Shar – Econtwo

DLSU-Manila
Microeconomics
- More concerned with individuals, household, firms and industry.
Macroeconomics
- More concerned with the economy as a whole.
- Focuses on economic behavior and policies that affect consumption and
investment.
GOAL OF MACROECONOMICS
1. Sustainable Economic Growth
= GDP+GNP
o GDP (Gross Domestic Product)
 Made in the Philippines
 Value of final good and services produced in the country within the
period
o GNP (Gross National Product)
 Made by Filipinos
 GDP + NFIA (Net factor income from abroad)
o Net domestic product = GDP – Depreciation
o National Income = NDP – Indirect tax
**For developing economies 5-7% yearly increase is needed**
2. Price Stability
o Decrease in prices
o Single Digit
o Inflation Rate = ((CPIc-CPIp)/CPIp) x 100
 CPI = Consumer Price Index (basket of goods)
 CPIc = Consumer Price Index Current
 CPIp = Consumer Price Index Past
o Describing inflation of 2008
 Increasing
 Prices of goods in the economy is increasing
 Decrease in purchase power
o Example of how prices of goods increase
 P10,000 deposited in bank; bank lends out money to company;
company buys raw materials; when company sells product price should
include 10,000 + Interest + Profit
o Inflation
 Increase in Prices
o Deflation
 Decrease in Prices
**When demand decreases, prices decreases, and unemployment increases.**
o Recession
 two consecutive (-) growth in GNP
 (-) growth
 Increase in Unemployment
 Decrease in Prices
o Depression – Prolonged Recession

1
Shar – Econtwo
DLSU-Manila
o Headline – Basket of Goods (all products) *is expected to be higher
o Core - removed commodities (volatile)

EFFECTS OF GOODS TO INFLATION

Food, Beverage, Tobacco 50.031%
Clothing 3.004%
Housing and Repairs 16.796%
Fuel, Light, Water 6.950%
Services 15.889%
Misc. 00.330%

3. Full Employment
o All those who wants a job gets a job (at least 95%)
 Labor Force (15-65yrs old)
 Labor Force = Population – non labor force members
o There cannot be 100% because there are:
 Seasonal and Frictional Employment (Transitional)
 Frictional Employment – those who are searching for jobs in between
jobs

CAUSES OF UNEMPLOYMENT
1. Low Educational Background
2. Over Population
3. Job opportunities in other countries
4. Factors of Production
Q = F(Labor , Capital)
a. Labor is expensive
o High Minimum Wage
b. Capital is cheaper
o No holiday pays and benefits
o No Tariff (Duty-Free Importation)
o Over-Valued Exchange Rate
5. Lack of job opportunities
6. Presence of foreign nationals
7. Inefficient Agriculture

POLICIES TO ALLEVIATE UNEMPLOYMENT

1. Promote cottage, small and medium scale industries labor intensive enterprises
2. Government to provide seed capital, technical extension and marketing services
necessary for the promotion, expansion and growth.
3. Focus on investment program that will shift to small and medium scale and less
foreign exchange dependent
4. Provision of initial support to small scale industry employment program
5. Labor intensive methods that will be used in the production of projects
6. Improve resources allocation efficiency and reliance on foreign borrowing
7. Improving training, rational allocation and efficient utilization of man power

2
Shar – Econtwo
DLSU-Manila

FORMS OF UNDER UTILIZATION

1. Open Unemployment
a. Voluntary – does not want to work
b. Involuntary – has no choice wants to work but no job
2. Under Employment
a. People working less than 8hrs
3. Visibly Active But Under Utilized
a. Disguised Unemployment
b. Hidden employment
c. Over-qualified cannot find a job
d. Premature Retirement
4. Impaired

INSTUMENTS IN MACROECONOMICS
1. FISCAL POLICY
o Reduced by crowding out; increased government spending increases interest
rates, reducing investment and partially offsetting the initial expansion in
aggregate demand.
o Government Expenditures
 Budget
• from taxes
o How the government gets budget?
Executive (initiative) > Legislative (approves) > Executive
(implements)
o National budget
2005/2006 P 946B
2007 P 1.026T
2008 P 1.227T
2009 P 1.4T
ALLOCATION OF NATIONAL BUDGET
1. Debt Servicing 32%
2. Education 18%
3. National Defense
4. DPWH
Pork Barrel > CDF > PDAF
** 3. and 4. are inter changeable depending on the need.**
TAXES
o Direct tax – income tax
o Indirect tax (sin tax)
• VAT (10%) > goods only
• E-VAT > goods and services
• R-VAT (12%) – goods and services
2. MONETARY POLICY
o Printing of money
 Central Bank

3
Shar – Econtwo
DLSU-Manila
• 1949-1992
• Controlled by the President
 Bangko Sentral ng Pilipinas
• 1993-present
• controlled by the monetary board
o Has a Governor
o 7 members
o 2 Gov’t officials
o 5 from private sectors
• Fixed term of 6years regardless of changing of President

