CHAP 10: Measuring a Nation’s Income

macroeconomics the study of

economy-wide phenomena, including This chapter considers gross domestic product
inflation, unemployment, and GDP - it is thought to be the single best measure
economic growth

1. The Economy’s Income and Expenditure

- Income = Expenditure (bcs every transaction has 2 parties: a buyer and a seller)

The Circular-Flow Diagram

Households buy goods and services from
firms, and firms use their revenue from sales
to pay wages to workers, rent to landowners,
and profit to firm owners. GDP equals the
total amount spent by households in the
market for goods and services. It also equals
the total wages, rent, and profit paid by firms
in the markets for the factors of production.

2. The Measurement of GDP

- Gross domestic product (GDP) is the market value of all final goods and services produced within a
country in a given period of time.
- GDP includes
+ The government includes this owner-occupied housing in GDP by estimating its rental value
+ GDP includes only the value of final goods
+ “final” for the moment
+ tangible goods & intangible services
+ GDP includes goods and services currently produced
+ items are included in a nation’s GDP if they are produced domestically, regardless of the nationality of
the producer.
- GDP excludes:
+ items produced and sold illicitly
+ vegetables you grow in your garden
+ no longer sold in a market
+ used (old)
+ transfer payment: social society, medicare, unemployment insurance, welfare, programs, subsidies

- 5 income measures
+ Gross national product (GNP): earned by a nation’s permanent residents
includes income that our citizens earn abroad and
excludes income that foreigners earn here.

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 excludes income that foreigners earn here.

+ Net national product (NNP): the total income of a nation’s residents (GNP) minus losses from
depreciation. Depreciation: trucks rusting and old computer models becoming obsolete.
+ National income: total income earned by a nation’s residents in the production of goods and services
+ Personal income: the income that households and non - corporate business receive
it excludes retained earnings
+ Disposable personal income: income that households and noncorporate businesses have left after
satisfying all their obligations to the government.
It equals personal income minus personal taxes and certain nontax
payments (such as traffic tickets)
3. The Components of GDP:
- To do this, GDP (which we denote as Y) is divided into four components: consumption (C), investment
(I), government purchases (G), and net exports (NX):
Y= C + I + G + NX
- Consumption: spending by households on goods and services, with the exception of purchases of new
housing
- Investment: spending on business capital, residential capital, and inventories
capital goods will be used in the future to produce more goods and services
- Government purchase: spending on goods and services by local, state, and federal governments
- Net exports spending on domestically produced goods by foreigners (exports) minus spending on
foreign goods by domestic residents (imports)
4. Real GDP vs Nominal GDP
- Nominal GDP uses current prices to place a value on the economy’s production of goods and services.
(reflect both quantity and price)
- Real GDP uses constant base-year prices to place a value on the economy’s production of goods and
services. e real GDP is not affected by changes in prices, changes in real GDP reflect only changes in the
amounts being produced
- GDP Deflator: reflect the change of price
GDP Deflator = (Nominal GDP/Real GDP)*100
- Inflation:
Inflation rate in year 2=(GDP deflator in year 2 - in year 1)*100/GDP deflator in year 1

5. Is GDP a good measure of Economic Well-being

- Large GPD lead good lives
SUMMARY

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 CHAP 11: Measuring the Cost of Living

How economists measure the inflation rate using the CPI

How this statistic can be used to compare dollar figures from different times.
1. The Consumer Price Index
- consumer price index (CPI) a measure of the overall cost of the goods and services bought by a
typical consumer
- 5 steps:
+ Fix the basket. Determine which prices are most important to the typical consumer. Q of which
bigger then P of that is more important
+ Find the prices. Find the prices of each of the goods and services in the basket at each point in
time
+ Compute the basket’s cost. Use the data on prices to calculate the cost of the basket of goods
and services at different times
+ Choose a base year and compute the index
CPI = (Price of basket of goods and services in current year/Price of basket in base year)*
100
+ Compute the inflation rate:
Inflation rate in year 2 = (CPI in year 2 - CPI in year 1)*100/CPI in year 1
- Inflation rate the percentage change in the price index from the preceding period
- core CPI a measure of the overall cost of consumer goods and services excluding food and energy
producer
+ Because food and energy prices show substantial short-run volatility, the core CPI better reflects
ongoing inflation trends
- price index a measure of the cost of a basket of goods and services bought by firms
+ Because firms eventually pass on their costs to consumers in the form of higher consumer
prices, changes in the PPI are often thought to be useful in predicting changes in the CPI.

- Goal of CPI: measure changes in the cost of living.

