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Laguna State Polytechnic UniversitySan Pablo City Campus

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Guilbert Kaligayahan

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3rd Quarter

Macroeconomics

Chapter 34

The Macro Economy

Factors of Production• Production is the combination and use of all factors

producing goods and services that will satisfy the needs of man. Factors of production are used to produce products and services, there are four factors of production: land, labor, capital, and entrepreneur. Land is the nonrenewable resource where the raw materials needed in production come from. This factor cannot be increased according to the desire of the individual. It is a natural factor of production. Labor or labor force, whether physical or mental, are the talents and strength necessary in production. Capital is the material things created by man. Entrepreneur is a factor of production and is called captain of the industry.

Market forFinished Products

The Circular Flow of Products and Services

Business Firms

Household

Market forFactors of Production

Land, Labor, Capital, Entrepreneur

Products and Services

Market forFinished Products

Flow of Money as Payments for Two Sectors

Business Firms

Household

Market forFactors of Production

Profit, rent, wages interest

Income

consumption Income

Market forFinished Products

Flow of Savings and Investments

Business Firms

Household

Market forFactors of Production

Profit, rent, wages interest

Income

consumption Income

Market for

CapitalSavings

investment

Market forFinished Products

The government’s role in the circular flow

Business Firms

Household

Market forFactors of Production

Profit, rent, wages interest

Income

consumption Income

Market for

CapitalSavings

investment

Government

Tra

nsfe

r pa

ymen

tsu

bsid

iary

Tax

Tax

Market forFinished Products

Role of the Foreign Market in the Circular Flow

Business Firms

Household

Market forFactors of Production

Profit, rent, wages interest

Income

consumption Income

Market for

CapitalSavings

investment

Government

Tra

nsfe

r pa

ymen

tsu

bsid

iary

Tax

Tax

Foreign market

Chapter 35

The National Economy

Economic Indicators

Economic progress can be traced through the economic performance of the country. It serves as gauge for the government and other sectors if they are performing well. In measuring the economic performance of the country indicators are being used. The indicators describe the condition of the country.

Gross National Product (GNP)

Gross National Product (GNP) is considered the most important indicator in measuring the development of the economy. In GNP, the overall production of the country is studied and examined. It is the accumulation of all the products and services produced in the country.

GDP

GNP

If the GNP measures the total production of the country in a year, Gross Domestic Product (GDP) refers to the total market value of goods and services produced within the country for one year

. All production within the country is included in our GDP, even if a foreigner produces it as long as it is done inside our country.

Difference of GNP and GDP

In general, all the produced goods and services of the Filipinos inside the Philippines is both included in GNP and GDP. As we deduct the income earned by the Filipinos abroad from the income earned by the foreigners in our country, we will get the Net Factor Income from Abroad (NFIA). When the income of the foreigners are higher than the income of the Filipinos abroad, the NFIA has a negative decrease compared to GDP.

Potential and Actual GNPThe number of workers, their working hours, machine-ries,

and technology used and the natural resources in the country are the basis in estimating the total production of the economy. Every country has a target quantity of production based on its capacity. Potential GNP is the estimated total production of the country based on the productivity and capacity of the factors mentioned earlier. It is the goal of the economy for a year. At the end of the year, the production of the country is being measured, and it represent the actual GNP. Actual GNP is the amount of the produced goods and services attained in a country for one year. It serves as a barometer if the economy has been effective in maximizing the use of the natural resources, machineries, and workers in achieving the potential GNP.

Chapter 36

The National Income

Approaches to GNP Measurement Factor Income Approach:

Each factor of production receives payment for its services and this serves as income. The various payments are rent for land, wages for workers, interest for capital, and profit for entrepreneur. If the factor incomes are combined together, the result is the national income.re are the main component of national income:

a) Compensation of Employees (CE) – it includes the all the benefits, commission, allowance like Cost of Living Allowance (COLA), clothing and, transportation allowances, personal emergency allowance or PERA, nonmonetary benefits, payments according to the contract of the employees, and salaries that employees receive on specific time represent the compensation of employees.

b) Entrepreneurial Income (EI) – this is the payment received by an individual which is not classified as wage salary. This is the income of the entrepreneur as a factor of production .

c) Corporate Income (CI) - income received by corporations and intended for business expansion represent the corporate income.

d) Government Income (GI) – all the incomes received by the government such as taxes, income of government owned and controlled corporations and the interest earned in loans provided by the government are considered income.

