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International School of Management and

Economics
BBAE Programme, K64

Macroeconomics:

Lecture 1: The Science of Macroeconomics

By

Bach Ngoc Thang

[email protected]

NEU, 2024
slide 1
 Instructor’s brief profile

 Education
 Ph.D. in economics (UQ, 2014); M.A. and B.A. in
Development Economics (NEU, 2005 and 2002).
 Teaching
 Macroeconomics 1 & 2 (NEU, since 2014);
Macroeconomics (B-BAE, since Cohort 1); Research
methods (NEU, since 2016).
 Advanced econometrics (E-PhD Programme)
 Fields of research
 Development economics, governance, SMEs.
 Personal profile at ISD: http://isd.neu.edu.vn/en/about-
us/team/bach-ngoc-thang-dr/

12/02/24 2
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 Learning Objectives

This chapter introduces you to

 the issues macroeconomists study
 U.S. macroeconomic data
 the tools macroeconomists use
 some important concepts in macroeconomic
analysis
 Vietnam vs. China macroeconomic data

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
 Why does the cost of living keep rising?
 Why are millions of people unemployed,
even when the economy is booming?
 What causes recessions?
Can the government do anything to combat
recessions? Should it?

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 Important issues in
macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
 What is the government budget deficit?
How does it affect the economy?
 Why does the U.S. have such a huge trade
deficit?
 Why are so many countries poor?
What policies might help them grow out of
poverty?

slide 5
U.S. Real GDP per capita
(2009 dollars)

slide 6
U.S. inflation rate

slide 7
U.S. unemployment rate
(% of labor force)

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 Why learn macroeconomics?
1. The macroeconomy affects society’s well-being.

Each
Each one-point
one-point increase
increase in
in the
the unemployment
unemployment raterate
is
is associated
associated with:
with:
 920
920 more
more suicides
suicides
 650
650 more
more homicides
homicides
 4000
4000 more
more people
people admitted
admitted to to state
state mental
mental
institutions
institutions
 3300
3300 more
more people
people sent
sent toto state
state prisons
prisons
 37,000
37,000 more
more deaths
deaths
 increases
increases inin domestic
domestic violence
violence and
and homelessness
homelessness

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 Why learn macroeconomics?
2. The macroeconomy affects your well-being.
5 5
In most years, wage growth falls
In most years, wage growth falls

percent change from 12 mos earlier

4 when
when unemployment
unemployment isis rising.
rising. 3
change from 12 mos earlier

3
1
2

1 -1

0
-3
-1
-5
-2

-3 -7
1965 1970 1975 1980 1985 1990 1995 2000 2005
unemployment rate inflation-adjusted mean wage (right scale) slide 10
 Why learn macroeconomics?
3. The macroeconomy affects politics.
Unemployment & inflation in election years
year U rate inflation rate elec. outcome
1976 7.7% 5.8% Carter (D)
1980 7.1% 13.5% Reagan (R)
1984 7.5% 4.3% Reagan (R)
1988 5.5% 4.1% Bush I (R)
1992 7.5% 3.0% Clinton (D)
1996 5.4% 3.3% Clinton (D)
2000 4.0% 3.4% Bush II (R)
2004 5.5% 3.3% Bush II (R) slide 11
 Economic models

…are simplified versions of a more complex reality

 irrelevant details are stripped away
…are used to
 show relationships between variables
 explain the economy’s behavior
 devise policies to improve economic
performance

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 Example of a model:
Supply & demand for new
cars
 shows how various events affect price and
quantity of cars
 assumes the market is competitive: each buyer
and seller is too small to affect the market price
 Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
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 The demand for cars

demand equation: Q d = D (P,Y )

 shows that the quantity of cars consumers
demand is related to the price of cars and
aggregate income

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 Digression: functional
notation
 General functional notation
shows only that the variables are related.
A list of the
Q = D (P,Y )
d
variables
 A specific functional form shows that affect Q d

the precise quantitative relationship.

 Example:
D (P,Y ) = 60 – 10P + 2Y

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 The market for cars: Demand

demand equation: P
Price
d
Q D (P ,Y ) of cars

The demand curve

shows the relationship
between quantity D
demanded and price, Q
other things equal. Quantit
y of
cars

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 The market for cars: Supply

supply equation: P
Price
s
Q  S (P , Ps ) of cars S

The supply curve

shows the relationship
between quantity D
supplied and price, Q
other things equal. Quantit
y of
cars

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The market for cars: Equilibrium

P
Price
of cars S

equilibrium
price
D
Q
Quantit
y of
equilibrium cars
quantity

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 The effects of an increase in income
demand equation: P
Q d D (P ,Y ) Price
of cars S

An increase in income
increases the quantity P2
of cars consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantit
the equilibrium price y of
and quantity. cars

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 The effects of a steel price increase
supply equation: P
s
S2
Q  S (P , Ps ) Price
of cars S1

An increase in Ps
reduces the quantity of P2
cars producers supply P1
at each price…
D

…which increases the Q

Q2 Q1
market price and Quantit
y of
reduces the quantity.
cars

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 Endogenous vs. exogenous
variables
 The values of endogenous variables
are determined in the model.
 The values of exogenous variables
are determined outside the model:
the model takes their values & behavior
as given.
 In the model of supply & demand for cars,
endogenous: P , Qd , Q s
exogenous: Y , Ps
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1. Write down demand and supply
equations for wireless phones;
include two exogenous variables
in each equation.
Demand equation: i-Phone 14
1. Draw a supply-demand graph
for wireless phones.
2. Use your graph to show how a
change in one of your exogenous
variables affects the model’s
endogenous variables.

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1. Draw a supply-demand graph
for wireless phones.
2. Use your graph to show how a change in one of
your exogenous variables affects the model’s
endogenous variables.

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 A multitude of models

 No one model can address all the issues we

care about.
 e.g., our supply-demand model of the car
market…
 can tell us how a fall in aggregate income
affects price & quantity of cars.
 cannot tell us why aggregate income falls.

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 A multitude of 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
 Market clearing: An assumption that prices are
flexible, adjust to equate supply and demand.
 In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand. For example,
 many labor contracts fix the nominal wage
for a year or longer
 many magazine publishers change prices
only once every 3-4 years

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 Prices: flexible vs. sticky

 The economy’s behavior depends partly on

whether prices are sticky or flexible:
 If 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
 Long run: prices flexible, markets clear,
economy behaves very differently
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 See the data in the following slides and discuss
relevant issues.
 Discussion questions:
 Why there might be differences between
Vietnam and China in terms of:
 Economic growth, inflation, interest rates
 Per capital income
 Labor force participation rates
 Can Vietnam catch up with China overtime?

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 Vietnam and China:
GDP growth rate (%)

02/12/24 29 29
slide
 Vietnam and China:
per capital GDP (US$)

02/12/24 30 30
slide
 Vietnam and China: Labor force
participation rate for ages 15-24, total (%)

02/12/24 31 31
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 Vietnam and China:
Inflation, consumer prices (y.o.y., %)

02/12/24 32 32
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 Vietnam and China:
Deposit interest rate (%)

02/12/24 33 33
slide
USD/VND: recent 5 years

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USD/CNY: recent 5 years

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