MACROECONOMICS

Dr. Do Thi Thu

Faculty of Economics – Banking Academy of Vietnam
Email: thudt@[Link]
Mobile: 0934645883
 COURSE DESCRIPTION

Macroeconomics is a compulsory course within general

education, specifically designed for students of
economics. As a branch of economics, macroeconomics
studies the behavior of the overall economy to address
the problem of resource scarcity and achieve
macroeconomic goals.
The purpose of this course is to provide learners with
insights into the functioning of the economy, including
the dynamics of commodity markets, money markets,
foreign exchange markets, and the relationships
between these markets. It also covers macroeconomic
policies, such as fiscal and monetary policies, aimed at
achieving objectives like economic growth, controlling
inflation, reducing unemployment, and addressing
foreign economic goals
KHOA KINH TẾ - HỌC VIỆN NGÂN HÀNG 2
 CHUẨN ĐẦU RA (CLOs)

CLO 1 CLO 2 CLO 3

Demonstrate the
Work in groups at a
ability to select
Interpret the basic basic level to
appropriate
movement of the apply
fiscal/monetary
whole economy and macroeconomic
policy
calculate some theories to
instruments to
basic analyze and
achieve
macroeconomic evaluate current
macroeconomic
indicators. economic issues
objectives in
and policies.
different scenarios.

01 02 03

KHOA KINH TẾ - HỌC VIỆN NGÂN HÀNG 3

 01 Chapter 1. Introduction to macroeconomics

02 Chapter 2. The data of macroeconomics

KẾT 03 Chapter 3. Production and growth

Chapter 4. Open economy: Basic concepts

CẤU
04

05 Chapter 5. Money and inflation

HỌC 06 Chapter 6. Aggregate Demand and Aggregate Supply

PHẦN 07 Chapter 7. IS – LM model

08 Chapter 8. Macroeconomic policy in open economy

KHOA KINH TẾ - HỌC VIỆN NGÂN HÀNG 4

 CHAPTER 4

OPEN ECONOMY: BASIC CONCEPTS

KHOA KINH TẾ - HỌC VIỆN NGÂN HÀNG 5

 Reading materials

Chapter 31, 32. Mankiw, N.G (2021), Principles of economics,

9th Edition, Cengage Learning.

6
 Purpose
Develop the basic concepts macroeconomists use to study open
economies
Address why a nation’s net exports must equal its net capital outflows
Address the concepts of the nominal and real exchange rate; develop a
theory of exchange rate determination; distinguish exchange rate
mechanisms.
Establish the interdependence of some economic variables in an open
economy, especially the relationships between the prices and quantities in
the market for loanable funds, and the prices and quantities in the market for
foreign-currency exchange.
Analyze the impact of various government policies on an economy’s
exchange rate and trade balance.

7
 Learning objectives
By the end of this chapter, students should:
• Explain the relationship between net exports and net capital outflow;
saving, investment, and international flows.
• Describe the loanable funds market.
• Describe the market for foreign-currency exchange; contrast a
country's nominal exchange rate with its real exchange rate;
distinguish exchange rate mechanisms.
• Analyze the effect of macroeconomic policies on the foreign-currency
exchange market and other macroeconomic variables.

8
 CHAPTER 4

1. International flows of goods and capital

2. Market for loanable funds

3. Foreign exchange market

KHOA KINH TẾ - HỌC VIỆN NGÂN HÀNG 9

 International Flows of Goods and Capital

Closed economy
Economy that does not interact with other economies in the
world
Open economy
Economy that interacts freely with other economies around
the world

10
 Open economy

It buys and sells It buys and sells capital

goods and services assets in world financial
in world product markets
markets

Purchase of foreign assets by

Import domestic residents
Flow of Flow of
goods capital
Purchase of domestic assets
Export by foreigners
 International Flows of Goods and Capital

The Flow of Goods

Exports
Goods and services that are produced domestically and
sold abroad
Imports
Goods and services that are produced abroad and sold
domestically
Net exports, NX (Trade balance)
= Value of exports – value of imports

12
 Trade Surpluses & Deficits

Trade surplus, NX > 0

Exports are greater than imports
The country sells more goods and services abroad than it buys from other
countries
Trade deficit, NX < 0
Imports are greater than exports
The country sells fewer goods and services abroad than it buys from other
countries
Balanced trade: Exports = Imports