Factor Income Approach

The combination of all the components mentioned above will sum up as National Income. This formula for National Income (NI):

NI = CE+EI+CI+GI

For example, if CE is Php110million, EI = 50 million pesos, CI = 15 million pesos and GI = 22 million pesos, then, ………

NI = 110+50+15+22 = 197million pesos

To be able to measure the GNP, we will add the other production expenses such as:

1. Capital Consumption Allowance (CCA). It refers to the fund for depreciation intended for buying new machineries and facilities.

2. Indirect Business Taxes (IBT). Indirect tax imposed on the products and services made after the subsidy has been deducted.

In general, GNP can be measured with the use of the formula : . . . .

GNP = NI+IBT+CCA

For example, if NI = 197 million pesos, IBT = 5 million pesos and 12 million pesos for CCA, then GNP is equal to 214 million pesos.

Factor Income Approach shows the GNP using the different income received in the economy.

Final Expenditure Approach

The economic sectors like household, government, business firm, and foreign market have their own expenses, which are significant in measuring GNP,

a. Government expenditure (G)b. Personal expenditure (P)c. Business expenditure (B)d. Net export (X)(M)e. Net Factor Income from Abroad (NFIA)f. Statistical Discrepancy (SD)

If all the expenditures mentioned above are put together, GNP will be computed. The formula for measuring the GNP using this approach is:

GNP = G+P+B+(X – M)+NFIA+SDFor example:G = 34 million pesosP = 130 million pesosB = 59 million pesosM = -7 million pesosX = -7 million pesosNFIA = -5 million pesosSD = 3 million pesos

Using the formula in measuring GNP at Factor Income Approach, the amount is…

Industrial Origin Approach

It is also called value added approach where all the contributions of each industry like agriculture, industry, and services are computed. The value of the products depends on the contribution of every sector in the processing and production of goods and services.

Limitations in Measuring the GNP

GNP alone is not enough to measure the development of the economy. Even if the government stated that the GNP achieved a five percent increase, the reality speaks the truth, the common man still not experience and feel the said increase in his daily living. Still the lives of many Filipinos are falling into poverty.

In GNP measurement, not all commodities are included in the total market value of products and services. There are products and services which are not included in the computation because they are not recorded or they are not paying the required tax. This kind of activities include in the underground economy.

Chapter 37

Measurement of Price Increases

Price Increases

The continuing increases in the general price

level of commodities are called inflation.

As of now, inflation cannot be prevented. It remains big problem o the economy. The basic commodities like sugar, rice, beef, milk, cooking oil and etc. are affected by price increases. So many consumers cannot afford to satisfy their basic needs in life.

Types of Measuring Instruments of Price Changes

1. GNP deflator or GNP Implicit Price Index – it is the average price index used to adjust the current GNP against constant GNP. The GNP deflator is being used to know the value of GNP based on the previous year. This formula being used:

GNP at constant prices = GNP at Current Prices

GNP deflator

In short, it is used for any changes in price in the computation of GNP.

2. Wholesale Price Index and Retail Price Index – it shows and measures the changes in the price of finished products, intermediate goods, and crude materials in wholesale and retail trading. Wholesale is the price of every piece of goods.

3. Consumer Price Index (CPI) – it is the most popular instrument in measuring inflation. The CPI measures the average percentage in the change of retail prices of commodities usually purchased by consumers. It describes the present living condition of the consumers according to changes on price. The commodities, which the CPI measures, are those products that are included in the market basket of goods. The inflation rate depends on the CPI.

Computation of CPI

Hypothetical Data

Commodities Unit Weight

RiceSugarFishMeat

Cooking OilCoffee

KiloKiloKiloKiloKiloKilo

40510152010

251960852540

2822801103245

PRICE

20042005

1. Computation of Weighted Price – the first step is to multiply the weight and price (w x p) to get the weighted price, we will get the WP in the year 200 and 2005.

2. Total Weighted Price (TWP) – after getting the weighted price of the commodities, combine the entire weighted price to get the total weighted price (TWP) of 2004 and 2005.

Commodities 2004 2005

RiceSugarFishMeat

Cooking Oil CoffeeTWP

1,00095

6001,275500400

3,870

1,120110800

1,650640450

4,770

3. Consumer Price Index (CPI) – if the TWP is already computed, then the consumer price index (CPI) of 2004 and 2005 can be computed by using this formula:

CPI =TWP2005 (present year)

TWP2004(base year)

4,700

3,870

x 100 = 123.25

So, the CPI of 2005 is 123.25 based on the computation. The total of CPI should not be rounded off.

