group assignment - fin201

Deadline: 31st July, 2014

Group assignment

Macroeconomics

Monetary Economics and Global

Economy - FIN201

SB0802 class

Group members:

Nguyn c Bo

Nguyn c Pht

Nguyn Khc Duy

Lecturer: m Nguyn Anh Khoa

Email: [email protected]

Requirement: Find an article (one article ONLY) in a recent newspaper or

magazine (dated year 2011 or 2012) that illustrates one macroeconomic issue

in VIETNAM. Read and understand the article, then answer the following

questions based on the article.

2

Group assignment FPT University

Present: 1st August, 2014 SB0802 - summer 2014

Table of Contents

Introduction .......................................................................... 3

Situation of Vietnams economy in 2014 ................................................................... 3

Summarize the article: ................................................................................................ 4

Definition and clarifying ...................................................... 5

Gross domestic product - GDP ................................................................................... 5

Purchasing power parity - PPP ................................................................................... 5

Consumer Price Index CPI ...................................................................................... 5

Macroeconomic issues .......................................................... 5

GDP the virtual configures (unreal) ........................................................................ 6

Advantages ............................................................................................................. 7

Disadvantages ......................................................................................................... 7

Southeast Asian region ........................................................................................... 7

CPI .............................................................................................................................. 8

Disadvantages ......................................................................................................... 8

Advantages ............................................................................................................. 9

Conclusion and Recommendation ....................................... 9

Conclusion .................................................................................................................. 9

Recommendation: ....................................................................................................... 9

GDP and Unemployment ....................................................................................... 9

GDP and Inflation ................................................................................................. 10

Relationship between GDP, Consumption, saving and investment ..................... 10

Appendices .......................................................................... 13

Reference ............................................................................. 13

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Introduction Situation of Vietnams economy in 2014

With the goals of improving living standards and encouraging foreign investment through more

open economic policies, a renewed period of economic reform began in 1986. The initial steps of

economic reform ("doi moi") had been gradual. But during the 1990s, enhanced institutional

support and steadily improving infrastructure made Viet Nam's growth rate one of the highest in

the region. This growth brought impressive gains in incomes and in the quality of life of the

Vietnamese people.

The investment-led growth of the mid-1990s began to tail off even before the Asian financial

crisis dealt a further blow. Investor expectations were not being met, and many projects suffered

from excessive bureaucratic interference. However, the cautious economic policies of the

government enabled the economy to avoid the serious balance of payments, fiscal, and banking

crises common elsewhere in the region.

In recent times, the Government has had to focus its policy efforts on avoiding a macroeconomic

crisis; however, with inflation likely to have peaked and the merchandise trade deficit having

eased back, there are now concerns that policymakers will become complacent, with the

governments potentially shifting its focus back to boosting growth rather than stabilizing the

economy.

The government has started to heed the calls of donor governments and investors for greater

transparency, reform of the SOE, financial and trading sectors, and improved public sector

governance. Implementation has been slow, however, and Viet Nam retains a strong commitment

to state enterprise and outmoded financial and trade regimes. Reforms and restructuring have

reduced the numbers of state owned firms to around 6,000, but despite preferential access to credit

through the state banking sector, these enterprises are not growing strongly enough to absorb the

growing numbers of unemployed.

Viet Nam's growth over the medium term depends on whether it becomes a truly multi-sector

economy in which private businesses are able to grow and compete in an undistorted environment

with the same freedoms as state enterprises. In 2007, FDI inflows exceeded government's

expectations and credit growth rose by approximately 50 percent. However, forecasts for growth

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are being scaled down in light of rising inflation and other signs the Vietnamese economy is

overheating.

Summarize the article: This website had a great question about the development of Vietnams Economy, which

usually be confused about its speed: starting with the lower position within the highly investment

from foreigners while compare with other countries in South East Asia, why our economy rises

slightly like that? Secondly, is this development stable and unshakeable ?

