Economic

Sector
Planning
For: PIEP North Luzon
By: Justin Victor dela Cruz
 Outline
• Rationale for Economic Planning
• Measuring the Economy
• Structuring the Economy
• Economic Analysis
 Rationale for
Economic Planning
 Economic Growth & Dev’t
Growth
An increase in the amount of
goods and services produced per
head of the population over a
period of time.
Primarily Quantitative
Uni-Dimensional
Independent
Development
Processes that seek to improve
the economic well-being and
quality of life by creating and/or
retaining jobs and supporting or
growing incomes and the tax base.
Both Quantitative and Qualitative
Multi-Dimensional
Inter-dependent
 Economic Development

• Objectives of Economic Development

– Increase availability of basic goods and
services
– Broaden socio-economic opportunities
available
– Raise income and living standards
– Fairness and equity in income distribution
 Economic Development
• Driving Force: The Firm
– Creates new products & services out of
limited resources
– Innovates
– Provides employment and education
– Distributes wealth based on level of risk and
work
 Economic Development
• Role of Government
– Policies and Programs to building Infrastructure
• Highways, Waterways, Basic Services

– Policies and Programs to improving the Business

Environment
• Neighborhood development, intellectual property protection,
trade linkages

– Policies to meet Broad Economic Objectives

• Inflation, Employment, Monetary Supply, etc.
Measuring the
Economy
Measuring Economic Activity
• Simon Kuznets
– Russo-American Economist
– Standardized measurement
of GDP and GNP
– Measurement via System
of National Accounts (first
National Accounting
System)
 Measuring Economic Activity
• Gross Domestic Product (GDP)
– the monetary value of all goods and services
produced within a nation's geographic
borders over a specified period of time.

• Gross National Product (GNP)

– measures the levels of production of all the
citizens or corporations from a particular
country working or producing in any country.
 Three Approaches to GDP
• Expenditure Approach
Y = C + I + G + (EX - IM)

• Income Approach
National Income + (Depreciation + Taxes -
Subsidies)

• Production Approach
– Primary + Secondary + Tertiary Sector
 Limitations of GDP
• Does not account for informal output
• Does not account for ecological impacts
• Does not reflect quality-of-life measures
• Does not reflect output distribution
• Does not account for population growth
 Household Economics
• Income Sources
– Salaries & Wages
– Entrepreneurial Activities
– Other Sources
• Household Expenditure
• Food Threshold
– Daily food cost x 365
Structuring the
Economy
 Classification of Firms
• By Employment & Capitalization

Category Employment Capitalization

Micro < 10 < P3M
Small 10-99 P3M – P15M
Medium 100-199 P15M – P100M
Large ≥ 200 > P100M
 4 Factors of Production
1. Capital
2. Entrepreneurship (Organization)
3. Land
4. Labor
 6M Strategic Resources
1. Money
Existing financial resources, fund-raising activities
2. Materials
Supplies, raw inputs, land, building
3. Management
Organization, professionals, partnerships
4. Machinery
Tools, technology, obsolescence, maintenance
5. Manpower
Soft & hard skills
6. Markets
Accessibility, sustainability, purchase power
 Sectors of the Economy
• Official
– Primary Sector
– Secondary Sector
– Tertiary Sector

• Additional
– Quaternary Sector
– Quinary Sector
 Primary Sector
• A.k.a. “Extractive Sector” or “Agriculture
Economy”
• Value derived direct from nature
• Forestry, Farming, Grazing, Hunting,
Fisheries
 Secondary Sector
• A.k.a. “Manufacturing Sector” or
“Industrial Economy”
• Value-added by combining and processing
from raw materials
• Automobile assembly, Ship-building,
Textile Production, Food Processing,
Energy Utilities, Mining, Transportation,
Construction
 Tertiary Sector
• A.k.a. “Service Economy”
• Value-added by selling goods from the
secondary sector
• HR-heavy
• Services for the General Public
• Accommodations, Healthcare, Finance,
Real Estate, Telecommunications, Legal
 Quaternary Sector
• A.k.a. “High-tech Sector” or “Knowledge
Economy”
• Value-added by technical innovation
• Technology-heavy
• Services for the Information-Driven
• Education, Scientific Research, Biotech,
Engineering Design, BPO’s, KPO’s, I.T.,
CGI and Animation
 Quinary Sector
• A.k.a. “Policy Sector”
• Value-added by high-level decision-
making
• Officials in government, universities,
healthcare, culture, think tanks
Economic
Analysis
 Economic Base Model
• Basic Local Sector
– Produces surplus and exports to outside
– Creates primary employment & income
– The “Engine of Growth”