+ CPI not a perfect measure of the cost of living
- 3 problems with index:
+ Substitution bias:
. Consumers respond to these differing price changes by buying less of the goods
whose prices have risen by relatively large amounts and by buying more of the goods
whose prices have risen less or perhaps even have fallen.
. If a price index is computed assuming a fixed basket of goods, it ignores the
possibility of consumer substitution and, therefore, overstates the increase in the cost
of living from one year to the next.
--> , the index will measure a much larger increase in the cost of living than consumers
actually experience.
+ introduction of new goods: because the CPI is based on a fixed basket of goods and services, it
does not reflect the increase in the value of the dollar that arises from the introduction of new
goods
+ unmeasured quality change: quality change --> adjust price
changes in quality remain a problem because quality is hard to measure
- GDP vs CPI
+ 2 difference:
. GDP deflator reflects the prices of all goods and services produced domestically,
whereas the CPI reflects the prices of all goods and services bought by consumers.
. The CPI compares the price of a fixed basket of goods and services to the price of the
basket in the base year.
By contrast, the GDP deflator compares the price of currently produced goods and services
to the price of the same goods and services in the base year.
This difference is not important when all prices are changing proportionately.
But if the prices of different goods and services are changing by varying amounts, the way

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 But if the prices of different goods and services are changing by varying amounts, the way
we weight the various prices matters for the overall inflation rate.

2. Correcting Economic Variables for the effects of Inflation:

- Dollars figures from different times:
+ Formula:
Amount in today's dollars = Amount in Year T dollars * Price level today / Price level in year T
- Indexation: the automatic correction by law or contract of a dollar amount for the effects of
inflation
+ a cost-of living allowance (or COLA), automatically raises the wage when the CPI rises
- Real vs Nominal Interest rates
+ the higher the rate of inflation, the smaller the increase in Sally’s purchasing power.(lạm phát
cao --> mua đc ít hơn, lạm phát âm --> with the same amount of money we can buy more)
+ nominal interest rate the interest rate as usually reported without a correction for the effects of
inflation. how fast the number of dollars in your bank account rises over time
+ real interest rate the interest rate corrected for the effects of inflation. how fast the purchasing
power of your bank account rises over time.
+ Fomula
Real interest rate = Nominal interest rate - Infation rate
SUMMARY

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 CHAP 12: Production and Growth

- How much the level and growth of living standards vary around the world.
- The role of productivity
- The link between productivity and the economic policies that a nation pursues.

1. Economic Growth around the World

- the world’s richest countries have no guarantee they will stay the richest and that the world’s poorest
countries are not doomed to remain forever in poverty.
2. Productivity: Its Role and Determinants
- Productivity is so important: Why do some countries zoom ahead while others lag behind?
+ productivity the quantity of goods and services produced from each unit of labor input
+ Productivity’s key role in determining living standards
+ A nation can enjoy a high standard of living only if it can produce a large quantity of goods and services
- Determine Productivity: Why are some economies so much better at producing goods and services than
others?
+ physical capital: the stock of equipment and structures that are used to produce goods and services (công
cụ lao động)
+ human capital: the knowledge and skills that workers acquire through education, training, and experience
(level of entry HR)
+ Natural resources: the inputs into the production of goods and services that are provided by nature, such
as land, rivers, and mineral deposits
renewable and non renewable
NOTES Although natural resources can be important, they are not necessary for an economy
to be highly productive in producing goods and services
+ Technology Knowledge: society’s understanding of the best ways to produce goods and services
NOTES: All these forms of technological knowledge are important for the economy’s production
of goods and services
3. Economic Growth and Public Policy: What can government policy do to raise productivity
and living standards?
- Saving and investment
+ one way to raise future productivity is to invest more current resources in the production of capital.
- Diminishing Returns and the Catch - up Effect
+ diminishing returns the property whereby the benefit from an extra unit of an input declines as the
quantity of the input increases
+ catch-up effect the property whereby countries that start off poor tend to grow more rapidly than
countries that start off rich
- Investment from Abroad
+ Foreign direct: A capital investment that is owned and operated by a foreign entity
+ foreign portfolio investment: An investment that is financed with foreign money but operated by domestic
residents
- Education—investment in human capital—is at least as important as investment in physical capital for a
country’s long-run economic success.
- Health and Nutrition: The right investments in the health of the population provide one way for a nation to
increase productivity and raise living standards.
- Property Rights and Political Stability: Another way policymakers can foster economic growth is by
protecting property rights and promoting political stability. This issue goes to the very heart of how market
economies work.
- Free Trade
- Research and Development
- Population Growth