13
 Factors that Influence NX
Factors that might influence a country’s exports, imports, and net exports:
Consumers’ tastes for foreign and domestic goods
Prices of goods at home and abroad
Exchange rates at which foreign currency trades for domestic currency
Incomes of consumers at home and abroad
Transportation costs
Government policies

14
 Active Learning 1:
Variables that affect NX

What do you think would happen to U.S. net exports if:

A. Canada experiences a recession (falling incomes,
rising unemployment)
B. U.S. consumers decide to be patriotic and
buy more products “Made in the U.S.A.”
C. Prices of goods produced in Mexico rise faster than
prices of goods produced in the U.S.

15
 Active Learning 1: Answers A, B
A. Canada experiences a recession (falling incomes,
rising unemployment)
U.S. net exports would fall
due to a fall in Canadian consumers’ purchases of
U.S. exports
B. U.S. consumers decide to be patriotic and
buy more products “Made in the U.S.A.”
U.S. net exports would rise
due to a fall in imports

16
 Active Learning 1: Answers, C

C. Prices of goods produced in Mexico rise faster than

prices of goods produced in the U.S.
✓This makes U.S. goods more attractive relative to
Mexico’s goods.
✓Exports to Mexico increase, imports from Mexico
decrease, so U.S. net exports increase.

17
 The U.S. economy’s increasing openness
20.00

18.00

16.00
Imports
Percent of GDP

14.00

12.00

10.00

Exports
8.00

6.00

4.00

2.00

0.00
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

18
 International Flows of Goods and Capital

The Flow of Financial Resources

Capital outflow: Purchase of foreign assets by domestic
residents (Invest capital to abroad)
Foreign direct investment
Foreign portfolio investment
• Capital inflow: Purchase of domestic assets by
foreigners (receive foreign capital from abroad)
–Foreign direct investment
–Foreign portfolio investment

• Net capital outflow (NCO)

NCO = Capital outflow – Capital inflow

19
 Net Capital Outflow, NCO

NCO measures the imbalance in a country’s trade in assets:

When NCO > 0, “capital outflow”
Domestic purchases of foreign assets exceed foreign purchases
of domestic assets
When NCO < 0, “capital inflow”
Foreign purchases of domestic assets exceed domestic
purchases of foreign assets

20
 Variables that Influence NCO

❖ Real interest rates paid on foreign assets/ domestic assets

❖ Perceived economic and political risks of holding foreign
assets
❖ Government policies affecting foreign ownership of
domestic assets

21
 The Equality of NX and NCO
An accounting identity: NCO = NX
Every transaction that affects NX also affects NCO by the same
amount (and vice versa)

• When a foreigner purchases a good

from the U.S.,
–U.S. exports and NX increase
–The foreigner pays with currency or assets, so the U.S. acquires
some foreign assets, causing NCO to rise.

• When a U.S. citizen buys foreign goods,

–U.S. imports rise, NX falls
–The U.S. buyer pays with U.S. dollars or assets, so the other
country acquires U.S. assets, causing U.S. NCO to fall.

22
 The Equality of NX and NCO
• When a Japanese consumer purchases a good from the U.S.,
–U.S. exports and NX increase
–The US firm receives Japanese Yen, then
• Case 1: stuffs in the mattress (the firm has a yen for yen) → the firm acquires a
foreign asset (Japanese Yen) → increase in [Link] capital outflow
• Case 2: buys stock in a Japanese corporation/a Japanese government bond →
increase in US. net capital outflow (which equals the increase in US. net exports)
• Case 3: buys a good made in Japan → U.S. imports increase → net exports are
unchanged. In this case, no American ends up
acquiring a foreign asset and no foreigner ends up acquiring a U.S. asset, so there is
also no impact on U.S. net capital outflow
• Case 4: exchanges Yen for US dollar. The bank then can buy Japanese assets (a U.S.
net capital outflow); buy a Japanese good (a U.S. import); or sell the yen to another
American who wants to make such a transaction

In the end, U.S. net exports must equal U.S. net capital
outflow. 23
 The Equality of NX and NCO
• When a U.S. citizen buys $50M goods from China,
–U.S. imports rise, NX falls
–Something must happen to that $50 million
• China could use the $50 million to invest in the U.S. economy. This capital inflow from
China might take the form of Chinese purchases of U.S. government bonds. In this case,
the purchase of the clothing reduces U.S. net exports, and the sale of bonds reduces U.S.
net capital outflow.
• Alternatively, China could use the $50 million to buy a plane from Boeing, the U.S. aircraft
manufacturer. In this case, the U.S. import of clothing balances the U.S. export of aircraft,
so net exports and net capital outflow are both unchanged.
–In all cases, the transactions have the same effect on net
exports and net capital outflow.

