PHILIP’S CURVE

(Relation between inflation, unemployment)

1. When inflation go up → unemployment go down
2. When inflation go down → unemployment go up
→ the link between them is salary, more staff→ higher salary → inflation up
→ short run
- Short run: no low inflation and unemployment at the same time ⇒ trade-
off

- PHILIP’S CURVE ONLY WORKS IN SHORT RUN

+ Trade-off don’t exist in long run because long run is in full
employment
+ So Philips belong to Keynes philosophy

THE LIQUIDITY TRAP

- Economic situation: Keynes and Classical policies does not work anymore
+ 1974, 1979: we have stagflation
+ 1 of the solution is Qe
⇒ Dat why Keynes not as famous as before
- The failure of Keynes policy
1. Def: Liquidity trap
- Occurs when
+ Interest rate is close or equal to 0
+ Central banks finds that run out of room to stimulate AD during
slowdown/ recession
- Interest rate go to 0 so nobody invest or consume (aka lost effness) →
recession stays
VD: Japan
- Why it happens:
1. Risk averse banks (Monetary policies does not work + less eff)
- After crisis , banks keep more capital → hard to loan →
bankrupt
- Charging a risk premium on new loans especially to business
customers
 2. Private sector: (business and consumers)
- 2008, thousands of US ppl homeless cause borrow too much
+ lose house + price of house go down as well
- Lose trust in banks ⇒ even when interest =0 ng ta vẫn ko
borrow
- Def:
+ Low on confidence/animal spirits
+ Focused on cutting their debt rather than taking out
new loans

❖ How to overcome a liquidity trap effect:

1. Bye bye to monetary policy:
- Fiscal policy →become more imp e.g running a larger budget deficit
⇒ lift AD through the circular flow + increase the money supply

2. We invent negative interest rate:

- Def: Central banks may opt to use (-) interest rates in a bid ⇒ to reduce real
interest rates
- VD You borrow 99, you get 100
- Banks use negative interest rate: to reduces interest rate to increase more
borrowing and saving
- Deposit less + buy more stocks (company then borrow money to buy their
own share)
- Support bubble

3. QE (Quantitative easing) aka printing money;

- Def: Central banks may supply the financial markets with extra liquidity e.g
via QE ⇒ encourage them to lend to each other again and increase the
flow of funds available or borrowers
- Why it is diff from Zimbabwe: TRUST
- QE is only a tool to earn time

4. Change currency as substitute to interest rate when interest rate go

down
- Def: Central banks and their GOV may decide to switch to a managed
floating exchange rate to seek a competitive depreciatin
● Abenomics strategy (by Mr.Abe):
+ want Japanese woman to come back to business
+ Robots to go jobs
● After Japan, the next be Germany (will face same prob)

T6: Try to draw money demand and supply to prove VN is not in liquidity trap
while Japan is (draw 2 diagram)

HELICOPTER MONEY (AKA GIVE $$ FOR FREE)

⇒ Not a solution but to earn time to be in power (politics)

OPEN ECONOMICS
BALANCE OF PAYMENTS (BOP), EXCHANGE RATE (FIXED, FLOATING,
MANAGED)
I. BALANCE OF PAYMENTS (BOP):
- Def: the record of all financial transaction made between consumers,
business, and GOV in 1 country with other nations
- The balance is always =0
- Resident vs citizen: resident is spend 6 months + 1 day in country nếu ko là
non-resident
VD: If samsung (korean) open in VN for more than 6 months, it is balance of
payment in VN ⇒ nationality is not im here
- When money come in country: +, out of country :-
VD: VN export rice to US, and US put US in VN ⇒ $$ go in, we sell USD and
buy VND⇒ link of Bop w/ currency
⇒ the balance betw in and out will explain exchange rate later
● Inflows of foreign currency are counted as a positive entry (e.g exports
sold overseas
● Outflows of foreign currency are counted as a negative entry (e.g
imported G&S)
● Current account= main measure of external trade performance
● Financial account = measures inflows and outflows of financial capital
across national boundaries
1. Current account
- Import: money go out
- Export: money go in
- Before 2013, balance of trade always negative (because agri)
- Since 2013, it became positive because we have machinery
- (1) Balance of trade in goods
VD: foods, clothes
- (2) Balance of trade in services
+VD: Tourism, education, healthcare (underdeveloped)
- (3) Net primary income (inflow or outflow of interest, profits, dividends &
migrant remittance)
+ Remittances: all the $$ that the Việt Kiều bring back to VN every
year
+ Western Union is the place ppl get $$ from oversea
- (4) Net secondary income (contributions to EU, military aid, overseas aid)
+ Official
Development ODA
Assistance
+ The most imp VD of ODA is grant (don’t have to pay back or interest)
VD: Japan give $$ for VN as a economical move from com. and political
move
 - Positive because of goods, services, Viet Kieu and
(1)+(2)+(3)+(4)= the country’s current account

