This document discusses macroeconomic concepts including measuring a nation's income, GDP, GDP components, real vs nominal GDP, the GDP deflator, and the consumer price index (CPI). It defines GDP as the total market value of final goods and services produced within a country in a given period. GDP is measured by summing consumption, investment, government spending, and net exports. The document also explains how to calculate real GDP to measure economic growth and the GDP deflator to account for inflation. Finally, it outlines how the CPI is used to measure changes in consumer prices over time.

1. MACROECONOMICS
Le Phuong Thao Quynh
FACULTY OF INTERNATIONAL ECONOMICS
Email: quynhlpt@ftu.edu.vn

2. Chapter 2:
Measuring macroeconomic variables

3. MEASURING A NATION’S INCOME
• Macroeconomics answers questions such as:
– Why is average income high in some countries and low in
others?
– Why do prices rise rapidly in some periods while they are
more stable in other periods?
– Why do production and employment expand in some
years and contract in others?

4. THE ECONOMY’S INCOME AND
EXPENDITURE
• 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.

5. THE ECONOMY’S INCOME AND
EXPENDITURE
• For an economy as a whole, income must equal
expenditure because:
– Every transaction has a buyer and a seller.
– Every dollar of spending by some buyer is a dollar of
income for some seller.

6. THE MEASUREMENT OF GDP
• Gross domestic product (GDP) is a measure of the total
income and expenditures of an economy.
• It is the total market value of all final goods and services
produced within a country in a given period of time.

7. THE MEASUREMENT OF 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, house cleaning, doctors’ visits).

8. THE MEASUREMENT OF GDP
• ‘... produced ...’– It includes goods and services
currently produced, not transactions involving goods
produced in the past.
• • ‘... within a country ...’– It measures the value of
production within the geographic confines of a country.
• ‘... in a given period of time.’– It measures the value of
production that takes place within a specific interval of
time, usually a year or a quarter (three months).

9. THE COMPONENTS OF GDP
• GDP includes all items produced in the economy and sold
legally in markets.
• What is not counted in GDP?
– GDP excludes most items that are produced and
consumed at home and that never enter the marketplace.
– It excludes items produced and sold illicitly, such as
illegal drugs.

10. THE CIRCULAR-FLOW DIAGRAM

11. THE CIRCULAR-FLOW DIAGRAM
• Sectors of a simple economy:
1) Households – contain all the people
2) Firms – all the business enterprises

12. THE CIRCULAR-FLOW DIAGRAM
Sectors are connected by 2 markets: factor and product market:
1) Households sell productive services to firms through factor
markets
- The factors of production are land, labor, capital.
- When households sell productive services to firms, they receive
income: wages, rent, profits, interest
2) Firms sell goods & services in product markets
- The income of firms in this market is also the expenditure of
households

13. THE CIRCULAR-FLOW DIAGRAM
- Underlying principle of the circular flow: the dollar inflow
into each market or sector must equal the dollar outflow
from each market or sector
- So, total production = total spending = total income

14. COMPONENTS OF GDP
• GDP (Y) is the sum of the following:
– consumption (C)
– investment (I)
– government purchases (G)
– net exports (NX)
Y = C + I + G + NX

15. COMPONENTS OF GDP
• Consumption (C):
– The spending by households on goods and services,
with the exception of purchases of new housing.
• Investment (I):
– The spending on capital equipment, inventories and
structures, including household purchases of new
housing.

16. COMPONENTS OF GDP
• Government purchases (G):
– The spending on goods and services by local, State and
federal governments
– Does not include transfer payments because they are
not made in exchange for currently produced goods or
services
• Net exports (NX): Exports minus imports.
NX = X - M

18. Problems and applications
What happens to GDP’s components when:
• A household buy a new refrigerator
• You buy a new house
• A company sells its last year’s inventory
• You buy a pizza
• Hochiminh City constructs a new bridge
• Your parent buy a bottle of wine which was imported
from France
• A factory buys new machines for production

19. REAL VERSUS NOMINAL GDP
• Nominal GDP:
Nominal GDP values the production of goods and
services at current prices.
q: quantity
p: price
t: current year
i: good number i in n products
n
t
GDP =
i
t
q
i=1
n
å i
t
p

20. REAL VERSUS NOMINAL GDP
• In reality, GDPn often increases from year to year. Only
looking at GDPn we can not know whether the increase
comes from price or quantity.