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SUMMARY

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 CHAP 13: Saving, Investment, and the Financial s
ystem
financial system the group of institutions in the economy that help to match one person’s saving with another person’s
investment
- how the financial system works
1. Financial Institution in the U.S. Economy
- The financial system is made up of various financial institutions that help coordinate the actions of savers and
borrowers.
- Financial institutions can be grouped into two categories: financial markets and financial intermediaries.
+ Financial Markets: financial institutions through which savers can directly provide funds to borrowers
The two most important Financial Markets in our economy:
• The Bond market: thị trường chứng khoán
. Bond: a certificate of indebtedness
. Debt finance: the sale of bond
. date of maturity: ngày đáo hạn/ trả tiền gốc/ trả tiền lãi định kì
. Người mua trái phiếu thì đưa tiền and cuối cùng nhận lại gốc + lãi
. Người mua trái ph có thể hold đến cuối or sell cho người khác
- These bonds differ according to three significant characteristics:
. Bond's term: the length of time until the bond matures
Ex: never mature: perpetuity
long term: higher risk; higher interest
short term: less risk, lower interest
. Credit risk: người vay có thể ko thể hoàn trả đc 1 phần lãi vốn --> default (vỡ nợ)
junk bond: trái phiếu rác risk vs lãi cực cao
. Tax treatment: cách xử lý thuế
Người sở hữu trái phiếu phải chịu thuế
But người giữ trái ph do chính quyền địa phương phát hành ko cần đóng
thuế do interest thấp
• The stock Market: thị trường chứng khoán
. stock a claim to partial ownership in a firm
. Stock represents ownership in a firm
. Equity Finance: The sale of stock to raise money
. Compared to bonds, stocks offer the holder both higher risk and potentially higher
return
. Demand and price của cổ tỉ lệ thuận (vd người mua thấy sự ph triển của tập đoàn
trog tương lai sau đó thì mua và giá cổ cũng sẽ đc tăng)
. stock prices reflect expected profitability, these stock indexes are watched closely
as possible indicators of future economic conditions.
+ Financial Intermediaries: tài chính trung gian// financial institutions through which savers can indirectly
provide funds to borrowers
The two of the most important financial intermediaries: banks and mutual funds
• Bank:
.Banks are the financial intermediaries with which people are most familiar
. Interest of borrower higher than saver
. Bank plays another important role: medium of exchange/store of value (ptien trao đổi,
tích lũy)
• Multual Funds: Quỹ tương hỗ// mutual fund an institution that sells shares to the public and
uses the proceeds to buy a portfolio of stocks and bonds (dùng tiền thu đc từ việc bán cổ phần
để mua/ đầu tư vào các danh mục lớn).
. Shareholder suffer loss/benefit
. The primary advantage of mutual funds is that they allow people with small amounts of
money to diversify their holdings.
. Don’t put all your eggs in one basket. Để giảm rủi ro
. Lợi ích thứ 2: access to the skills of professional money managers
//These managers buy the stock of companies they view as having a profitable
future and sell the stock of companies with less promising prospects. This
professional management, it is argued, should increase the return that mutual fund

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 professional management, it is argued, should increase the return that mutual fund
depositors earn on their savings//
. But As a result, it is hard to “beat the market” by buying good stocks and selling bad ones
(vì price phản ánh tình trạng/ kì vọng in the future)
In fact, mutual funds called index funds, which buy all the stocks in a given stock index,
perform somewhat better on average than mutual funds that take advantage of active
trading by professional money managers
All financial institutions same goal: directing the resources of savers into the hands of borrowers.
2. Saving and Investment in thư National Income Accounts
- Accounting refers to how various numbers are defined and added up.
- an identity is an equation that must be true because of the way the variables in the equation are defined.
- Identities are useful to keep in mind, for they clarify how different variables are related to one another
*Some important Identities:
- GDP (denoted as Y) is divided into four components of expenditure: consumption (C), investment (I),
government purchases (G), and net exports (NX). We write
Y= C + I + G +NX
• A closed economy is one that does not interact with other economies (NX=0):
Y= C + I + G (1)
• Actual economies are open economies—that is, they interact with other economies around the
world.
• Financial market:
From (1), we have: Y - C - G = I
S=Y-C-G: National Saving/ Saving (total income in the economy that remains after paying
for consumption and government purchases)
--> Saving equal Investment or S =I
Let T denote the amount that the government collects from households in taxes minus the
amount it pays back to households in the form of transfer payments
----> S = Y - C - G or S = (Y - T - C) + (T - G) (2)
In (2), National saving, separated into 2 pieces: private saving (Y - T - C) and public saving
(T - G)
. Private saving is the amount of income that households have left after paying their taxes
and paying for their consumption.
. Public saving is the amount of tax revenue that the government has left after paying for
its spending.
If T> G, the government runs a budget surplus because it receives more money than
it spends. .
If the government spends more than it receives in tax revenue, then G> T. In this
case, the government runs a budget deficit (thiếu hụt ngân sách)
- how these accounting identities are related to financial markets.
+ S=I --> For the economy as a whole, saving must be equal to investment. take in the nation’s saving and
direct it to the nation’s investment
*The meaning of saving and Investment
. Income > Consume: add to the S: national saving--> gửi bank, mua cổ ph, trái ph: act is saving
. , investment refers to the purchase of new capital, such as equipment or buildings.
. Banks and other financial institutions make these individual differences between saving and investment
possible by allowing one person’s saving to finance another person’s investment.
. S=I s does not have to be true for every individual household or firm
3. The market for loanable Funds
- market for loanable funds the market in which those who want to save supply funds and those who want to
borrow to invest demand funds
*Supply and Demand for Loanable Funds
- saving is the source of the supply of loanable funds.
- , investment is the source of the demand for loanable funds.
- Demand curve nghịch biến
- Supply curve đồng biến