Purchasing Power of the Peso (PPP)

In computing the PPP, the formula 100/CPI is used to determine the real value of the peso compared to a base year. For example, if the base year is 2000 and the CPI of May 2005 is 128.3, the real value of the peso in May 2005 is 0.78 compared to the base year. What is the implication of this? The value of the peso in 2000 went down to 0.78 in May 2005. there is a decline in the purchasing power of peso.

Chapter 38

The Causes of Price Increases

Kinds of Inflation

1. Demand – pull – all sectors of the economy, household, business firm, and government have their own demand. The demand of these sectors comprises the aggregate demand of the economy. The demand – pull inflation happens id he sectors desire to buy products and services more than the available supply in the market. In short it is the condition where aggregate demand is more than the aggregate supply.

The total expenditure of consumer, business, firms, and government

Quantity of goods to be produced and distributed by the businessmen

Aggregate Demand Aggregate Supply >

= Demand Pull Inflation

According to monetarists headed by Milton Friedman, an economist, excessive money supply or money in circulation causes the increase in the demand of each sector. Higher income or excess money leads to consumption of more products and services by households. As a result, the demand is pulling the prices of the commodities become higher. This condition prevails as long as the people continue to consume more products and services.

Cost - Push

• The increase in the production costs of firms leads to price increases. Income in wages, purchases of raw materials and machineries, and the desire to have more profit are the main reasons why the price of the commodities increases, particularly if the factors of production ask for high payment for the services.

Highprices

Inflation

Wage increase

Structural Inflation

The increase in the normal price of commodities is a result of an imbalance and abrupt increase of demand and supply of the different sectors of he economy. There is competition among wage earners and profit earners. There is competition between the private and public sectors in getting the share of the country’s resources. Every action and movement of each economic sector causes an increase in the price of commodities. This is called Structural Inflation.

Examine if the following are effects of inflation or causes of inflation. Write EI if it is an effect and CI if it is a cause.

____1. consumers cannot afford to buy many products in the market

____2. a big portion of our budget is allocated for the payment of foreign debt

____3. a huge amount of bonus is given to workers____4. corruption in the government is so rampant____5. increase in the production level of the country.

Chapter 39

Effects of and Solutions to Price Increases

Groups that usually benefit during Inflation

1. Borrowers2. Speculators3. People without Fixed income4. On people with Fixed income5. On lenders

The causes and solutions of inflationCAUSES RESULTS POSSIBLE SOLUTIONS

Excess money in circulation

Increase in demand Improve a tight money policy

High production cost Decrease in supply Increase production by maximizing the use of resources

Export orientation Shortage of supply in the local market

Give priority to the needs of the local market

Import dependence Oversupply of imported products

Utilize and maximize the local resources

Monopoly and cartel Price is manipulated and controlled

Enforce penalty to the members of cartel

Middlemen The price of goods is increasing

Impose price control

Loan payment The amount is not utilized for the development of the

industries

Set aside a small part of the national budget for debt services

Military expenses Buying unnecessary military equipment

Use the money in agricultural development

A. Fill in the blanks with correct answer.

____1. the evidence of government credit to the public____2. experience bankruptcy during inflation____3. strategy of Banko Sentral ng Pilipinas to

monitor and control the money supply____4. specific amount of money that depreciates if

left in the bank____5. businessmen who buy products when the price

is increasing.

Chapter 40

Distribution of Income

What is income?

• Income is the money received by an individual as payment for producing goods and services. Per Capita income (PCI) is the income received by an individual if the total population divides the total production. It is also known as GNP per capita. In computing the per capita income use he formula:

= GNP per capita GNP

Population

Income distribution

Refers to show the national income is divided among all sectors of the economy. A study of the statistical report of NEDA shows that the target of the national economy is very far from being realized.

Lorenz CurveIncome distribution in a country is

illustrated in a curve called Lorenz Curve, which was formulated by Conrad Lorenz, an American statistician.

Lorenz curve consist of two axes: the horizontal that represents the percentage of population by income group and the vertical, which represents the percentage of income received.

In constructing the Lorenz curve , it is necessary to get the cumulative percentage of income and population.

Chapter 41

Theories on Development and Progress

For you.. What is development and progress …?

• The term Development and Progress are frequently used in economics. The two terms are interrelated but they have different characteristics

What is development and what is progress?

Economic progress can be easily measured. It is the result of a process that shows changes in the economy.

While…Economic development is not only the idea

of improvement of the economy cut also the enhancement of human dignity, security, justice, and equality.