21. REAL VERSUS NOMINAL GDP
• Real GDP (GDPr) values the production of goods and
services at constant prices.
• t = 0 is base year
r
t
GDP =
i
t
q
i=1
n
å i
0
p

22. REAL VERSUS NOMINAL GDP
• If GDPr increases, it exactly comes from the increase in
quantity=> GDPr is used to measure economic growth
• Case of Venezuela

23. GDP deflator
• GDP Deflator-D GDP): The GDP deflator is a measure of
the price level calculated as the ratio of nominal GDP to
real GDP times 100.
• It tells us the rise in nominal GDP that is attributable to a
rise in prices rather than a rise in the quantities produced..
GDP
t
D = n
t
GDP
r
t
GDP
´100

24. GDPn, GDPr and GDP Deflator
P book Q book P pen Q pen
2011 5 100 3 75
2012 6 150 4 100
2013 7 200 5 150

25. GDPn, GDPr and GDP Deflator
• 2011 is base year
Year Nominal GDP
2011 100 x 5 + 3 x 75 = 725
2012 6 x 150 + 4 x 100 = 1300
2013 7 x 200 + 5 x 150 = 2150

26. GDPn, GDPr and GDP Deflator
Year Real GDP
2011 5 x 100 + 3 x 75 = 725
2012 5 x 150 + 3 x100 = 1050
2013 5 x 200 + 3 x 150 = 1450

27. GDPn, GDPr and GDP Deflator
Year D GDP = (GDPn/GDPr) x 100
2011 D GDP = 725/725 x 100 = 100
2012 D GDP = 1300/1050 x 100 = 124
2013 D GDP = 2150/1450 x 100 = 148

28. GDPn, GDPr and GDP Deflator
Inflation rate in 2012 = (124 – 100)/100 = 24%
Inflation rate in 2013 = (148 – 124)/124 = 19.35%

29. DISCUSSION
• WHY SHOULD A MANAGER MONITOR GDP GROWTH?

30. GDP AND ECONOMIC WELLBEING
• GDP is the best single measure of the economic
wellbeing of a society.
• GDP per person tells us the income and expenditure of
the average person in the economy.
• Higher GDP per person indicates a higher standard of
living.
• However, GDP is not a perfect measure of the happiness
or quality of life.

31. GDP AND ECONOMIC WELLBEING
• Some things that contribute to wellbeing are not included
in GDP:
– the value of leisure
– the value of a clean environment
– the value of almost all activity that takes place outside of
markets, such as the value of the time parents spend with
their children and the value of volunteer work.

32. Net economic welfare (NEW)
• Net economic welfare (NEW)
• NEW = GDP(or GNP) + V1 – V2
• V1: value of rest, value of goods and services which are
not sold, revenue from transactions in black market…
• V2: negative externality for natural resource, environment
such as noise, traffic jam, air pollution…
• NEW reflects welfare better than GNP but it is very
difficult to have enough data to compute NEW. Therefore,
economists still use GDP and GNP

33. GDP per capita of some nations in
2019 (World Bank)

34. GDP and the quality of life
Country
Real GDP per
person (2005)
Life
expectancy
Adult literacy
(% of population)
Internet usage
(% of population)
United
States
Japan
Germany
Russia
Mexico
Brazil
China
Indonesia
India
Pakistan
Bangladesh
Nigeria
$41,890
31,267
29,461
10,845
10,751
8,402
6,757
3,843
3,452
2,370
2,053
1,128
78 years
82
79
65
76
72
72
70
64
65
63
47
99%
99
99
99
92
89
91
90
61
50
47
69
63 %
67
45
15
18
19
9
7
3
7
0.3
4
The table shows GDP per person and three other measures of the quality of life
for twelve major countries.
Country
Real GDP per
person (2005)
Life
expectancy
Adult literacy
(% of population)
Internet usage
(% of population)
United
States
Japan
Germany
Russia
Mexico
Brazil
China
Indonesia
India
Pakistan
Bangladesh
Nigeria
$41,890
31,267
29,461
10,845
10,751
8,402
6,757
3,843
3,452
2,370
2,053
1,128
78 years
82
79
65
76
72
72
70
64
65
63
47
99%
99
99
99
92
89
91
90
61
50
47
69
63 %
67
45
15
18
19
9
7
3
7
0.3
4
The table shows GDP per person and three other measures of the quality of life
for twelve major countries.

