Bài giảng Macroeconomics - Chapter 1: Introduction to macroeconomic policy issues and data - Nguyễn Thùy Dung

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demand equation: 
 ( , )=dQ D P Y
D2
A shift in Demand
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Changes in Equilibrium
2) The effects of increasing in flour price
Q
Quantity 
of pizza
P 
Price 
of pizza S1
D
Q1
P1
An increase in Pm
reduces the quantity of 
pizza producers supply 
at each price
which increases the 
market price and 
reduces the quantity.
P2
Q2
S2
A shift in Supplysupply equation:
Q s = S (P, Pm)
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The use of multiple models
▪ No single model can address all the issues we 
care about. 
▪ e.g., our supply-demand model of the pizza 
market
▪ can tell us how a fall in aggregate income affects 
price & quantity of pizza.
▪ cannot tell us why aggregate income falls.
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The use of multiple 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
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Prices: flexible vs. sticky
▪ To answer most questions, economists use 
market-clearing models
▪ Market clearing: An assumption that prices are 
flexible, adjust to equate supply and demand. 
▪ In the short run, many prices are sticky –
adjust slowly in response to changes in supply or 
demand. For example, 
▪ many labor contracts fix wage for a year or longer.
▪ many magazine publishers change prices 
only once every 3-4 years.
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▪ After all, prices adjust to changes in supply and 
demand. 
▪ Long run: Price flexible is a good assumption, 
markets clear.
▪ Short run: 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
Prices: flexible vs. sticky
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1.2 The Data of Macroeconomics
Gross Domestic Product
Consumer Price Index
Unemployment rate
➔ Rather than telling us about a particular household, firm, or a 
market these statistics tell us something about the entire economy.
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Measuring a Nation’s Income
Gross Domestic Product (GDP)
▪ When judging whether the economy is doing well 
or poorly, it is natural to look at the total income 
that everyone in the economy is earning.
▪ GDP tells us the nation’s total income and total 
expenditure on its output of goods & services.
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There are 2 ways 
of viewing GDP
Total income of everyone in the economy
Total expenditure on the economy’s 
output of goods and services
Households Firms
Income $
Labor
Goods
Expenditure $
Income, Expenditure 
and the Circular Flow
For an economy as a whole, income must equal expenditure
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the market value of all final goods & services 
produced within a country in a given period of 
time.
Goods are valued at their market prices, so:
▪ All goods measured in the same units 
(e.g., dollars in the U.S.)
▪ Things that don’t have market value are excluded, 
(e.g., housework you do for yourself.)
Gross domestic product (GDP) is
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$0.50 $1.00
GDP = (Price of apples Quantity of apples)
+ (Price of oranges Quantity of oranges)
= ($0.50 4) + ($1.00 3) = $5.00
Suppose that the economy produces four apples 
and three oranges. How can we compute GDP?
Multiply each good by its price and then add them all together
Using market prices
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the market value of all final goods & services 
produced within a country in a given period of 
time.
▪ Final goods: intended for the end user 
▪ Intermediate goods: used as components or 
ingredients in the production of other goods 
GDP only includes the value of final goods. In other way, 
GDP is also the total value added of all firms in the 
economy
Gross domestic product (GDP) is
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E.g.: McDonalds buy meat at $0.5 and ▪
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Exercise: Value added of a firm
Assume that these are the only transactions in the 
economy
▪ A farmer grows a bushel of wheat 
and sells it to a miller for $1.00. 
▪ The miller turns the wheat into flour 
and sells it to a baker for $3.00. 
▪ The baker uses the flour to make a loaf of bread 
and sells it to an engineer for $6.00. 
▪ The engineer eats the bread. 
Compute value added at 
each stage of production and GDP
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the market value of all final goods & services 
produced within a country in a given period of 
time.
GDP includes 
▪ tangible goods 
(like DVDs, mountain bikes, beer)
▪ and intangible services 
(dry cleaning, concerts, cell phone service).
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Gross domestic product (GDP) is
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the market value of all final goods & services 
produced within a country in a given period of 
time.
GDP includes currently produced goods, not goods 
produced in the past.
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Gross domestic product (GDP) is
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the market value of all final goods & services 
produced within a country in a given period of 
time.
GDP measures the value of production that occurs 
within a country’s borders, whether done by its own 
citizens or by foreigners located there. 
