRO-ECONOMIC SYSTEM
P.A.Samuelson: Inputs, outputs and black box

MACRO-ECONOMIC SYSTEM
1.

Inputs of macroeconomic system:

Exogenous factors: the factors that affect the operation of


one country economy but the government can not control.

Weather

War

Population

Technology

INPUTS OF MACROECONOMIC SYSTEM


-

Endogenous factors: the factors that affect the operation of


one countrys economy and the government can control.
Eg: Economic development policies: fiscal policy, monetary
policy, income policy, foreign trade policy

2. BLACK BOX OF MACROECONOMIC SYSTEM


AD- AS MODEL
Black box includes 2 forces: aggregate supply (AS) and
aggregate demand (AD)

Aggregate Demand- AD

Aggregate demand (AD) is the total demand for final goods and
services in the economy at a given time and price level. It
specifies the amounts of goods and services that will be
purchased at all possible price levels.
AD determinants:
- Price : P AD
- Income: Income AD
- Population: Pop AD
- Expectation

AGGREGATE DEMAND- AD

AD in relation to the price

AD curve slopes downward: P goes down => AD increases


(provided that other factors unchanged).

AGGREGATE SUPPLY AS

Aggregate supply (AS) is defined as the total amount of goods


and services (real output) produced and supplied by an
economys firms over a period of time.

AGGREGATE SUPPLY AS

Determinants of AS:
Price: PAS
Production costs (P of inputs): PC AS
Y*- Potential Yield: Y* AS

(Y* is the maximium yield an economy can produce at full


employment)

AS CURVE

Long run AS (LRAS): The LRAS is shown as perfectly


vertical, reflecting economists' belief that changes in
aggregate demand (AD) have an only temporary change on
the economy's total output.

AS CURVE

Short run aggregate supply (SRAS): SRAS slopes


upward, which shows a positive correlation
between price level and output.

Equilibrium in AD-AS model

The economy is in short run macroeconomic equilibrium when


the quantity of aggregate output supplied is equal to the
quantity demanded
Pe and Ye are equilibrium price and yield.

3. OUTPUTS OF MACRO-ECONOMIC SYSTEM

Outputs of macroeconomic system include the variables


measuring the results of economic activities: yield (GDP),
employment, price, inflation, import-export, etc.

MACROECONOMIC GOALS AND POLICIES


1. Macroeconomic goals:
-

General goals: stability, growth and equality

Specific goals: high yield, high economic growth, more


employment creation, moderate inflation, foreign exchange
stability, equality in distribution etc.

2. MACROECONOMIC POLICIES

Fiscal policy
Monetary policy
Incomes policy
Foreign trade policy)

FISCAL POLICY

Fiscal policy refers to the use of taxation and government


spending to influence economic activity.

Instruments: government spending (G) v taxation (T).

G: (for education, military, etc): G increases => AD and Y rise


T: T increases => disposable income reduces => consumption
goes down => AD and Y goes down

MONETARY POLICY

Monetary policy is the process by which the monetary


authority of a country controls the supply of money, often
targeting a rate of interest for the purpose of promoting
economic growth and stability.

The official goals:


unemployment.

Instruments: money supply (MS) and rate of interest (i).

relatively

stable

prices

and

low

MONETARY POLICY

MS: is the total amount of monetary assets available in an


economy at a specific time.
MS private investment AD and Y

Interest rate:
low i investment increases AD and Y

high i investment reduces AD and Y decrease

INCOME POLICY

Incomes policies in economics are economy-wide wage and


price controls, most commonly instituted as a response to
inflation.

FOREIGN TRADE POLICY

Goals: stabilize foreign exchange rate, low trade deficit

Tools: taxations, trade barriers, foreign exchange policies etc.