MACROECONOMICS

CHAPTER 1

INTRODUCTION
BASIC TERMS IN
ECONOMICS
• GOOD – anything which yields satisfaction to
someone.
– TANGIBLE GOODS – material goods or commodities
– INTANGIBLE GOODS – services rendered
– CONSUMER GOODS – which yield satisfaction directly
– CAPITAL GOODS – used in the production of other
goods and services.
– ESSENTIAL GOODS – used to satisfy basic needs of man
– LUXURY GOODS – man may live without but can
contribute to his comfort and well-being
– ECONOMIC GOOD – useful good and scarce. It has
value attached and the price has to be paid for its use
– FREE GOOD - goods that are so abundant that there is
enough of it to satisfy everyone’s need
• Goods are created by means of production.
• Production – involves the physical
transformation of a commodity to another
– Manufacturing/Industry – if the production takes
place in the factory
– Agricultural production – planting and harvesting
– Mineral exploration – exploration for oil, minerals, and
precious metals.
ECONOMIC RESOURCES
• Factors of production
– LAND
– Natural resources which are given by and found in nature,
not man-made
– LABOR
– Any form of human effort exerted in a production of goods
and services
– Supply of labor – it is dependent on its production and
on the percentage of its population that is willing to
join the labor force.
Number of workers will depend on the following
factors:
– Age distribution of the population
– The age at which young people finish school and
start work
– The age at which people retire
 – Social and cultural practices:
– Are women workers discriminated against?
– Are married girls liberated enough to work despite
marriage, instead of being plain housewives?
– Migratory tendencies

• CAPITAL
– Man-made goods used in the production of goods and
services. It includes buildings, machineries, raw materials,
and other physical necessities
– It does not include money.
– Savings – part of person’s income which is not spent on
consumption
– Interest – income from the use of capital

• ENTREPRENEUR
– It does a special type of work, and is therefore , not
ordinary labor,
– A person who combines the other economic resources
for use in the production of goods and services
THE NEED TO CHOOSE
Scarcity – the limitations that exist in obtaining all
the gods and services that people want. It
gives rise to economic problems and it is the
reason why man has to make choice.
Fundamental Questions:
1. What to produce?
2. How much to produce?
3. How to produce?
4. For whom to produce?
ECONOMIC SYSTEM
• Traditional Economy – basically a subsistence
economy. It refer to traditional manner of doing
things
• Command Economy – the means of
production are owned by the economy
• Market Economy – privately owned and
decisions are made by the people themselves.
OPPORTUNITY COST
• When one makes a choice, there is always an
alternative that has to be given up.
• The value of alternatives given up is called
opportunity cost.
 EXAMPLE
Number of Number of
Colas Sandwiches
0 10

3 9 Let us say you are a student with a weekly

allowance of P300.00. You decide that to
6 8 spend it on combination of sandwich and
cola. The price of cola is P10 and
9 7
sandwich is P30, with these, it gives you
12 6 alternatives

15 5

18 4

21 3

24 2

27 1

30 0
CONSUMPTION
POSSIBILITIES LINE
The connection of possible
30 combinations is the
27
CONSUMPTION POSSIBILITIES
LINE.
24

21 This is a downward sloping

18 line that reflects the inverse
15
relationship between the
consumption of colas and
12
the consumption of
9 sandwiches.
6

0 1 2 3 4 5 6 7 8 9 10
SOCIETY’S TECHNOLOGICAL
POSSIBILITIES
• INPUTS – refer to the commodities or services
used to produce the good or services
• OUTPUTS – refer to the useful goods and
services resulting from the production process
THE CIRCULAR
FLOW OF
ECONOMIC
ACTIVITY
CHAPTER 2
• Important Economic Activities
– Production – the use of economic resources in the
creation of goods and service for the satisfaction of
human wants
– Employment – the use of economic resources in
production
– Rent – amount receive by a land-owner for the use of
land
– Interest – amount received by a capitalist for the use of
fund
– Consumption – when goods and services produced
are ready for use
STOCK AND FLOW
VARIABLES
• FLOW – the quantity measured over a particular
period of time
• STOCK – the quantity measured as of a given
point in time

This concept is important in understanding the

economic variables of wealth and income.
Wealth – anything of valued owned
THE CIRCULAR FLOW OF
THE PRODUCTION PROCESS

Economic Resources

HOUSEHOLDS FIRMS

Goods and Services

Household – basic consuming unit

Firms – basic producing unit
 CIRCULAR FLOW OF GOODS
AMONG PRODUCTION UNITS
Raw materials – Raw Materials
unprocessed goods

Intermediate Goods
– also called as Raw Material Firm
goods in process,
Intermediate Firm
because they have
been partially Consumers
processed but are
not yet ready for
final use in
consumption