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 - Real interest rate = nominal interest rate - inflation rate
*Policy 1: Saving Incentive --> Supply tăng
*Policy 2: Investment Incentive --> Demand tăng
*Policy 3: Government Budget Deficits --> Supply giảm
Surplus --> Supply tăng
crowding out a decrease in investment that results from government borrowing
SUMMARY

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 CHAP 15: Unemployment

1. Identifying Unemployment
*How is Unemployment Measured? (Age 16 and older)
- Employed: This category includes those who worked as paid employees, worked in their own business,
or worked as unpaid workers in a family member’s business. Both full-time and part-time workers are
counted. This category also includes those who were not working but who had jobs from which they
were temporarily absent because of, for example, vacation, illness, or bad weather
- Unemployed: includes those who were not employed, were available for work, and had tried to find
employment during the previous four weeks. It also includes those waiting to be recalled to a job from
which they had been laid off.
- Not in the labor force: y includes those who fit neither of the first two categories, such as full-time
students, homemakers, and retirees.
- labor force the total number of workers, including both the employed and the unemployed
(Size)Labor force = Number of employed + number of unemployed
- unemployment rate the percentage of the labor force that is unemployed
Unemployment rate = number of unemployed*100/Labor force
- labor-force participation rate the percentage of the adult population that is in the labor force
Labor force participation rate = labor force*100/Adult population
- natural rate of unemployment the normal rate of unemployment around which the unemployment
rate fluctuates
- cyclical unemployment the deviation of unemployment from its natural rate
*Does the Unemployment Rate Measure What We Want It To?
- discouraged workers individuals who would like to work but have given up looking for a job
*How Long Are the Unemployed without Work?
- Most spells of unemployment are short, but most unemployment observed at any given time is long-
term
*Why Are There Always Some People Unemployed:
- frictional unemployment unemployment that results because it takes time for workers to search for
the jobs that best suit their tastes and skills
- structural unemployment unemployment that results because the number of jobs available in some
labor markets is insufficient to provide a job for everyone who wants on
2. Job Search
- job search the process by which workers find appropriate jobs given their tastes and skills
*Why Some Frictional Unemployment Is Inevitable
*Public Policy and Job Search
*Unemployment Insurance: a government program that partially protects workers’ incomes when they
become unemployed
3. Minimum Wage law: If the wage is kept above the equilibrium level for any reason, the
result is unemployment

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4. Unions and Collective Bargaining
- union a worker association that bargains with employers over wages, benefits, and working conditions
*The Economics of Unions:
- collective bargaining the process by which unions and firms agree on the terms of employment
- strike the organized withdrawal of labor from a firm by a union
*Are Unions Good or Bad for the Economy?
5. The theory of Efficiency wages:
- efficiency wages above-equilibrium wages paid by firms to increase worker productivity
*Worker Health.......
SUMMARY

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 CHAP 16: The Monetary System