24
 Trade Surplus and NCO

A country running a trade surplus, NX > 0

❖ Selling more goods and services to foreigners than it is
buying from them.
❖ Use the foreign currency it receives from the net sale of
goods and services abroad to buy foreign assets.
❖ Capital is flowing out of the country, NCO > 0

25
 Trade Deficit and NCO
A country is running a trade deficit, NX < 0
❖ Buying more goods and services from foreigners than
it is selling to them.
❖ Financing the net purchase of these goods and
services in world markets by selling assets abroad.
❖ Capital is flowing into the country, NCO < 0

26
 International Flows of Goods and Capital

Saving, Investment and the International Flows

Open economy: Y = C + I + G + NX
→ Y – C – G = I + NX (1)
National saving: S = Y – C – G (2)
In which, S = (Y – T – C) + (T – G)
S = Personal saving + Government saving
(1), (2) → S = I + NX
Because NX = NCO → S = I + NCO
National Saving = Domestic investment + Net capital
outflow
27
 International Flows of Goods and Capital:
Saving, Investment and the International Flows

Trade surplus:
Exports > Imports (Net exports > 0)
•Y > Domestic spending (C+I+G)
•S > I and NCO > 0
Trade deficit:
Exports < Imports (Net exports < 0)
•Y < Domestic spending (C+I+G)
•S < I and NCO < 0

28
 International Flows of Goods and Capital
Three possible outcomes for an open economy
Trade surplus Balanced trade Trade deficit
(Ex > Im) (Ex = Im) (Ex < Im)

Nx > 0 Nx = 0 Nx < 0

NCO > 0 NCO = 0 NCO < 0

Y > C + I +G Y = C + I +G Y < C + I +G

S>I S=I S<I

 EXAMPLE 1: Exporting to Germany

Kiara is a web designer living in Illinois. She creates and sells a

website to Gabrielle who is living in Germany. Gabrielle pays
Kiara 5,000 euros for the website.
What is the effect on the U.S. net exports and net capital
outflows if:
A. Kiara keeps the 5,000 euros at home
B. Kiara buys 5,000 euros worth of stocks in a German
company
C. Kiara spends the 5,000 euros on shoes made in Germany
D. Kiara exchanges the 5,000 euros into U.S. dollars

30
 EXAMPLE 1: Solution, exporting to Germany

Kiara (U.S.) sells a website to Gabrielle (Germany) for 5,000.

NX = Exports – Imports
NCO = Purchases of foreign assets by domestic resident –
Purchases of domestic assets by foreigners
The website sold to Gabrielle is an export for the U.S., so
U.S. exports and net exports increase.

31
 EXAMPLE 1: Solutions, A and B

U.S. exports and net exports increase.

A. Kiara keeps the 5,000 euros at home
Kiara (a domestic resident) acquired a foreign asset (5,000 euros
from Germany), so U.S. NCO increases
B. Kiara buys 5,000 euros worth of stocks in a German company
Kiara (a domestic resident) acquired a foreign asset (5,000 euros
worth of stocks in a German company), so U.S. NCO increases

32
 EXAMPLE 1: Answers, C and D

C. Kiara spends the 5,000 euros on German shoes

Kiara purchase of shoes made in Germany is an import for the
U.S.: overall, exports increase by 5,000 euros (website sale to
Germany), and imports increase by 5,000 euros (shoes bought
from Germany), so U.S. Net exports do not change; NCO do not
change.
D. Kiara exchanges the 5,000 euros into U.S. dollars
Now the bank has to use the 5,000 euros (keep in the vault, or
purchase German assets, or sell the euros to an American that
wants to purchase a good or service for euros) The change in NX
is matched by the change in NCO.