Progress leads to Development

Progress

Social Changes

Development

The Principle Theories on progress and Development

Physiocrats, composed of economist led by Francios Quesnay, believed in the rule of nature.

Physiocrats agreed hat industrialists and businessmen must have the freedom to intensify the industries. They supported the Laissez Faire doctrine because they believed that the expansion of industries is vital to economic development.

Model of Physiocrats

Agriculture Laissez Faire

Physiocrats

Theory of Adam Smith

Adam smith is popularly known as he Father of “Modern Economics”.

The principle of Adam Smith centered on the development of production through specialization. Specialization is the division of work based on capacity and ability. Job specialization is necessary in improving and fact tracking work.

Theory of David Ricardo

The physiocrats influenced David Ricardo on the idea of development. His theory centered on the advantages provided by the possession of natural resources, particularly land. The rapid increase of population is the main reason why lands are cultivated even if they are not fertile land. People have to do it in order o have a plantation for agricultural products, which will satisfy he needs of the individual.

Neoclassical SchoolThis group economists follows the ideas of the

classicists. Neoclassicists believe that are underlying factors that contribute to the development and progress of the country.

Competition No Monopoly

Free Trade Aid from the Government

One important mechanism that motivates businessmen and consumers to improve their activities is competition. Competition can only be achieved if there is no monopoly or oligopoly in the market that causes crisis in the economy.

Free trade is an effective method in the exchange goods services among countries without setting up barriers like quotas and tariffs. Quotas are limitations in the quantity of products that can be exported or imported while the tariffs are tax levied on imported products. The aforementioned factors are necessary to increase the revenue of the economy in order for it to achieve progress, according to neoclassicists.

Identify whether development or progress is happening. Write P for progress and D for Development.

____1. the government constructed a skyway.____2. investment is increasing____3. the people are fully employed____4. the government allocates a big budget for the

improvement of health services____5. each family has remote control appliances

Chapter 42

Theories and Models on Progress and Development

Models on Progress and Development

Model on Capital

Model on technology

Model on cumulative process

OUTPUT

Finished Products

Model on Capital

Roy Harrod of England and Evsey Domar of USA state that abundant and sufficient capital is vital for economic progress. This was explained through the relationship of input and output.

INPUTMachineriesBuildingsProductionEquipmentWorkers and abilitiesAnd skills and services

Model on TechnologyNicholas Kaldor emphasized the important role of

technology. Technology involves the use of capital. It is necessary to develop technology as part of investment. According to Kaldor, if technology develops faster than the stock of capital, additional productivity occurs and it will continue increasing. And the result is more investment. One good example of the importance of technology on economic progress and development is the case of Japan, which is considered the richest and most progressive country in Asia. The government of Japan set aside a big budget on research and technology to help he industries to prosper. They use robots in hospital, offices, and factories as workers. They introduce new inventions and technological breakthroughs.

Model on Cumulative ProcessGunnar Myrdal believed in the cumulative process as they key to

economic development. His ides were formulated based on his observation and studies of several countries in Asia. He wrote his book entitled Asian Drama to reveal the economic conditions of Asian countries.

Opportunity to save

Resulting to big capital

Having more production

Individuals will have big

income

Five Stages of Growth

The traditional

society

The pre – conditions for Take

Off

The take Off

The drive to maturity

Age of high mass consumpti

on

Theory of Karl Marx

The economic point of view of Karl Marx was derived from the beliefs of the classicist. Marx gave emphasis on labor. According to him, workers were the real producers of the products, but the profit goes to the capitalists and not to the workers. As a result, differences between the workers and capitalists exist.

Relationship of workers and capitalists

Workers (thesis)

New System (Synthesis)

Any Question???????

Explain your answer.

1. Do you agree that workers play an important role in the development of the economy as what Karl Marx stated? Why?

2. Why should the government intensify the accumulation of capital?

3. How does technology help in the development of the economy?

4. Why should the government support the entrepreneur or innovation?

Arrange the following sentences by putting number 1 – 5 according to their importance to economic development. Use number 1 as most important.

_____ use of modern equipment in production_____ development of other economic sectors_____ overflowing foreign investment_____ agreement between workers and capitalists_____ support of the government to Filipino inventors

Finish?

If yes … exchange papers…

That’s all…..

End…

SPECIAL THANKS TO:

•ATE MARFIL•SIR TENORIO•MORPHEME & APOLLO•KUA KEN•BSED, II – T•BSED, III – T, Math Majors•RIZZA U•DING•And to CARIE heheh!

Thank you 4 oL ur SupporT..