Final Goods - these

are goods that are
ready for
consumption Final Good Firm
CIRCULAR FLOW OF GOODS
AND INCOME AMONG
PRODUCERS AND
HOUSEHOLDS
AN
INTRODUCTION
TO DEMAND
AND SUPPLY
THE MARKET
• MARKET – is a means of interaction between
buyers and sellers for trading or exchange.
– Common Type of Market
– Wet Market – where people buy goods like, fish, meats,
and vegetables
– Dry market – where people usually buy clothes, shoes,
etc. (department store)
– Labor Market – where workers offer their services and
employers look for workers to hire.
– Stock Market – where commodities traded consist of
securities of corporation
DEMAND
• DEMAND – the quantity of a good that buyers
are willing to buy.
 Demand Schedule – shows the different quantities
that will be bought of a good, given various prices
 Demand Function – shows the quantity demanded of
a good is dependent on its determinants, the most
important of which is the price of the goods itself.
 Demand Curve – graphical representation of the
demand schedule.
The demand curve is downward sloping, reflecting the
inverse relationship between the price and its
demand. The negative slope of the demand curve
comes from the fact that lowering of prices brings in
new buyers
PRICE DETERMINANTS OF
DEMAND
1. INCOME EFFECT
Real Income – the buyer’s purchasing power obtained from
his money income. It represents the amount of goods
and services he can buy. If a good becomes more
expensive, the real income of the consumer suffers
because it goes down. To cope with this price increase,
the consumers buys less. The opposite happens when
the price of the good decreases. The consumer’s real
income increases and he can buy more of the good.
2. SUBSTITUTION EFFECT
When the price of commodity changes while other prices
remains constant, the consumer would tend to
substitute a lower priced commodity for the more
expensive one.
LAW OF DEMAND
• The law of demand states that “if Price goes UP
the quantity demanded of a good will go
DOWN, and if the price goes DOWN, the
Quantity demanded of a good will go Up,
Ceteris Paribus”
NON-PRICE FACTORS
AFFECTING DEMAND
• CONSUMER’S INCOME
– The consumer’s income can greatly influence
demand since it determines capability to buy.
– The increase in demand due to increased in income
results in a decrease in demand is reflected in a
leftward shift of the demand curve.

• SIZE OF THE POPULATION

– An increase in the population results in a greater
demand since there will be more consumers. This will
result in a shift of the aggregate demand curve to the
right,
• TASTE OF THE CONSUMER
– A greater preference of the consumer for the good
will lead him to buy more of it even if price is
unchanged. This causes his demand curve to shift to
the right.

• EXPECTATIONS OF FUTURE INCOME AND PRICE

– Expectations as to future income and prices may also
cause a shift of the demand curve. A consumer who
expects an increase in income or prices tends to buy
more at the present time, causing demand curve to
shift to the right. Meanwhile, a consumer who is
expecting a decrease in income or price at a present
time tends to purchase less, causing his demand
curve to shift to the left.
SUPPLY
• Supply is the quantity of goods and services
that firms are ready and willing to sell at a given
price within a period of time, others being held
constant.
• The quantity of goods and services which firm is
willing to sell at a given price, at a given point in
time,
• The product made available for sale by firms.
SUPPLY FUNCTION
LAW OF SUPPLY
• The law of supply states that “if Price goes UP
the quantity demanded of a good will go UP,
and if the price goes DOWN, the Quantity
demanded of a good will go Down, Ceteris
Paribus”
NON-PRICE DETERMINANTS
OF SUPPLY
• COST OF PRODUCTION
– Refers to all the expenses incurred to produce the good.
An increase in cost will normally result in a lower supply
of the good since the producer has come up with outlay
to produce the same amount of output.
– The decrease in cost is a rightward shift

• TECHNOLOGY
– The use of improved technology in the production of a
good results in an increased of output. Thus, even with
price unchanged, the supply increases. This will result to
a rightward shift in the supply curve.
– However, the use of obsolete or improper technology
will result in a downward shift of the supply curve.
• AVAILABILITY OF RAW MATERIALS AND
RESOURCES
– Another possible cause of a shift to the right of the
supply curve is increased in availability of raw
materials and resources. On the other hand, scarcity
of these resources will result in a shift to the left of the
supply curve.
MARKET EQUILIBRIUM
• The meeting of supply and demand results to ehat is
referred to as “market equilibrium”
• The balance that exists when quantity demand equals
quantity supplied.
• Equilibrium Market Price – is the price agreed by seller to
offer its good or service for sale and for the buyer to pay
for it.