2. Capital account: (ko thi cái này nó gần =0)

- Not the focus in VN since we don’t have much patents, franchises
- Sales/transfer of patents, copyrights, franchises (vd McDonald, Starbucks,..),
leases and other transferable contracts, and goodwill
- Transfers of ownership of fixed assets
3. Financial Account
- Includes transactions that results in change of ownership
➢ Net balance of foreign direct investment flows (FDI)
+FDI= build factory in foreign countries VD: building ph
➢ Net balance of Portfolio flow/portfolio investment (you can buy stocks
and bonds)
+ Foreigner can buy bonds and stocks in VN, but VN can’t buy foreign
bonds and stocks
⇒ because VND is not convertible⇒ The financial capital here is
positive ⇒ VND only convertible when foreigners buy VND bonds
(not reality yet)
➢ Balance of banking flows (e.g hot $$ flowing in/out of banking system)
+ We don’t have foreign banks
+ Hot $$ is short term $$
4. Furthermore:
● Balancing item (estimated errors & omissions)
● Changes to the value of reserves of gold and foreign currency
○ What will happen when more EU, USD enter VN?→ they go to
currency reserve in state bank of VN → more=reserve go up, ngược lại
nó go down
○ When country only import → they turn to IMF (likely to lose
independent)
○ International
Monetary IMF
Funds
● IMF have SDR (special drawing right) - the special currency of IMF, it
is a basket of currency (including VND)
● Overall balance of payments= zero
IF WE HAVE DEFICIT OF CURRENT ACCOUNT → MUST HAVE FINANCIAL
SURPLUS

Vì if not USE LIMITED RESERVE → SHOULD HAVE POSITIVE CURRENT/ FINANCIAL

ACCOUNT SURPLUS
More current account surplus = có nhiều tiền nước ngoài → some big VNese
company can go to other countries to lập nhà máy (vd Vinamilk, VinFast,..)

FIXED AND FLOATING EXCHANGE RATE

History: UK in the past, you mang UK bonds to the banks → receive fixed amount
of gold (Fixed exchange rate) because they have colony and $$ can’t go out and
only go in
Then they spend too much for WW1 ⇒ cant promise fixed amount of gold
anymore ⇒ gold is replaced by USD
1971, Mr.Mixon: say can’t link USD w/ gold anymore ‘cause too much spending in
VN War
⇒ withdraw $$ ⇒ FREE FLOATING (let $$ decide the value of USD)
⇒ VN= mixed of FREE FLOATING + FIXED = MANAGED-FLOATING CURRENCY
I. Classification of currency system
3 main options
1. A free-floating currency where the external value of a currency depends
wholly on market forces of supply & demand
- Flexible: exchange rate adjust immediately
+ If export ,more than import ⇒ auto currency go up
2. A managed-floating currency when the central bank may choose to
intervene in the foreign exchange markets to affect the value of the
currency to meet specific macroeconomic obj
- Mixed betw FREE + FLOATING
+ VD VN gov manage ko cho VND go up more than 5% (fixed by
selling the đồng and buy USD), ngược lại nó quá thấp:-5% (fix by
selling USD)
+ -5%<VND<5% → let market do
- Follow the market but intervene when reach the limit
- State bank of VN only have 7 days of foreign currency to do the FIXED
currency
⇒ currency becomes a key target of monetary policy
- FLOATING is no-no for VN vì có thể inflation
3. A fixed exchange rate system e.g a currency peg either as part of a
currency board system or membership of ERM II for countries intending to
join the Euro
- The GOV fix the exchange rate to gold or another currency
- When we export more than import ⇒ more $$in than out ⇒ $$become
overvalued (real value of $$ is higher than fixed value)
- Prob: the economy is not fixed → need to appreciate & depreciate value of $
$ → some speculators can earn a lot of $$
Mr.Soros is one of the speculators

BIG-MAC INDEX
★ PURCHASING POWER = the amount of goods you can get for $1
★ The Big-Mac index: show if your currency is overvalued or undervalued
○ VD: VN is 42,7% undervalued
⇒ evaluate purchasing power of currency
★ Limitation: Labor & Land cost ⇒ vary betw countries
CK: 1. Multiple choice (từ đầu đến h)
2. Draw AD-AS + recommendation for Keynes or capital