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Gross domestic product (GDP) is
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the market value of all final goods & services 
produced within a country in a given period of 
time.
Usually a year or a quarter (3 months) 
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Gross domestic product (GDP) is
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The Components of GDP
▪ GDP includes all of these various forms of 
spending on domestically produced goods and 
services 
▪ Four components:
Y = C + I + G + NX
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▪ These components add up to GDP (denoted Y):
▪Consumption (C)
▪ Investment (I)
▪Government Purchases (G)
▪Net Exports (NX)
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Consumption (C)
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▪ is total spending by households on good & services, 
with the exception of purchases of new housing 
✓durable goods
last a long time 
ex: cars, home appliances..
✓nondurable goods
last only a short time 
ex: food, clothing
✓services
work done for consumers 
ex: dry cleaning, hair cut
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Investment (I)
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▪ is total spending on goods that will be used in the 
future to produce more goods & services.
▪ includes spending on
▪ capital equipment (e.g., machines, tools)
▪ structures (factories, office buildings, houses)
▪ inventories (goods produced but not yet sold)
Note: “Investment” does not mean the purchase 
of financial assets like stocks and bonds.
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Government Purchases (G)
▪ is all spending on the goods & services by local, 
state, and federal governments.
▪ Including salaries of government workers, military 
equipment, highways,
▪ G excludes transfer payments to individual, 
such as Social Security or welfare. 
They are not purchases of goods & services. 
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Net Exports (NX)
▪ is are the value of goods and services sold to 
other countries (exports) minus the value of 
goods and services that foreigners sell us 
(imports).
▪ Imports are the portions of C, I, and G that are 
spent on goods & services produced abroad. 
▪ Adding up all the components of GDP gives:
Y = C + I + G + NX
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Components of U.S. GDP in 2014
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Source: Bureau of Economic Analysis
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In each of the following cases, determine how much GDP 
and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner 
at the finest restaurant in Boston.
B. Sarah spends $40,000 car from Range Rover, the 
imported British carmaker.
C. Jane spends $1200 on a computer to use in her editing 
business. She got last year’s model on sale for a great 
price from a local manufacturer. 
D. General Motors builds $500 million worth of cars, 
but consumers only buy $470 million worth of them.
GDP and its components
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Real versus Nominal GDP
▪ GDP measures the total spending on goods and 
services in all markets in the economy.
▪ Nominal GDP values output using current prices. 
It is not corrected for inflation. 
▪ Real GDP values output using the prices of a 
base year (constant prices). 
Real GDP is corrected for inflation
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EXAMPLE:
Compute nominal GDP in each year: multiply Ps & Qs 
from same year
2015: $10 x 400 + $2 x 1000 = $6,000
2016: $11 x 500 + $2.50 x 1100 = $8,250
2017: $12 x 600 + $3 x 1200 = $10,800
Pizza Coconut 
year P Q P Q
2015 $10 400 $2.00 1000
2016 $11 500 $2.50 1100
2017 $12 600 $3.00 1200
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EXAMPLE:
Compute real GDP in each year, 
using 2005 as the base year:
Pizza Coconut
year P Q P Q
2005 $10 400 $2.00 1000
2006 $11 500 $2.50 1100
2007 $12 600 $3.00 1200
2005: $10 x 400 + $2 x 1000 = $6,000
2006: $10 x 500 + $2 x 1100 = $7,200
2007: $10 x 600 + $2 x 1200 = $8,400
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EXAMPLE:
▪ The change in nominal GDP reflects both prices 
and quantities. 
year
Nominal 
GDP
Real 
GDP
2015 $6000 $6000
2016 $8250 $7200
2017 $10,800 $8400
▪ The change in real GDP is the amount that GDP 
would change if prices were constant. 
(i.e., if zero inflation). 
Hence, real GDP is corrected for inflation. 
20.0%
16.7%
37.5%
30.9%
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Nominal and Real GDP in the U.S., 
1965-2007
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1965 1970 1975 1980 1985 1990 1995 2000 2005
Billions
Real GDP 
(base year 
2000)
Nominal 
GDP
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GDP Deflator
▪ The GDP deflator is a measure of the overall 
level of prices. 