33
 EXAMPLE 2: Importing from China

Amazon U.S. purchases $10,000,000 worth of goods from

China (to sell to the American customers).
What is the effect on the U.S. net exports and net capital
outflows if:
A. China buys $10 million worth of U.S. government bonds
B. China buys $10 million worth of goods from the U.S.
C. China buys $10 million worth of stocks in U.S. companies

34
 EXAMPLE 2: Solutions, importing from China

The $10 million worth of goods bought from China are

imports for the U.S. Imports increase, NX decrease.
A. and C. China buys $10 million worth of U.S. government
bonds or stocks in U.S. companies
Purchase of domestic assets by foreigners increase, so U.S.
NCO decrease
B. China buys $10 million worth of goods from U.S.
U.S. imports increase (Amazon buys goods from China) and
U.S. exports increase (U.S. sells goods to China). NX do not
change. NCO do not change.

35
Market for Loanable Funds
 Market for Loanable Funds

In an open economy, S = I + NCO

Saving = Domestic investment + Net capital outflow
Market for loanable funds:
Supply of loanable funds:
from national saving (S)
Demand for loanable funds:
from domestic investment (I)
and net capital outflow (NCO)

37
 Market for Loanable Funds

Net outflow of capita when NCO > 0

Net purchase of capital overseas adds to the demand for
domestically generated loanable funds
Net inflow of capital when NCO < 0
Capital resources coming from abroad reduce the demand
for domestically generated loanable funds

38
 Market for Loanable Funds
How NCO depends on the real interest rate
r
The real interest rate, r, is the
real return on domestic assets.
A fall in r makes domestic r1
assets less attractive relative to
foreign assets. r2
Domestic people purchase
more foreign assets. NCO
People abroad purchase
fewer domestic assets. NCO1 NCO2 NCO
NCO rises.
Net capital
outflow 39
 Market for Loanable Funds
Loanable funds Both I and NCO
depend negatively on r, so
r
the D curve is downward-
S = saving
sloping.
Saving depends positively
on r so the S curve is
r1 upward-sloping
r adjusts to balance supply
D = I + NCO
and demand in the LF
LF market.

40
 Market for Loanable Funds
Real
Supply of loanable funds
Interest
(from national saving)
Rate

Equilibrium
real interest
rate Demand for loanable
funds (for domestic
investment and net
capital outflow)
Equilibrium Quantity of
quantity Loanable Funds

- The interest rate in an open economy is determined by

the supply and demand for loanable funds.
- At the equilibrium interest rate, the amount that people
want to save exactly balances the amount that people
want to borrow for the purpose of buying domestic
capital and foreign assets.
 EXAMPLE 1: Budget deficits and capital flows

Suppose the government runs a budget deficit

(previously, the budget was balanced).
Use the appropriate diagrams to determine the
effects on the real interest rate and net capital
outflow.

42
 EXAMPLE 1: Solution

A budget deficit reduces saving and the supply of LF,

causing r to rise.

Loanable
r funds
S2
S1

r2
r1

D1

LF
43
 EXAMPLE 1: Solution

The higher r makes domestic bonds more

attractive relative to foreign bonds, reduces NCO.

Loanable Net capital

r funds r outflow
S2
S1

r2 r2
r1 r1

D1 NCO1
LF NCO
44
 EXAMPLE 1: Solution

When working with this model, keep in mind:

the LF market determines r (in left graph),
then this value of r determines NCO (in right graph).
Loanable Net capital
r funds r outflow
S2
S1

r2 r2
r1 r1

D1 NCO1
LF NCO
45
 Foreign exchange market
Goods and services

Suppl Demand
y Buyers
Sellers
2
nations
Problem
Currencies
s

How do we
Which How calculate
currency currencies
the value
is paid? are
of a
transferred?
currency?
 Foreign exchange market

• What is the FX market?