Many data are presented, and the website made some analysis and also estimations about

GDP, ICOR, CPI, inflation to indicate out how and why Vietnam had those numbers. Beside of

that, the page not only point the data but also use it to provide some solutions for this situation of

our economy.

Date of Article: 21/2/2008

Source of Article: Economist Intelligent Unit, Taiwans WB, WDI.

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Definition and clarifying Gross domestic product - GDP GDP (gross domestic product) is the market value of final goods and services newly

produced within a nation during a fixed period of time.

Equation: Y = C + I + G + NX C: consumption

I: investment

G: government purchases of goods and services

NX: net export (NX = export import)

Purchasing power parity - PPP An economic theory that estimates the amount of adjustment needed on the exchange

rate between countries in order for the exchange to be equivalent to each currencys

purchasing power. It means real exchange rate equal to 1.

Consumer Price Index CPI A measure that examines the weighted average of prices of a basket of consumer

goods and services, such as transportation, food and medical care. The CPI is

calculated by taking price changes for each item in the predetermined basket of goods

and averaging them; the goods are weighted according to their importance. Changes in

CPI are used to assess price changes associated with the cost of living.

Macroeconomic issues Viet Nam GDP growth is on medium and low growth group. Compared to other

countries in South East region, Viet Nam is lower almost other countries except some

underdeveloped nations as: Laos, Cambodia while Viet Nam is a country have the

second highest inflation level in the world (after Venezuela) (2011).

High inflation and low GDP is signs which show that Viet Nam is a less developed

country.

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GDP the virtual configures (unreal) Much of any country's economic well-being flows from natural, rather than human-

made, assets land, rivers and oceans, natural resources (such as oil and timber), and

indeed the air that everyone breathes. Ideally, for the purposes of economic and

environmental planning, the use and misuse of natural resources and the environment

should be appropriately measured in the national income accounts. Unfortunately,

they are not. There are at least two important conceptual problems with the way the

national income accounts currently handle the economic use of natural resources and

the environment. (1. Natural resource depletion and 2. The costs and benefits of

pollution control) [Ref1]

Viet Nam is a country which develop rely on natural resource primarily.

In Viet Nam, the government claim that mineral and rsesource mining is a key (major,

pioneer) industry, accounted for high GDP proportion and it is also an industry which

affect to environment and social strongly.

Vietnam has more than 5000 mines with about 60 different types of minerals. Mineral

resources of Vietnam relative abundance and diversity of species, including the group

of fuel minerals (oil, coal); group of iron minerals and iron alloys (iron, chromite,

titanium, manganese); ferrous metals group minerals (bauxite, tin, copper, lead-zinc,

antimony, molybdenum); group of wealth mineral (gold, precious stones); Mineral

group of industrial chemicals (apatite, kaolin, glass sand); mineral group of

construction materials (cement, limestone, building stone, paving stone).

The rate of mineral exports in Vietnam is relatively high. For only the first 7 months

of 2013, exports of ores and minerals growth in both volume and value, we compared

to the same period last year, increased by 100.86% and 3.11% is equivalent to 1.4

million tones valued at $ 140.5 million. In particular, China is the main export

market, accounting for 91.2% of ores and minerals, with 1.2 million tons, valued at

101.7 million, an increase of 129.29% in volume and 28.6 % in value over the same

period in 2012. Next to the Japanese market, with 20.7 thousand tons valued at $ 12.1

million, down 17.88% and 36.85% decrease in value. The third major export markets

are Malaysia was with 15.9 thousand tons valued at $ 4.3 million, an increase of

61.97% and 31.59% increase in value over the same period. [ref2]

These data show that mineral mining industry of Vietnam is on track to strong growth

and a large proportion of the national economy. Its about 10-11% GDP of Viet Nam.

We have not mentioned to fuel group yet. In particularly, export value of fuels

accounted for 18-22% GDP of Viet Nam.

That are only statistic figures and no one know about real figures how it is high.