• Non-basic Local Sector

– Caters to local market
– Creates employment that is dependent on the
Basic local sector
 Economic Base Model
• Diversification
– Transformation of or Addition of Goods &
Services to the Base Sector

• Sufficiency
– Level of productive output of the local
economy in relation to its domestic needs
 Economic Base Model
• Specialization
– Proportion of a single industry/sector of the
local economy to the entire local economy

• Concentration
– Proportion of a single industry/sector of the
local economy to the entire industry/sector
of the larger regional/national economy
 Economic Base Model
• Location Quotient (LQ)
– Compares concentration of a sector/industry to the
national sector/industry
– Useful for identifying competitive advantages
– Employment, capitalization, income, expenditures or
other resources
• Calculate:
Local Employment in Industry
Total Local Employment
LQ = National Employment in Industry
Total National Employment
 Economic Base Model
• Calculate (alternative):

Local % of Employment in Industry

LQ = National % of Employment in Industry

LQ < 1 Non-Exporting Industry

LQ = 1 Same as Region
LQ > 1 Exporting Industry
 Economic Base Model
City 1 City 2 City 3 TOTAL
Financials 600 7,500 900 9,000
Mining 3,000 900 1,200
Tourism 2,250 3,300 10,800 16,350
TOTAL 5,850 11,700 30,450

( 7,500 / 11,700 ) 64.1%

LQ(City 2: Financials) = = = 2.18
( 9,000 / 30,450 ) 29.6%

( 2,250 / 5,850 ) 38.5%

LQ(City 1: Tourism) = = = 0.72
( 16,350 / 30,450 ) 53.7%
 Economic Base Model
City 1 City 2 City 3 TOTAL
Financials 600 7,500 900 9,000
Mining 3,000 900 1,200 5,100
Tourism 2,250 3,300 10,800 16,350
TOTAL 5,850 11,700 12,900 30,450

( 1,200 / 12,900 ) 9.3%

LQ(City 3: Mining) = = = 0.56
( 5,100 / 30,450 ) 16.7%
 Keynesian Income Multiplier
• Refers to the multiplier effect made on
economic activity by an investment.
• Effect is based on Marginal Propensity
to Consume (MPC) and any Taxation
• Calculate: 1
1 – (MPC)(1 – TR)

MPC = Marginal Propensity to Consume

TR = Tax Rate
 Keynesian Income Multiplier
• Assume MPC = 80%, Tax = 0%

• House Project P 1,000,000

• General Contractor P 800,000
• Subcontractors P 640,000
• Suppliers P 409,600
• Etc . P 327,680
• Etc. P 262,144

• Total Expenditures P 5,000,000

P 1,000,000 / (1-0.80)
 Keynesian Income Multiplier
• Assume MPC = 80%, Tax = 10%

• House Project P 1,000,000

• General Contractor P 720,000
• Subcontractors P 518,400
• Suppliers P 373,248
• Etc . P 268,739
• Etc. P 193,491

• Total Expenditures P 3,571,429

P 1,000,000 / (1-0.72)
 Keynesian Income Multiplier
1
1 – (MPC)(1 – TR)

Project MPC Tax Rate Multiplier Amount

Municipal
Airport 90% 0% 10 P200M
(P20,000,000)
IT Network
Modernization 70% 20% 2.27 P11.36M
(P5,000,000)
Gini Coefficient
• Conrado Gini
– Italian Statistician
• Uses the Lorenz Curve to
graphically represent
inequality

• Scores
0 = Perfect Equality
1 = Perfect Inequality
 Gini Coefficient

A
A+B
 Gini Coefficient
Country Coefficient Inequality
South Africa 62.5 High
Hong Kong 53.7 High
United States 47.0 Medium
Philippines 46.0 Medium
India 35.1 Medium
Germany 27.0 Low
Hungary 24.7 Low
 Gravity Model
• Looking at the trade potential between cities and
regions.
• Similar to Newton’s Law of Gravitation
• Calculate:
V = P1 * P2
d2

V = Trade volume
P = Population of location
d = distance between locations 1 and 2
 Gravity Model
V = P1 * P2
d2
City Population Distance from Trade Volume with
Davao Davao
Davao City 1,632,991 - -
Cagayan de Oro 675,950 255Km 16.98M
Kidapawan 140,195 116Km 17.01M