– The foreign exchange market is the market in
which foreign currencies or foreign exchange are
traded/ converted
• Why do we need to exchange one currency for
another?
– To pay for goods and services activities
– To make profit and speculations
 Foreign exchange market
Characteristics
• Continuous operation (24/7) and geographical dispersion
• Huge trading volume
• Exchange rates quoted on foreign exchange markets are
consistent with each other
• The importance of countries in the world economy will
determine the position of their currencies.
• The foreign exchange market is very sensitive to economic,
political, social, and psychological factors.…
 Foreign exchange market
Participants in FX markets
Buyer or seller of last resort
in the foreign exchange
markets central
banks
Clearinghouse for surpluses and
shortages between the commercial
banks brokers

Serve as the
clearinghouses for
currency exchange commercial banks

Those needing traditional users as tourists,

currency to fund importers, exporters,
transactions
investors, and so o n …
 Foreign exchange market

to transfer funds or purchasing power

from one nation and currency to another
Through electronic transfers and
Internet
FUNCTIONS the credit function
Credit is usually needed when goods are
in transit and also to allow the buyer
some time to resell the goods and make
the payment (60 days or 90 days after
sight)

to provide the facilities for hedging and

speculation
Through financial instruments: spot,
forward, future, option and swap
contracts
 Foreign exchange market

1. Nominal exchange rate:

is the price of one currency in terms of another
E.g: an exchange rate of 23000 Vietnamese Dong (VND) to
the United States dollar (USD, $) means that 23000 VND is
worth the same as 1 USD.

51
 ER – quotations
Direct quote
• 1 foreign currency unit = x home currency units (E)

Indirect quote
• 1 home currency unit = x foreign currency units (e)
Direct quotation: E(VND/USD) = 23000
or indirect quotation: e(USD/VND) = 1/23000
1
e= →E e
E
 ER – direct quotations

base currency (unit currency, transaction

currency)

E (VND/USD) = 23500 → 1 USD = 23500 VND

quote currency (price currency, payment currency, term

currency)

The quote currency is thus the numerator in the ratio,

and the base currency is the denominator.

The value of the base currency (denominator) is always 1

 Appreciation & Depreciation

Appreciation (or “strengthening”)

Increase in the value of a currency as measured by the
amount of foreign currency it can buy

Depreciation (or “weakening”)

Decrease in the value of a currency as measured by the
amount of foreign currency it can buy
 Appreciation & Depreciation

ER – direct quotation

If the foreign currency

is strengthening, the
if the exchange rate
exchange rate number
number decreases, the
increases and the
foreign currency is
home currency is
weakening then the
depreciating
home currency is
strengthening (i.e.
appreciating)

When E (VND/USD) rises, the dollar strengthens and the

dong looses its value
 EXAMPLE 1: Appreciation or depreciation?

Did the US dollar appreciate or depreciate?

A. Last year, Khalid exchanged $1 for 100 Japanese yen,
but this year he exchanged $1 for 105 Japanese yen.
B. Last year, Amira exchanged $1 for 25 Mexican pesos,
but this year she exchanged $1 for 20 Mexican pesos.

56
 EXAMPLE 1: Solutions

A. Last year’s exchange rate = 100 yen per dollar

This year’s exchange rate = 105 yen per dollar
US dollar appreciation : $1 now can buy more yens than
last year (Yen depreciation)
B. Last year’s exchange rate = 25 pesos per dollar
This year’s exchange rate = 20 pesos per dollar
US dollar depreciation : $1 now can buy fewer pesos
than last year (Peso appreciation)
57
 EXAMPLE 2: Appreciation or depreciation?

What is the exchange rate? Did the VND appreciate or

depreciate?
A. Last year, Nam exchanged $1 for 22000 VND, but this year
he exchanged $1 for 23000 VND.
B. Last year, Nam exchanged $1 for 25000 VND, but this year
he exchanged $1 for 20000 VND.

58
 EXAMPLE 2: Solutions

A. Last year, E (VND/USD) = 22000

This year, E(VND/USD) = 23000
US dollar appreciation : $1 now can buy more
yens than last year (VND depreciation)
B. Last year, E (VND/USD) = 25000
This year, E(VND/USD) = 20000
US dollar depreciation : $1 now can buy more
yens than last year (VND appreciation)
59
 Foreign exchange market
How to determine
nominal equilibrium exchange rate?
1. Purchasing Power Parity Theory
2. Uncovered Interest Parity
3. A simple approach – supply and demand
analysis