• SURPLUS – it is a condition in the market where the

quantity supplies is more the quantity demanded.
• SHORTAGE – a condition in the market in which quantity
demanded is higher than quantity supplied at a given
price.
ELASTICITIES OF DEMAND
AND SUPPLY
In terms of degree of elasticity, demand and supply may be
described as:
1. Elastic – it may be described as elastic when a change
in a determinant leads to a proportionately greater
change in quantity demand of supply
2. Inelastic – demand or supply are described as inelastic
when a change in a determinant results in a
proportionately lesser change in the quantity of
demand and supply. The coefficient of elasticity is less
than 1
3. Unitary Elastic – demand or supply are unitary elastic
when a change in a determinant leads to a
proportionately equal change in the quantity of
demand or supply. The coefficient of elasticity is equal
to 1
PRICE ELASTICITY OF
DEMAND
INCOME ELASTICITY OF
DEMAND
CROSS ELASTICITY OF
DEMAND
• Measures the responsiveness of demand to
changes in the prices of other goods, indicating
how much more or less of a particular product
is purchased as other prices changes.
ELASTICITY OF SUPPLY
NATIONAL
INCOME
ACCOUNTING
CHAPTER 4
GROSS NATIONAL
PRODUCT
The market value of all final products produced by the
resources of the economy resources during a
specified period time.
3 important limitations of the definition
1. It excludes products not produced by the
resources of the economy as imports
2. It only includes those products that can no longer
be used for higher stages of production
3. It eliminates from the aforementioned those not
produced by the economy within the period of
time accounted.
GNP Accounting:
Expenditure Approach
• This approach classifies them according to end use such as consumption,
government, investment, and exports.

GNP = C + I + G + (X-M)
Where:

GNP = Gross National Product

C = Consumption

I = Investment

G = Government Spending

X = Exports

M = Imports

(X-M) = Net Exports

• NET FOREIGN INCOME = the difference
between aggregate flow of factor from (+) and
to (-) the rest of the world.
• The inflow (+) is likened to exports as it consists
payments for the use of economy’s in the rest
of the world like salary remittances of OFWs
• The outflow (-) is likened to imports as it consists
of payments for the economy’s use of foreign
resources like profit remittances of foreign
multinational companies to their countries for
their investments in the Philippines
• STATISTICAL DISCREPANCY
– Is a theoretical account used to even out the
practical differences between the figures arrived at
by the two alternative approaches to GNP
accounting
GNP Accounting: Income
Approach
• From another viewpoint, GNP is equal to the
additive values of factor contributions in the process
of transforming products into their final forms.
• 3 pillars of income approach
– Direct payments of the producing units to the resource
owners represent the latter’s direct contributions to
production otherwise known as factor contributions,
– The additive values of the products in the whole
production process result from the direct contribution of
resources owners in every production stage to transform
products or inputs to higher forms
– The approach has built-in mechanism to exclude imports
and previously produced inventories but include
currently produced inventories.
• TAXES are also classified as factor contributions
since they should have otherwise been part of
factor payments if without taxation
• CAPITAL CONSUMPTION ALLOWANCE or
Depreciation – represents payments to the resource
owners for the consumption of capital goods in the
production process and likewise considered as a
factor contribution
– THIS approach also includes Government Income from
Property and Entrepreneurship

• SUBSIDIES are excluded since they only bloat profits

and product values and do not entail production
and factor contributions.
OTHER CONCEPTS OF
NATIONAL INCOME
ACCOUNTING
• NET NATIONAL PRODUCT (NNP) – is a fine-tuned
value for a more accurate accounting of the
economy’s final products which are equal to
GNP less depreciation.
• NATIONAL INCOME (NI) - is the income earned
by the factor owners and equal to NNP less
Indirect Taxes, the latter levied on production
and not on income
PERSONAL INCOME
• Personal Income (PI) in income earned by
persons or households. The initial procedure
deducts from National Income (NI) non-
personal accounts such as corporate taxes,
undistributed profit, and government
entrepreneurial income.
PI = NI – (S + T + GI) +TP
Where:
PI= Personal Income
NI=National Income
S= Undistributed Profits or Corporate Savings
T= Corporate Taxes
GI= Government Entrepreneurial Income
TP= Transfer Payments
Personal Income is alternatively
expressed according to source,

PI = W + D + E + TP

Where:
PI= Personal Income
W= Wages and Salaries
D = Dividends or Distributed Profits
E= Entrepreneurial and Property Income of
Persons
TP= Transfer Payments
DISPOSABLE INCOME AND
CONSUMPTION
• DISPOSABLE INCOME is personal income available for
consumption as it excludes Personal Taxes.
• CONSUMPTION – is equal to Disposable Income less
Savings
DI = PI – PT
C = DI – PS
Therefore
C = PI – PT – PS
Where:
DI = Disposable Income
C = Consumption
PI = Personal Income
PT = Personal Taxes
PS = Personal Savings
CURRENT VERSUS REAL
GNP
• CURRENT GNP is a value using current prices
whereas Real GNP uses a base or constant
price.

Where:
Pc = Current Price
Pb=Base Price
Qc = Current Volume of Goods and Services
Based on the equations presented, the growth rate in Real GNP
(i.e. using a constant price) is theoretically the growth rate in
volume and, thus, reflects the movement of economic activities
through time.

However, Real GNP is computed from Current GNP using a price

coefficient since direct computation poses practical problems
and unwieldiness. The coefficient is in the form of weighted
price index for all the products as based on their relative
importance in the expenditure basket with the following
equations as framework:

Then:
The price index is otherwise known as a GNP
deflator and the most commonly used is the
Consumer’s Price Index. This is a proximate
reflection of the prices of the final goods and
services of the economy since consumption is a
significant portion of GNP and, therefore,
competes with the other expenditure
components. Furthermore, the measure renders
further confidence additionally considering that
prices of capital goods ultimately affect
consumer prices.