The “National Insolvency Risk” Model

3.2.3. “Bank bankruptcy risk” model

Banks and financial companies are important links in a country's economy. The banking system is likened to the blood vessels of the economy, with the function of attracting idle money from the population for effective use.

more effective. Banks are also businesses, and management also occurs.

weak, inefficient business. If banks use society's financial resources wastefully, lending regardless of investment efficiency, its harm will be multiplied. In that case, if the economy cannot eliminate these banks, the economy itself is gradually accumulating the conditions that cause a crisis. Factors leading to the risk of bankruptcy of a bank:

Businesses - the main debtors of banks - are losing money and going bankrupt. When businesses go bankrupt en masse, the bad debts of banks increase, resulting in banks gradually losing their ability to pay and eventually going bankrupt.

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The sudden increase in capital withdrawal demand affects the liquidity of banks. The danger of the banking system is that it spreads very quickly, just because one weak bank causes the above situation to occur, it can also affect a series of other normally operating banks. Even more serious is that if these banks do not have enough reserves or do not receive timely support, they can also be at risk of bankruptcy.

Government intervention in bank lending activities, especially state-owned banks. The government can intervene in many ways such as forcing banks to lend at preferential rates or guaranteeing loans. Such deep government intervention makes credit appraisal procedures, which are very necessary, become mere formalities and are not given due importance. Therefore, loans can go to weak businesses with low debt repayment capacity, causing banks' bad debts to increase and increasing the risk of bank bankruptcy.

3.2.4. “National Insolvency Risk” Model

Foreign investment is one of the important sources of capital for the development of the country's economy. However, under certain conditions, this type of investment can create a risk of insolvency for a country. To attract foreign investment

The necessary condition is that the domestic interest rate must be higher than the interest rate of the investing country. But a high interest rate means that the interest payable in foreign currency is higher,

national debt increases. Moreover, once investors want to transfer profits back to

The state must spend a large amount of foreign currency to pay them. This large amount of foreign currency will reduce foreign exchange reserves, if foreign exchange reserves are not enough, the country will lose its ability to pay.

Some countries borrow short-term but invest in long-term projects that generate little foreign currency, such as housing, office, and telecommunications construction projects. When the repayment period comes, the country will not have foreign currency to pay. This is a risk of insolvency due to an unreasonable investment structure. Even for official development assistance (ODA) where the recipient country chooses ineffective projects, the ability to repay capital is also very worrying. When the repayment period comes, the government must use foreign currency reserves or borrow new debt to pay old debt, increasing foreign debt. Once the risk of insolvency approaches, the country must quickly attract additional foreign currency. At that time, the most basic measure applied is to increase the domestic base interest rate higher than the foreign interest rate, which continues to increase the country's ability to pay. The country falls into a vicious cycle, the more it repays the debt, the closer the risk of insolvency.

3.3 Flow model of expenditure and income

The flow chart shows the balance of expenditure, income and prices of products. It shows the transactions between households, businesses, the government and the rest of the world ( the world market ) . These transactions take place in the factor markets, the goods markets and the financial markets . All economic activities and the effects of macroeconomic policies will operate based on

on the principle of

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Figure 3.2. Flow of Expenditures and Income

S Household savings

Market of factors of production

Commodity Market

Doan

Market

Financial markets

career

world school

Y Government pay

debt or loan

X - M

IG Borrow and Lend

Foreign loan requirements

X - M

Business borrowing

Source: Mc Taggart Findlay Parkin, 2007 According to the flow of expenditure and income, household expenditure is (C), business investment is (I), government spending on goods and services is G and net exports (XM) – red line.

Households receive income from businesses (Y) – blue line. Total income (blue line) equals total expenditure (red line).

Households use income to buy consumer goods and services (C), save (S), and pay taxes (NT).

Businesses borrow to invest, governments and the rest of the world (world markets) borrow to finance deficits or lend out surpluses (green lines).

Firms hire factors of production from households. Therefore, the blue line (Y) is the total income of households paid by firms.

Households buy consumer goods and services. The red line (C) shows household spending. Household saving (F) is income minus net taxes (NT) and spending (C) and flows into the financial market, specifically:

S= Y- (C + NT )  Y = C + S + NT

Firms borrow savings from households to use for investment needs and to buy capital goods from other firms. The red line (I) represents firm investment.