TOOLS:
1. Primary Tools
o Open Market Operation (OMO) – for the federal reserve
 Sells Securities to increase money stocks
 Buys Securities to decrease money stock
KINDS OF GOV’T SECURITIES
Treasury Bills 30-365 days
Bonds 5 years
Notes 11 years
**RISK FREE compared to banks with risk**
2. Secondary Tools
o Rediscount Rate
 Private banks borrow from Bangko Sentral ng Pilipinas
 Increase in money supply decreases interest rates
o Reserve Requirement
o Special Deposit Account
 Bank deposits to BSP
 Minimum of 2 weeks maximum of 6months
** BSP 7%> BANK 6%> DEPOSITOR
 Printing money (inflamatory)
 Moral Suasion (least effective)
3. Exchange Rate Policy
o Local Currency VS Foreign Currency

National Income Accounting

Income = GDP
GDP > VALUE ADDED > Intermediate Goods v.s. Final Good

3 APPROACHES
Final Expenditure = GDP
** GDP = Y = C + I + G + (X-M)
1. Consumption (C)
 Durable – more than 1 year life
 Non-Durable – less than one year life
o Clothes are classified here

4
Shar – Econtwo
DLSU-Manila
2. Investment (I)
 Short-term
 Long-Term
3. Government Expenditures (G)
 Public Investment
 Public Service
4. Trade (T)
 Import
 Export
Income Approach = GDP
o Sources of Income (add everything)
 Sole Proprietorship + Partnership + Corporations
Value Added/ Industrial Origin = GDP
 Agriculture + Manufacturing + Services = GDP

SECTOR ECONOMIES
1 Sector economy
y = C (at equilibrium)
Income Consumption
0 150
200 300
450 450
600 600
800 750
1000 900
** y-y1=(y2-y1/x2-x1)(x-x1)
** Sample
C = 150 + 0.75y
C = 600
2 Sector economy
y=C+I
** Sample
I = 300
Y = 150 + 0.75y + 300
Ye = 1800
3 Sector economy
Y=C+I+G
G= 200
Y= 150+0.75+300+200
0.25y= 650
Ye=2600

3 sector economy with tax

Y=C+I+G
C= 150 = 0.75YD
(YD  disposable income)
T= 2 + 0.099y

5
Shar – Econtwo
DLSU-Manila
y=150+0.75(y-T)+300+200
y=150+0.75(y-2 + 0.099y )+300+200
y=150+0.75y-1.5-0.7425y+300+200
0.32425y=648.5
ye=2000
4 Sector economy
Y=C+I+G+(X-M)
y=150+0.75(y-2 + 0.099y )+300+200+(135-3.5-0.00075)
ye=2400

ECONOMIC STANDING
Trade Standing of the country
X=135
M= 3.5 + 0.00075y
M= 3.5 + 0.00075(2400)
M= 5.3
** X>M => Surplus
** X<M => Deficit
** X=M =>Balance
Budget Standing
G=300
T=2+0.99y
T=2+0.99(2400)
T=239.6
** G>T => Deficit
** G<T => Surplus
** G=T =>Balance
Income Level that will generate Balanced Trade/Budget
Trade Balance
X=M
135= 3.5 + 0.00075y
Y=175333.33
Budget Balance
G=T
200=2+0.99y
Y=2000

Regular Multiplier EQ
C 150 + 0.75yd Co + C1
I 300 Io
G 200 Go
T 2+0.099y To + T1
X 135 Xo
M 3.5+0.00075y Mo+M1

0 when the is no y
1 if there is a y

For government to borrow money from IMF (international monetary fund)

6
Shar – Econtwo
DLSU-Manila
IMF RECOMMENDATIONS:
1. Fiscal Discipline
a. Lower government expenses
i. Streamlining of government functions
ii. Cost-cutting (Utilities)
iii. Cost-cutting (Travels)
iv. National budget be maximized less expense but mor benefit
2. Tax Reform (increase taxes)
a. New tax system
i. Old: 3, 5, 7, ….. 35%
ii. New: 5, 10, 15, …… 32%
iii. R-VAT 12%
iv. Minimum wage (tax exemption)
3. Privatization and Deregulation
a. Privatization - Selling of government properties to people
i. Reduce/Remove government control subsidies
1. Napocor
b. Deregulation – Remove Government control pricing
i. Sample: OIL
1. Tariff Differention
a. being unfair like refined oils tariff 7% and unrefined is
3% it does not give chance to those who want to join in
the competition
2. Predatory Pricing – destroyer pricing
(firms sell at very low price to elimiate other firms)
3. 30 day Inventory requirement
4. Trade Liberalization
a. Remove government Restrictions (Tariff)
i. Sample: Luxury Vehicles
a. from 200% to 150% tax
2. WTO says that 2020 should be 0-5% tariff
3. WTO says that 2032 should be 0% tarriff
5. Financial Liberalization
a. Let more banks foreign or local open because 1997 only 10 foreign banks
were allowed this was not only limited
b. IMF: Should be fully Liberated (2002)
6. Liberal Foreign Investment
a. Old law only 40% of investment by foreigners are allowed
b. IMF: should take the limit out and allow 100%, because this discourages and
stops investments from coming in. except for the negative list this was
enacted
7. Prudent Policy on money Supply
a. Money supply increases 2-3% only