▪ Definition: a price index used to adjust nominal 
GDP to find real GDP
▪ One way to measure the economy’s inflation 
rate is to compute the percentage increase in 
the GDP deflator from one year to the next. 
GDP deflator = 100 x
nominal GDP
real GDP
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GDP Deflator
year
Nominal 
GDP
Real 
GDP
GDP 
Deflator
2005 $6000 $6000
2006 $8250 $7200
2007 $10,800 $8400
2005: 100 x (6000/6000) = 100.0
100.0
2007: 100 x (10,800/8400) = 128.6
128.6
Compute the GDP deflator in each year:
2006: 100 x (8250/7200) = 114.6
114.6
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Inflation rate
▪ The inflation rate is the percentage increase in 
the overall level of prices.
▪ Using the GDP deflator, the inflation rate 
between two consecutive years is computed as 
follows:
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GNP and GDP
▪ Gross National Product (GNP):
Total income earned by the nation’s factors of 
production, regardless of where located.
▪ Gross Domestic Product (GDP):
Total income earned by domestically-located 
factors of production, regardless of nationality.
(GNP – GDP) = (factor payments from abroad) 
– (factor payments to abroad)
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GNP and GDP
▪ From the perspective of the U.S., factor 
payments from abroad includes things like
• wages earned by U.S. citizens working abroad
• profits earned by U.S.-owned businesses located abroad
• income (interest, dividends, rent, etc) generated from the foreign 
assets owned by U.S. citizens
▪ Factor payments to abroad includes things like
• wages earned by foreign workers in the U.S.
• profits earned by foreign-owned businesses located in the U.S.
• income that foreigners earn on U.S. assets
(GNP – GDP) as a percentage of GDP 
selected countries, 2002
U.S.A. 1.0% 
Angola -13.6 
Brazil -4.0 
Canada -1.9 
Hong Kong 2.2 
Kazakhstan -4.2 
Kuwait 9.5 
Mexico -1.9 
Philippines 6.7 
U.K. 1.6 
▪ Ex: In Canada, GNP 
is 1.9% smaller than 
GDP.
▪ Meaning: 1.9% of all 
the income generated 
in Canada is taken 
away and paid to 
foreigners.
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Measuring the Cost of living
Consumer Price Index (CPI)
▪ Is the most commonly used measure of the level 
of prices.
▪ The consumer price index (CPI) is a measure of 
the overall cost of the goods and services bought 
by a typical consumer.
▪ Using a fixed basket of goods that are 
representative of what a typical consumer 
purchases each month
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How the CPI is Calculated
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How the CPI is Calculated
Let’s consider a simple economy in which 
consumers buy only two goods: hot dogs and 
hamburgers
Step 1: Basket = 4 hot dogs, 2 hamburgers
Step 2: Find the Price of each good in each year
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How the CPI is Calculated
Step 3: Compute the basket’s cost
Step 4: Base year is 2013, then CPI each year is
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Inflation rate 
Step 5: Compute the inflation rate
Inflation rate measures the percentage change in
the price index from the preceding period
▪ If the result > 0: the rate of inflation over that period. 
▪ If the result < 0: the rate of deflation over that period
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CPI Components by BLS
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CPI versus GDP Deflator
▪Goods & services bought by firms or government:
– included in GDP deflator (if produced domestically)
– excluded from CPI
▪Prices of imported consumer goods:
– included in CPI
– excluded from GDP deflator
▪The basket of goods:
– CPI: fixed
– GDP deflator: changes every year
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CPI biases
▪ Substitution bias
- When prices change substantially, consumers tend to 
substitute lower-priced alternatives.
▪ New product bias
- CPI does not reflect the increase in the value of the 
dollar that arises from the introduction of new goods
▪ Quality bias
- Quality of goods & services changes will change the 
value of the dollar, but are often not fully measured. 
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▪ Macroeconomics is the study of the economy as a 
whole, including
▪ growth in incomes,
▪ changes in the overall level of prices,
▪ the unemployment rate.
▪ Macroeconomists attempt to explain the economy and 
to devise policies to improve its performance.
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▪ Economists use different models to examine different 
issues.
▪ Models with flexible prices describe the economy in 
the long run; models with sticky prices describe the 
economy in the short run.
▪ Macroeconomic events and performance arise from 
many microeconomic transactions, so 
macroeconomics uses many of the tools of 
microeconomics.