The government purchases goods and services, called government expenditure (G). The government must borrow if government expenditure exceeds taxes (G > T) and repay the debt if G < T (T is the tax rate). Net taxes are taxes paid to the government minus transfers.

Businesses export and import goods and services from world markets. Exports (X) minus imports (M) equals net exports (X – M). If imports are greater than exports, the deficit (M – X) is borrowed from world markets. Total expenditure on final goods and services equals the value of the output of those goods and services (= GDP).

Total expenditure = C + I + G + X – M

Total income from the production of final goods (Y) equals total expenditure:

Y = C + I + G + X – M

Financial markets finance deficits and investments. If the government spends more than it collects in taxes, the deficit (G – NT) will be borrowed from financial markets. (If NT > G, the surplus will also go into financial markets.) The world markets borrow and lend through financial markets.

Investment is financed from three sources: personal saving (S), budget surplus (NT – T) and borrowing from the world (M – X). This is illustrated by the income-expenditure equation. Or:

Y = C + S + NT = C +I + G + (X – M)  I = S + (NT – G) + (M – X)

Personal Savings + Government Savings (NT – G) = National Savings.

3.4. Theory of aggregate supply – aggregate demand (AS – AD) model

 Aggregate demand model (AD)

Aggregate demand is built on two markets: goods and services (IS) and money market (LM).

IS: Y = C( Y- T) + I( Y, i) + G LM: Ms /P = Md (Y,i)

IS – LM.

There exists (Y,i) to satisfy the above two equations with: Y = Y( G, T, Ms/P) and i = i(G, T, Ms/P)

In which: i: Interest rate in the economy

Y: Income (GDP) Ms: Money supply

P : Price level in the economy C : Consumption

T : Tax

G: Government spending

When P increases, Ms/P decreases, i increases, I decreases, Y decreases, and aggregate demand (AD) decreases. When P decreases, Ms/P increases, i decreases, I increases, Y increases, and aggregate demand (AD) increases.

Conclusion: The aggregate demand curve AD slopes downward (dY/dP < 0).

Figure 3.3. Formation of the Aggregate Demand Curve AD

LM (P )

0 0

LM (P )

1 1

1 IS

0 1

Source: Macroeconomics, Blanchard

The aggregate demand curve in the macro economy is influenced by the goods market and the money market. When prices fall, the LM curve shifts down, Y increases. The same is true when P increases.

 Aggregate supply (AS) model

WS valuation: W = Pe.F(u,z) PS valuation: W = P/(1 + µ)

 P = Pe.(1+ µ).F(u,z)

With u = (L – N)/L = 1 – L/N

But Y = N  u = 1 – Y/L

 P = Pe.(1 + µ).F.(1 – Y/L,z)

In which: u: unemployment rate

z : other variables (unemployment benefits, minimum wage)

µ : compensation level (in monopoly market µ is high)

An increase in Y leads to a decrease in unemployment (u), an increase in wages (W), an increase in the cost of production, and an increase in prices. A decrease in Y leads to an increase in unemployment (u), a decrease in wages (W), an increase in the cost of production, and a decrease in prices.

Conclusion: Aggregate supply curve slopes upward (dY/dP > 0)

Figure 3.4. Formation of Aggregate Supply Curve AS

Source: Macroeconomics, Blanchard

 AS – AD model

Figure 3.5. AS – AD Model

Source: Macroeconomics, Blanchard

At E there are 3 equilibrium markets: IS, LM and the labor market.

 Use the aggregate supply - aggregate demand model to explain

Figure 3.6. Increase Aggregate Demand, Increase Aggregate Supply to Prevent Economic Recession.

LRAS

SRAS

GDP

In which, SRAS is short-run aggregate supply, LRAS is long-run aggregate supply (vertical line). Increasing AD aggregate demand increases prices and increases GDP. Increasing supply decreases prices but increases GDP in the short run.

3.5. Causes of economic decline in Vietnam

Since the end of 2008, Vietnam's economy has continuously shown signs of economic recession. First of all, there has been a decline in import and export turnover.

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