We can confirmed that least 1/3 Viet Nam GDP is from the exploitation.

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Advantages From the above analyzes, GDP expresses excessively the wealth creating ability and

competitiveness. It makes foreign investors misidentify about Viet Nam. Generally,

Viet Nam will be received more investment (ODA, FDI...) than we expected.

Secondly, high GDP figure makes people improve awareness about their

achievements and patriotism. It also improve mental and performance in their work.

Disadvantages GDP cannot express Viet Nam growth ability exactly. It can be an error for investors

and make many investments become the mistakes. Furthermore, the wrong

investments can causes the bad debts in commercial banks one of the crisis causes.

From the beautiful figures, Viet Nam hard to find how to create wealth and develop. A

country which lean to minerals and resources so much, do not have a stable economic

platform in the present, so a bright future of the economy is unrealistic.

Southeast Asian region Overall, Viet Nam GDP (PPP) is quite low and ranking 5th in ASEAN (2010). In the

present, it seems we are at 6th ASEAN (Singapore is 5th).

We consider GDP per capita of Viet Nam, Viet Nam GDP is only equal 1/17

Singapore while Singapore area is equal a city of Viet Nam. What a disappointing

figure!

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CPI In the article, there is an issue in recent years: CPI inflation.

Although growth speed does not have a significantly changing, CPI increase strongly

year by year. 3-4% early years 2000s up to 12.6% in 2007 and 18.12% in 2011.

We back to the fuel industry. Petrol and gasoline are skyrocketing, two petrol litter

value is higher than a minimum wage day (1,350,000VND/month -> 45,000

VND/day). This is also a main cause high CPI inflation.

Disadvantages Firstly, The CPI increasing is an inflation tax which reduces life of people,

especially the people has been retired and had a fixed salary.

Secondly, the inflation is higher than saving rate (real rate is negative), so money flow

in the economy are running to other investment channels as: securities and real estate.

More details: [ref3]

There are 7 important investment channels.

1. Produces

2. Services

3. Securities

4. Debit in bank

5. Foreign currency

6. Gold

7. Real estate

In Viet Nam, (1) is not encouraged so (3) is not attractive; because of high inflation,

(4) is not a good choice. Money flow will run to (7) because real estate have high

profit and low tax, but disadvantage of (7) cannot be splited into the smaller pieces.

People will invest to remain channels as (5) & (6). (5) is limited by anti-dollarization

policy, (6) is monopoly by the state (SJC). So people invest to (7) because of no more

other choices.

This is an unstable point in the economy which cause real estate bubble and bad debt.

Lastly, outstanding loan ratio of real estate is quite high (10%) and almost loans are

mortgaged by real estate. In the present, the real estate bubble has been broken and

Viet Nam economy is in difficult stage. Bank system are threatened seriously.

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Advantages Businesses can take a bit disadvantages if theyre contracting with governments, but

consider wage contracts when the employers worked at a factory, their contracts

with factory are usually signed in long-run, so if CPI inflation increases, firms and

businesses are the beneficiaries. That means that the business could negotiate

contracts throughout the year for supplies and sales, but its real wage expenses

actually fell.

Conclusion and Recommendation Conclusion

Vietnam is a developing economy in the Southeast Asia. In recent years, the nation has been

rising as a leading agricultural exporter and an attractive foreign investment destination.

Vietnam's key products are: rice, cashew nuts, black pepper, coffee, tea, fishery products and

rubber. Manufacturing, information technology and high-tech industries constitute a fast

growing part of the economy. Vietnam is also one of the largest oil producers in the region.

Viet Nam have many human resources, while Viet Nam has not yet taken advantages of

available resources. Viet Nam need more good and clean-handed policymakers to develop

and build a stable platform for the economy.