Investment

7
Shar – Econtwo
DLSU-Manila
 we have to know the present value
 PV = FV(1+i)^-n
 PV = FV/(1+i)^n
Bonds
 5yrs.. need more than 1 million
 Capital Gain/Loss
 Interest Gain/Loss (dividends)

EXAMPLE
1) Suppose a bond pays 8% interest per year for 5 yrs on the 5th year the
government pays 1000 plus interest. How much is the price of the bond?
PB = 80/(1.08) + 80/(1.08)^2 + 80/(1.08)^3+ 80/(1.08)^4+ 1080/
(1.08)^5
PB= 1000
2) Suppose the interest rate decreased to 6% how much is the price of the bond?

PB = 80/(1.06) + 80/(1.06)^2 + 80/(1.06)^3+ 80/(1.06)^4+ 1080/

(1.06)^5
PB = 1084  capital gain
** Only the present value will change not he interest id the value of the bond changes
after you bought it.**

3) Suppose the interest rate increased to 10% how much is the price of the
bond?

PB = 80/(1.1) + 80/(1.1)^2 + 80/(1.1)^3+ 80/(1.1)^4+ 1080/(1.1)^5

PB = 924.18

Capital Loss = 924 – 1000

= 75.82
Capital Loss – interest = effective yield
75.82 – 80 = 4.18

Increase of interest  hold on bonds

Decrease of interest  sell

Money  barter system

Uses and function of money

 Medium of exchange
 Store of value  wealth
 Standard unit of value
 Standard unit of deferred payment

Motives why people hold money

 Transaction Motive

8
Shar – Econtwo
DLSU-Manila
 Precautionary Motive
 Speculative Motive

** 1 and 2 are F(Y)

** 3 is F(i)

Money Market Equilibrium

Money demand = Money Supply
 Transactions (+)
 Precautionary (+)
 Speculative (-)

F(Y)  Lt = (trans + precau)

F(i)  Ls = (spec)

Money Supply Composition

M1 (narrow money) = Currency in Circulation + Demand Deposit

(paper bills and coins) (checking account)
 Individual Check
 Managers Check

M2 (Broad Money) = M1 + Savings and Time Deposit

M3 (Money Supply) = M2 + Deposits Subsidies (government issued)

MD > MS  deficit  inflation

MD < MS  surplus  deflation

EXAMPLE
Ms = 200
Lt = 0.25y
Ls = 50-200i
Y initial Level = 700  GDP = Y  (C+I+G+X-M)

Money Market Equilibrium

MD = Lt + Ls
= 0.25Y + 50 - 200i
= 0.25(700) + 50 - 200i
= 225 – 200i

MD = MS
225 – 200i = 200
ie = 0.125
Plot MD and MS

9
Shar – Econtwo
DLSU-Manila

General Equilibrium Model

Goods Market  Y= C+I+G+X-M  IS (investment saving)
Money Market  MD=MS  LM

C= 180 + 0.625
I= 300 – 10i
G= 150
T= 50 = 0.2y
MS = 360
Lt = 0.25
Ls = 100-20i

IS EQ
LM EQ
GENERAL EQUILIBRIUM
If G ^ to 300 Ye?
If I decrease to 200 Ye?
Changes
Change in IS  Fiscal Policy (C, I , G , X, M)
Change in LM  Monetary Policy

Shift
Right  Expansionary
Left  Contractionary

Goals of the Economy

1) Internal Balance
 Income Level at Full Employment

a. Recession
• 2 consecutive (-) growth
• High unemployment Rate
• Low Inflation
b. Economic Boom
• High Growth (7%)
• Low Unemployment Rate
• High Inflation

10
Shar – Econtwo
DLSU-Manila
2) External Balance
 Condition where Balance of Payment (BOP = 0)
 Means all international transactions of the economy (foreign transactions
currency)
• Inflow  increase in BOP
• Outflow  decrease in BOP
a) Current Account
= Merchandise (trade) + Non-merchandise (service)
Inflow Export ; OFW Remittance
Outflow  Import ; Foreign Income
b) Capital Account
Inflow  Foreign Investment; Foreign Loans
Outflow  Local Investing in foreign currency ; debt payment
c) International Reserves – BSP
1. Foreign Currency
2. Gold Reserves

Causes of Inflation
1. Demand Pull Inflation
D>S
AD>AS  increase in price  supply cannot just adjust to demand
2. Cost Push Inflation
 Supply side
 Increase in cost of production
o Raw Materials – Oil
o Equiptment – Foreign Exchange Rate (depreciation)
o Legislative Minimum Wage Increase
Solutions
1. Short Term Solution
a. Contractionary Monetary Policy (decrease in MS)
2. Long Term Solution
a. Iprove/Increase Productive Capacity

11