- Barter: —the exchange of one good or service for another—to obtain the things they need
- The role of money in the economy
1. The meaning of money
- money the set of assets in an economy that people regularly use to buy goods and services from other people
*The function of money: 3 functions in economy
- Medium of exchange: phương tiện trao đổi // an item that buyers give to sellers when they want to
purchase goods and services
- Unit of account: the yardstick people use to post prices and record debts
be measured in dollars, not in a quantity of goods and services.
- Store of value: an item that people can use to transfer purchasing power from the present to the future
Money is not the only store of value in the economy: A person can also transfer
purchasing power from the present to the future by holding nonmonetary assets such as
stocks and bonds
The term wealth is used to refer to the total of all stores of value, including both money
and nonmonetary assets.
- liquidity the ease with which an asset can be converted into the economy’s medium of exchange(việc dễ dàng
chuyển đổi st sang tiền, nếu ko dễ vd mất nhiều tgian, công sức thì gọi là less liquid)
- Money is the most liquid asset, but it is far from perfect as a store of value
- When prices rise, the value of money falls. (giá tăng thì tiền mua đc ít hơn)
*The Kinds of Money:
- intrinsic value means that the item would have value even if it were not used as money
- commodity money money that takes the form of a commodity with intrinsic value (eg. Gold)
- fiat money money without intrinsic value that is used as
- the quantity of money circulating in the economy, called the money stock
- currency—the paper bills and coins in the hands of the public (tiền mặt)
- demand deposits—balances in bank accounts that depositors can access on demand simply by writing a
check or swiping a debit card at a store (tiền trog tk)
- t the money stock for the U.S. economy includes not only currency but also deposits in banks and other
financial institutions that can be readily accessed and used to buy goods and services.
2. The federal Reserve System
- Federal Reserve (Fed) the central bank of the United States
- The Fed has two related jobs:
+ The first is to regulate banks and ensure the health of the banking system
+ The Fed’s second and more important job is to control the quantity of money that is made available in the
economy, called the money supply
- monetary policy the setting of the money supply by policymakers in the central bank
- Central banks are important institutions because changes in the money supply can profoundly affect the economy.
- prices rise when the government prints too much money
- society faces a short-run trade-off between inflation and unemployment.
- Fed’s policy decisions are key determinants of the economy’s rate of inflation in the long run and the economy’s
employment and production in the short run.
3. Banks and the money supply
- the Federal Reserve controls the supply of money by buying and selling government bonds in open-market
operations
*The Simple Case of 100-Percent-Reserve Banking
- reserves deposits that banks have received but have not loaned out
- Balance sheet the assets and liabilities exactly balance
--> , if banks hold all deposits in reserve, banks do not influence the supply of money
*Money creation with fractional - Reaserve Banking
- fractional-reserve banking a banking system in which banks hold only a fraction of deposits as reserves
- reserve ratio the fraction of deposits that banks hold as reserves
- Money supply = currency + demand deposits
--> when banks hold only a fraction of deposits in reserve, the banking system creates money

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 --> when banks hold only a fraction of deposits in reserve, the banking system creates money

*The money multiplier: money multiplier the amount of money the banking system generates with each dollar of
reserves
- : The money multiplier is the reciprocal of the reserve ratio (tỉ lệ; 1/money multiplier)
*Bank Capital, Leverage, and the Financial Crisis of 2008–2009
- bank capital the resources a bank’s owners have put into the institution
- the value of the owners’ equity is, by definition, the value of the bank’s assets (reserves, loans, and
securities) minus the value of its liabilities (deposits and debt)
- leverage the use of borrowed money to supplement existing funds for purposes of investment
- leverage ratio the ratio of assets to bank capital = total asset/capital
- capital requirement a government regulation specifying a minimum amount of bank capital
4. Tools of Monetary Control
- open-market operations the purchase and sale of U.S. government bonds by the Fed
- t influence the quantity of reserves and those that influence the reserve ratio and thereby the money multiplier.
+ change the money supply is by changing the quantity of reserves.
• reduce the money supply: sells government bonds to the public in the nation’s bond markets-->
reducing the amount of money in circulation--> Tool 1: Open market operations the purchase and
sale of U.S. government bonds by the Fed
• increase the quantity of reserves in the economy by lending reserves to banks.
• alter the money supply by changing the discount rate. A higher discount rate discourages banks from
borrowing reserves from the Fed. Thus, an increase in the discount rate reduces the quantity of
reserves in the banking system, which in turn reduces the money supply.
*Ìnluence Reserve Ratio: One way the Fed can influence the reserve ratio is by altering reserve requirements, the
regulations that set the minimum amount of reserves that banks must hold against their deposits.
• An increase in reserve requirements means that banks must hold more reserves and, therefore, can loan out
less of each dollar that is deposited. -->, an increase in reserve requirements raises the reserve ratio, lowers
the money multiplier, and decreases the money supply.
• Conversely, a decrease in reserve re quirements lowers the reserve ra o, raises the money mul plier, and
increases the money supply
• Paying Interest on Reserves

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