Recommendation:

GDP and Unemployment The relationship between unemployment and GDP is called Okun's law. It is the association

of a higher national economic output with the decrease in national unemployment. This is

because in order to increase the economic output of a country, people will need to go back to

work, thus lowering unemployment. Empirical studies on the relationship between GDP and

unemployment show that for every percentage point fall in the unemployment rate there is an

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increase in GDP by 2.5 percent. Experts believe that the reason for this large coefficient is

because the unemployment rate does not count discourages workers who obtain a job before

they are counted in the unemployment numbers. Another reason is when economic output

increases firms typically don't hire new workers but have their current workers work for

longer hours. Also some industries have increasing returns to scale where increasing the labor

force has a multiplicative effect on their output.

GDP and Inflation GDP and inflation are both considered important economic indicators. It is widely believed

that there is a relationship between the two. The problem is that there are disagreements as to

what that relationship is or how it operates. As a result, when governments make decisions

based on these pieces of information, the outcome often cannot be guaranteed.

How to Grow the Economy without Growing Inflation. Simply put, however, it is possible to

grow the economy without any drastic manipulation of the money supply. Supply-side

factors may stimulate output independent of aggregate demand through:

- Increases in labor productivity (output per worker), through investments in

education, capital goods and technological advances.

- Shifts in investment as a result of lower prices for capital and higher expected

future returns.

- Increases in globalization and free trade, which makes imports more

affordable while increasing the demand for U.S. exports.

- Cutting taxes on capital investment, which stimulates job creation.

Relationship between GDP, Consumption, saving and

investment One of the points that emerges from the discussion in our program 'The Paradox of Thrift' is

that while saving is undeniably an important part of the economic process that gives rise to

new investment and economic growth, the precise relationships between saving and

investment is somewhat complex. This helps to explain why there are differences prediction

as to what is a satisfactory national saving rate.

Here we try to unravel the elements of the puzzle, and to clarify some of the macroeconomic

issues that underlie the saving debate.

The Components of Saving

On this basis, then, we can represent the (real) GDP for any period as a sum of these

components:

(1) GDP = C + I + G + NX

The process of production generates not only a flow of outputs of goods, but also a flow of

incomes to those participating in the process. Since, in general, every dollar of production

generates a dollar of income, it follows that the real GDP of a country reflects a

corresponding flow of aggregate real income in that country.

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Thus aggregate output and income are essentially equivalent measures of aggregate economic

activity. Leaving aside some refinement of detail associated with international transactions,

all of the income generated in any period is attributable to the household sector, since the

owners of firms (whose income takes the form of profits) are of course themselves also part

of that sector.

The incomes received by households may be deal into the part that they spend on

consumption goods, the part that they save, and the part that they are required to pay in taxes.

Thus aggregate income may be represented as a sum of consumption (C), saving (S) and

taxation (T). Bearing in mind that we can represent aggregate income by GDP, we can

summary the components of income as:

(2) GDP = C + S + T

Now we may combine our definitions of aggregate output and aggregate income in equations

(1) and (2), to get:

(3) C + I + G + NX = C + S + T

This may be rearranged as:

(4) I = S - (G - T) - NX

This important national accounting relationship gives us the key to much of the discussion in

'The Paradox of Thrift' concerning the macroeconomic significance of the national saving

rate. For it defines, in the three terms on the right hand side, the sources of saving from which

aggregate investment can be financed.

The first is domestic private sector saving, S (that is, saving by households and business

enterprises). The second is public sector saving, represented by the government budget

deficit, or the difference between government expenditure and tax revenue, (G-T).

The third source of saving is the foreign sector. By the logic of our international economic

relationships any net borrowing from the rest of the world implies a corresponding current

account deficit. Thus our use of foreign saving is represented here by net exports, NX. It is

important to note that, in principle, any of these saving flows may be positive, zero, or

negative.

Saving, Investment and Foreign Debt

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It is clear now that some of the confusion about the relationship between saving and

investment derives from the fact that there are several kinds of saving to be taken into

account. Total saving is made up of a domestic component and an international component,

either of which may be positive, zero or negative. Domestic, or national, saving comprises the

saving of the private sector, S, and the saving of the government sector (G-T).