60
 Foreign exchange market
Supply and demand approach
• Supply for foreign currency ($) in the FX
is driven by transactions requiring E(VND/USD)
foreign currency selling through buying SUSD
domestic currency.
– Exports
– Asset inflow (Invests or travels into a
country)
• Supply for foreign currency has upward
slope DUSD
– E(VND/USD) increases → VN’s goods are QUSD
relatively cheaper than those of the US
→ Export increases → supply of USD rises
 Foreign exchange market
Supply and demand approach
• Demand for foreign currency ($) in FX is
driven by transactions requiring foreign E
(VND/USD)
currency buying through selling
domestic currency.
– Imports
– Asset flows abroad (Invests abroad or
travels abroad)
• Demand for foreign currency has
downward slope DUSD
– E(VND/USD) increases → The US’s goods are
more relatively expensive than those of QUSD
VN → Import decreases → demand of
USD falls
 Foreign exchange market
Supply and demand approach

• The equilibrium E(VND/USD)

exchange rate Surplus
SUSD
occurs at the
intersection of the Equilibrium
supply and demand exchange rate

curve for foreign

currency. Shortage
DUSD
Equilibrium QUSD
quantity of
foreign currency
 Changes to equilibrium

• Example 1
– Suppose that the supply of E
(VND/USD)
USD increases from an S1USD
increased desire to
S2US
purchase V.N. goods. D
E1
–E →e Equilibrium
E2
Since fewer VNDs are
required to buy USD, the DUSD
VND has strengthened or
QUSD
appreciated.
 Changes to equilibrium

• Example 2
– Suppose that the supply of $
falls due to a decrease in E(VND/USD) S2US
export. D
S1USD
–E →e E2
Since more VNDs are Equilibrium
E1
required to buy USD, the
VND has weakened or
depreciated. DUSD
QUSD
 Factors that Influence Exchange Rates

• Factors which affect the E(VND/USD)

demand and supply of SUSD
foreign currencies will impact
on the equilibrium of ER
Equilibriu
• What are they? m

DUSD
QUSD
 Factors that Influence Exchange Rates

Change in EX
EX ↑ => S foreign currency↑ => S curve for IM ↑ => D foreign currency ↑ => D curve for
foreign currency shifts right => E ↓ foreign currency shifts right => E ↑

E(VND/USD D1
)
D S E(VND/US
D
S1 D)
S

E0
E1
E1
E0

Q0 Q1 QUSD Q0 Q1 QUSD
 Factors that Influence Exchange Rates
Relative Inflation Rates
Domestic interest rate Domestic interest rate
> Foreign interest rate < Foreign interest rate
 Capital flows into  Capital flows out
 S foreign currency↑ => S curve for foreign  D foreign currency ↑ => D curve for foreign
currency shifts right => E ↓ currency shifts right => E ↑
E(VND/USD) E(VND/USD) D1
D S D
S1 S

E0 E1
E1 E0

QUSD
Q0 Q1 Q0 Q1 QUSD
 Factors that Influence Exchange Rates

Relative prices
E(VND/USD) D1
D S1
Domestic price > foreign price S

E1

IM ↑ EX ↓
E0

DUSD ↑ SUSD ↓

E↑ Q0 Q1 QUSD
 ACTIVE LEARNING:

Explain how does each of the following transactions

influence supply and demand in foreign exchange market
then affect exchange rate?

1. Vietnam students go abroad for university study

2. More foreigners choose Vietnam as a best
destination for tourists
3. BIDV opens new branch in Laos
4. A new bridge is built using ODA funds from
Japan
5. Vietnam government has a support of USD 1
million for Cuba for economic development
 Exchange rate mechanisms

➢ Floating exchange rate mechanism

• Freely floating exchange rate mechanism
• Managed floating exchange rate mechanism
➢ Fixed exchange rate mechanism
 Foreign exchange market
2. Real exchange rate:
Rate at which the goods and services of one
country trade for the goods and services of
another
𝑬 ∗ 𝑷𝒇
𝑹=
𝑷𝒅
Where
Pd = domestic price
Pf = foreign price (in foreign currency)
R = real exchange rate
E = nominal exchange rate (domestic
currency per unit of foreign currency) 85
 Real exchange rate
You want to buy a pair of Adidas shoes and take a search on the internet...