35. Consumer Price Index - CPI

36. CPI
The consumer price index (CPI) is a measure of the overall
cost of the goods and services bought by a typical
consumer.
- When the CPI rises, the typical family has to spend more
dollars to maintain the same standard of living.
- The Vietnamese Bureau of Statistics reports the CPI each
month.

37. Measurement of CPI in Vietnam

38. How the CPI is calculated?
B1: Fix the base year and the basket
of goods and services
- Year 2010
- Basket: 10kg rice và 5kg fish
B2: Determine the prices of each of
the goods and services in the basket
for each point in time.
Year P of rice P of fish
2010 3 15
2011 4 17
2012 5 22
B3: Calculate the basket’s cost: Use
the data on prices to calculate the
cost of the basket of goods and
services at different times. CP t =
2010: 3 x 10kg rice + 15 x 5kg fish = 105
2011: 4 x 10kg rice + 17 x 5kg fish = 125
2012: 5 x 10kg rice + 22 x 5kg fish = 160
B4: Compute the index 2010: = (105/105) X 100 = 100
2011: = (125/105) X 100 = 119
2012: = (160/105) X 100 = 152.4
B5: Compute inflation rate Inflation rate year 2011:
(119 - 100)/100 x 100% = 19%
Inflation rate year 2012:
(152.4 – 119)/119 x 100% = 28%
i
0
q
i
t
p
i
t
p
å ´
i
0
q
t
CPI = (
i
t
p
å i
t
q i
0
p
å i
0
q ) ´100
t
CPI -
t-1
CPI
t-1
CPI
´100%

39. CPI of Vietnam from 2010 – 2020
(Source: Statista)

40. Inflation of Vietnam (2016 – 2021)

41. PROBLEMS IN MEASURING THE COST OF
LIVING
• The CPI is an accurate measure of the selected goods
that make up the typical bundle, but it is not a perfect
measure of the cost of living
– substitution bias
– introduction of new goods
– unmeasured quality changes

42. PROBLEMS IN MEASURING THE COST OF
LIVING
• Substitution bias:
- The basket does not change to reflect consumer reaction
to changes in relative prices.
- Consumers substitute toward goods that have become
relatively less expensive.
- The index overstates the increase in cost of living by not
considering consumer substitution.

43. PROBLEMS IN MEASURING THE
COST OF LIVING
• Introduction of new goods:
- The basket does not reflect the change in purchasing
power brought on by the introduction of new products.
- New products result in greater variety, which in turn
makes each dollar more valuable.
- Consumers need fewer dollars to maintain any given
standard of living.

44. PROBLEMS IN MEASURING THE COST OF
LIVING
• Unmeasured quality changes
– If the quality of a good rises from one year to the next, the
value of a dollar rises, even if the price of the good stays
the same.

45. CORRECTING ECONOMIC
VARIABLES FOR THE EFFECTS OF
INFLATION
• Price indexes are used to correct for the effects of inflation
when comparing dollar figures from different times.

46. DOLLAR FIGURES FROM DIFFERENT TIMES

47. REALAND NOMINAL INTEREST
RATES
Interest represents a payment in the future for a transfer of
money in the past.
• The nominal interest rate is the interest rate usually
reported and not corrected for inflation. It is the interest
rate that a bank pays.
• The real interest rate is the nominal interest rate that is
corrected for the effects of inflation.

48. REALAND NOMINAL INTEREST
RATES
Real interest rate = Nominal interest rate – Inflation rate
r = i - 

49. Questions
1. GDP is equal to
a. The total value of goods and services produced in an economy during a
given period
b. C + I +G +IM
c. The total value of intermediate goods plus final goods
d. The total income received by producers of final goods and services
2. Which of the following is included in GDP?
a. Changes to inventories
b. Intermediate goods
c. Used goods
d. Financial assets
e. Foreign produced goods

50. Questions
3. Which is the following is not included in GDP:
a. Capital goods such as machinery
b. Imports
c. The value of domestically produced services
d. Government purchases of goods and services
e. The construction of structures