If the government sector is in deficit, as in Australia it typically has been over the period

since the second World War, then the government is dissaving and contributing negatively to

aggregate domestic saving. We can see then that under those conditions if indeed the national

saving rate is thought to be too low, the government itself must share the responsibility for

this, and any attempt to correct the problem can have important budgetary implications.

Recognition of this point has been implicit in the widely-public strategy of the current

government to transform the Federal Budget from deficit to surplus. It also helps to explain

the Labor government's flirtation with surplus budgeting in the late 1980s and early 1990s.

As noted earlier, our reliance or otherwise on foreign saving is reflected in net exports. If NX

is negative, indicating a current account deficit, then foreign lenders are contributing to the

flow of saving available to sustain our domestic investment, thereby enabling us to spend in

excess of our income. This has been chronically the situation for Australia for some decades,

and is a point of some concern for Dr. Fitzgerald in 'The Paradox of Thrift'.

So the key underlying macroeconomic issue in the saving debate is not whether it is possible

for investment to proceed in the face of a relatively low rate of national saving, but whether it

is desirable (or even feasible), on a long term basis, to cover a shortfall between national

saving and national investment by drawing on the saving of foreigners. Our views on this

issue will be colored by a number of considerations, including whether it is the public or the

private sector that is accumulating the foreign debt, whether the investment projects are

economically and socially viable, and whether we think heavy reliance on foreign lending

makes us unduly vulnerable to global volatility.

13



Appendices [ref2](gdmv.gov.vn) T l xut khu khong sn Vit Nam tng i cao. Tnh

ring 7 thng u nm 2013, xut khu qung v khong sn tng trng c v lng

v tr gi so vi cng k nm trc, tng ln lt 100,86% v tng 3,11% tng

ng vi 1,4 triu tn, tr gi 140,5 triu USD. Trong , Trung Quc l th trng

xut khu chnh, chim 91,2% lng qung v khong sn, vi 1,2 triu tn, tr gi

101,7 triu USD, tng 129,29% v lng v tng 28,6% v tr gi so vi cng k nm

2012. K n l th trng Nht Bn, vi 20,7 nghn tn, tr gi 12,1 triu USD, gim

17,88% v lng v gim 36,85% v tr gi. Th trng xut khu ch yu ng th

ba l Malaysia vi 15,9 nghn tn, tr gi 4,3 triu USD, tng 61,97% v lng v tng

31,59% v tr gi so vi cng k. See more at:

http://dgmv.gov.vn/index.php?option=com_k2&view=item&id=6252:t%C3%A1c-

%C4%91%E1%BB%99ng-x%C3%A3-h%E1%BB%99i-c%E1%BB%A7a-

ho%E1%BA%A1t-%C4%91%E1%BB%99ng-khai-th%C3%A1c-kho%C3%A1ng-

s%E1%BA%A3n&Itemid=357&lang=vi

(Media.chinhphu.vn) - Ngnh cng nghip khai khong v ang ng vai tr quan

trng trong s nghip pht trin nn kinh t t nc khi hng nm ng gp khong

10 - 11% GDP ca c nc. Nhng ti nguyn th hu hn do vy vic khai thc v s

dng ti nguyn phi minh bch v hiu qu. - See more at:

http://media.chinhphu.vn/Video/ChiTiet/toa-dam-truc-tuyen-khai-thac-tai-nguyen-

khoang-san-minh-bach-va-hieu-qua--1#sthash.rp3rpKRV.dpuf

Reference

Author Source In-text

Andrew B. Abel, Ben S.

Bernanke, Dean

Croushore

Title: Macroeconomics seventh

edition book, page 29.

Much of any country's

economic well-being flows

[Ref1]

L Tot (2012) Xacbacxangbang.blogspot.com There are 7 important

investment channels...

[ref3]

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