Assume that there is no shipping cost,

If exchange rate is 35.000 VND per USD, will you buy shoes in US or Vietnam?
If exchange rate is 23.000 VND per USD, will you buy shoes in US or Vietnam?
 Real exchange rate

You want to buy a pair of Adidas shoes and taking a search on internet...
If exchange rate is 35.000 VND per USD, will you buy shoes in
US or Vietnam?
𝐸 ∗ 𝑃 𝑓 35000 ∗ 85
𝑅= = = 1,19
𝑃𝑑 2500000
1 pair of Adidas shoes in the USA = 1,19 ones in VN =>
Adidas in the US is relatively more expensive than that
in VN => Adidas in VN is highly competitive
If exchange rate is 23.000 VND per USD, will you buy shoes in
US or Vietnam?
𝐸 ∗ 𝑃 𝑓 23000 ∗ 85
𝑅= = = 0,782
𝑃𝑑 2500000
1 pair of Adidas shoes in the USA = 0,782 one in VN =>
Adidas in the US is relatively cheaper than that in VN =>
Highly competitive
 For the Economy as a Whole
Real exchange rate
𝑬 ∗ 𝑷𝒇
𝑹=
𝑷𝒅

= price of a foreign basket of goods relative to price of a

domestic basket of goods
•Pd = domestic price level, e.g., Consumer Price Index,
measures the price of a basket of goods
•Pf = foreign price level
Real exchange rate reflects a country's ability to compete
with other countries' goods 88
 Real exchange rate (R) = [Link]/Pd

A rise in real exchange rate A fall in real exchange rate

➢ Vietnam’s goods ➢ Vietnam’s goods
(domestic goods) (domestic goods)
become cheaper become more expensive
compared to foreign compared to foreign
goods goods
➢ Consumers at home and
➢ Consumers at home and abroad - buy fewer
abroad buy more Vietnam’s goods and
Vietnam’s goods and more goods from other
fewer goods from other countries
countries ➢ Lower exports, Higher
➢ Higher exports, Lower imports
imports → Lower net exports
→ Higher net exports
 Real exchange rate, NX and NCO
➢ An increase in R makes domestic goods cheaper relative to
foreigners’ → Export increases → NX increases
➢ An increase in R has no effect on S or I, so it does not affect
NCO (=S – I) → (S-I) curve is a vertical line.
Low R

R1

R adjusts to
NX (R)
balance NX
and NCO
High R
 Impact of macroeconomic policy
on real exchange rate
• Fiscal policy:
–Setting the level of government purchase (G) and taxation
(T) by government policymakers

–Classification:
• Expansionary fiscal policy: An increase in G and/or decrease in T

• Contractionary fiscal policy: A decrease in G and/or increase in T

 Impact of macroeconomic policy
on real exchange rate
• Domestic fiscal policy:
- The government increases G
or/and decreases T
 thấpR
Low
=> Government Saving
decreases R2
=> S decreases
=> (S-I) falls, (S-I) curve shifts left R1
=> NCO decreases => Demand NX (R)
of foreign currency decreases
=> E decreases => R decreases High R

=> domestic goods become

(S = I + NCO)
more expensive => NX
decreases (NX1 → NX2)
 Impact of macroeconomic policy
on real exchange rate
• Foreign fiscal policy:
- The foreign government
increases G or/and decreases T
=> Foreign S decreases => Low R
foreign interest rate increases
=> domestic Investment R1
decreases => (S-I) increases =>
(S-I) curve shifts right => NCO R2
increases => Demand of foreign NX (R)
currency increases => E
High R
increases
=> R increases => domestic
goods become cheaper => NX
increases (NX1 → NX2)
 Impact of macroeconomic policy
on real exchange rate
• Policy to encourage domestic investment:
- Domestic investment increases => (S-I) falls => (S-I) curve shifts left
=> NCO decreases => Demand of foreign currency decreases => E
decreases => R decreases => domestic goods become more
expensive => NX decreases (NX1 → NX2)
 thấp
Low R

R2

R1

NX (R)

High R
 Impact of macroeconomic policy
on real exchange rate
• Trade policy:
- Trade policy to restrain IM, increase
EX => NX increases at every
exchange rate => NX curve shifts Low
 thấpR
right => Supply of foreign currency
increases (meanwhile S and I R2
unchanged) => E decreases => R
decreases => domestic goods R1
NX (R2)
become more expensive => NX
NX (R1)
decreases (eliminate the initial
increase of NX). Finally, NX remains High R

constant (NX1), R decreases.

 THANK YOU FOR
WATCHING

Học viện Ngân hàng T: 1900 561 595 F: 1900 561 595
12 P. Chùa Bộc, P. Kim Liên, TP. Hà Nội E: truyenthong@[Link]
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