Macroeconomics

(based on the most recent CPA Board Exam Syllabus)

Part 1: National Economic Issues and

Measures of Economic Performance

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 What is Macroeconomics?
• Macroeconomics is a branch of economics that studies how
an overall economy – the market systems that operate on a
large scale – behaves.
• It encompasses the study of national economies (e.g.
Philippines), regional economies (e.g. Asia), and the global
economy.
• It studies economy-wide phenomena, including inflation,
unemployment, and growth.
• Key areas of study:
• National indicators: GDP, CPI, Inflation, Unemployment, BOPS
• Policy instruments: Monetary policy, fiscal policy

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 Coverage:
• National Economic Issues and Measures of
Economic Performance such as GDP
• Unemployment and inflation
• Fiscal and monetary policies
• International trade and foreign exchange rates

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 Part 1:

National Economic Issues and Measures

of Economic Performance such as GDP

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Circular Flow Model (Mixed Economy)

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 National Income Accounting:
• A bookkeeping system that a government uses to measure
the output and performance of a nation’s economy.
• The aggregation of the spending and income of the various
elements in the national economy is done through the
national income accounts
• National income accountants or statisticians are those
who compute for these economic measures.

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 Real National Income Issues:
• How to enhance real national income level?
• The level of real national income depends not only on an increasing total
demand but also on an increasing supply, that is, on the ability of the
producers to satisfy the demand for goods and services.
• How to increase the supply of goods?
• Increase the resources used in production
• Improve the level of productivity of these resources
• What is the status of the availability of resources in the
Philippines?
• The single biggest contributor to the increase in the supply of goods is
the increase in labor resources, because of high population growth.
• Land resources are still awaiting to be tapped in increase our supply of
goods.
• Capital resource is the most difficult resource to increase because this
depends on the level of savings and foreign exchange (foreign
investments) available
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 Real National Income Issues:
• Increasing resources is not sufficient to increase the supply
of goods. More and more productivity should be increased.
What are the main sources of productivity?
• Advances in knowledge/technology
• Increased education per worker
• Economies of scale
• Improved resource allocation
• Increased capital per worker
• Improvement in environmental conditions
• International specialization and trade

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 GDP and GNP
• Gross Domestic Product (GDP)
• The total market value of all final goods and services produced
within a country in a given time period, usually one year. It is a
more commonly used method than the GNP.
• Gross National Product (GNP)
• The total market value of all final goods and services that have
been produced by an economy during a given time period, usually
one year.
• The market value of all final goods and services produced by a
country’s nationals in a given period of time.
• The money value of total national production of final goods and
services.
Market value refers to a measurement in money terms (eg:
Philippine pesos) and the value assigned to these produced goods
and services are their prices in the market
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 How to compute for GDP/GNP?
• Spending approach or Expenditure Approach – measures the total
amount spent on goods produced by a country in a year.
• Income Approach – measures the total incomes earned by households
in a nation in a year.
• Value-added Approach – sum of the value-added to products during
the production process
*Alternatives to GDP
1. GNP/GNI = Gross National Product / Gross National Income
• GNP = GDP – Income of foreigners in the Philippines + Income of Filipinos from
abroad.
• GNP should be quite close to GDP; may see this terms in older exam questions.
2. NNP = Net National Product
• NNP = GNP – Depreciation
3. HDI = Human Development Index
• Measures human well-being (by the UNDP)
4. GNH = Gross National Happiness
• Adopted by Bhutan. It is very subjective
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 How to compute for GDP/GNP?
• Spending approach or Expenditure approach – easiest to
measure and most widely used.
• Y = C + I + G + NX
• Consumption Goods and Services or Consumer Spending (C)
• Consumer Durables (household appliances, car, household furnishings)
• Consumer Non-durables (food, clothing, fuel, medicine)
• Consumer services (travel, medical fees, educational expenses)
• Gross Domestic Investment, Investment, Gross Capital Formation, or
Business Spending (I)
• New construction and durable equipment for production purposes
• New housing and public construction
• Increase in stocks of goods (inventories) of business firms
• Government or Public Goods and Services or Government Spending (G)
• Consumption goods (postal services, health and medical services, police and
fire protection, national defense)
• Public investment (roads, school buildings, bridges, dams, parks, harbors,
airports, government buildings)
• Net Exports (NX)
• Export of goods and services less import of goods (trade) and services
(invisibles or nontrade) 11
 Expenditure Approach:
GDP and GNP Illustration
2008 2009 2010 2011
Consumption 5,740 5,993 6,442 7,177
Government Spending 682 791 875 932
Capital Formation 1,489 1,332 1,849 2,114
Exports 2,850 2,587 3,134 3,020
Imports 3,040 2,945 2,842 2,684
Statistical Discrepancy 268 -455 -823
GDP 7,721 8,026 9,003 9,736
Net factor Income 2,055 2,626 2,993 3,143
GNP 9,776 10,652 11,996 12,878

• Net factor income is also known as Net foreign factor income, it is the
difference between the aggregate amount that a country’s citizens and
companies earn abroad and the aggregate amount that foreign citizens and
overseas companies earn in that country.
• Net factor income = GNP – GDP.
• If there is no net factor income, GNP = GDP 12
 Sample Problem – Expenditures Approach:
• Calculate the GDP and GNP using the Expenditures Approach by using the
actual data below:

Personal consumption 3,657

Depreciation 400
Wages 3,254
Indirect business taxes 500
Interest 530
Domestic Investment 741
Government expenditures 1,098
Rental income 17
Corporate profits 341
Exports 673
Net foreign factor income 20
Proprietor’s income 403
Imports 704 13
Solve by Yourself – Expenditures Approach:
• Calculate the GDP and GNP using the Expenditures Approach by using
the actual data below:

Household consumption 10,001.30

Corporate profits 1,066.60
Investment expenditures 1,589.20
Indirect business taxes 1,001.10
Depreciation 1,861.10
Government expenditures 2,914.90
Net foreign factor income 146.20
Net exports (386.40)
Wages 7,954.70
Proprietor’s income 1,030.70
Rents 292.70
Interest income 765.90 14
 Income approach
• Y = Total National Income + Sales Tax + Depreciation + Net
foreign factor income
• Total National Income = All Wages, Interest, Rent, Profit
• Therefore, Y = Wages (Labor) + Interest (Capital) + Rent
(Land) + Profits (Entrepreneurship) + Sales tax +
Depreciation + Net foreign factor income
• Factor Income of Persons (Wages or compensation of employee)
• Government income from capital
• Undistributed corporate profits
• Indirect business taxes
• Depreciation allowance (consumption of fixed capital)

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 Sample Problem – Income Approach:
• Calculate the GDP and GNP using the Income Approach by using the actual
data below:

Personal consumption 3,657

Depreciation 400
Wages 3,254
Indirect business taxes 500
Interest 530
Domestic Investment 741
Government expenditures 1,098
Rental income 17
Corporate profits 341
Exports 673
Net foreign factor income 20
Proprietor’s income 403
Imports 704 16
 Solve by Yourself – Income Approach:
• Calculate the GDP and GNP using the Income Approach by using the
actual data below:

Household consumption 10,001.30

Corporate profits 1,066.60
Investment expenditures 1,589.20
Indirect business taxes 1,001.10
Depreciation 1,861.10
Government expenditures 2,914.90
Net foreign factor income 146.20
Net exports (386.40)
Wages 7,954.70
Proprietor’s income 1,030.70
Rents 292.70
Interest income 765.90 17
 How to compute for GDP/GNP?
• Value-added approach: Y = Value-added (Market Value – Cost) of all producers.
Value Added by raw material-
STAGE 1 producing firm
Value of output of the raw Value added by intermediate
STAGE 2 material-producing firm good-producing firm
Value added by final good-
Value of output of intermediate good-producing firm
STAGE 3 producing firm
FINAL VALUE OF FINAL OUTPUT

Stage 1: Value Added by Agriculture in Palay Production (per kilo of rice equivalent)
Wages and Salaries 40
Rent 34
Interest 6
Profit 4 84
Stage 2: Value Added by Industry
Factor incomes from Rice milling (payment to land,
labor, capital inputs used) 22
Stage 3: Value Added by the Service Sector
Factor incomes from Transportation 28
Commerce
Wholesaling 28
Retailing 12 68
Value Added by All Sectors 174
Depreciation 14
Indirect Taxes 12
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Market Value of Final Production 200
 Pro-forma Formula (Value-Added Approach):
Agriculture, Fishery and Forestry xxx
Mining and Quarrying xxx
Manufacturing xxx
Construction xxx
Transportation, Communication, and Storage Utilities xxx
Commerce xxx
Services xxx
Net Domestic Product xxx
Net Factor Income from Abroad xxx
Net National Product or National Income xxx
Indirect Taxes xxx
Depreciation Allowance xxx
Gross National Product xxx
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 Sample Problem – Value-Added Approach:
• Calculate the GDP, GNP, NDP, and NNP using the Value-Added
Approach by using the actual data below:

Agriculture, Fishery and Forestry 5,000,000

Mining and Quarrying 3,000,000
Manufacturing 2,000,000
Construction 4,000,000
Transportation, Communication,
and Storage Utilities 1,000,000
Commerce 6,000,000
Services 3,000,000
Net Factor Income 50,000
Indirect Taxes 400,000
Depreciation Allowance 100,000
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 Types of GDP:
• Nominal GDP – the total value of all goods and services
produced at current market prices (including changes in
prices due to inflation or deflation).
• Real GDP – sum of all goods and services produced at
constant prices (inflation-adjusted measurement)
• Actual GDP – real-time measurement of all outputs at any
interval or any given time (existing state of business of the
economy).
• Potential GDP – ideal economic condition with 100%
employment across all sectors, steady currency and stable
product prices.

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 Solving for Nominal and Real GDP:
2018 2019 2020
Price of Product A Php 15 Php 20 Php 25
Quantity of Product A produced 100 units 150 units 200 units
Price of Product B Php 35 Php 40 Php 45
Quantity of Product B Produced 50 units 100 units 100 units

Requirements:
1. Compute the total nominal GDP in 2018, 2019, and 2020?
2. Compute the total real GDP in 2018, 2019, and 2020?
3. What is the GDP Deflator in 2018, 2019, and 2020?
4. What is the growth in nominal GDP in 2019 and 2020?
5. What is the growth in real GDP in 2019 and 2020?
6. What is the growth in GDP deflator (Inflation)? 22
Solutions Sheet

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 Applications of Real GDP:
Real GDP
• Real GDP per-capita measures prosperity
Population
Real GDPy1
• Real GDP growth − 1 measures economic
Real GDPy0
growth:
• Expansion: Positive real GDP growth
• Recession: Negative real GDP growth over 2 quarters
• To compare prosperity across countries, use real GDP or real
GDP adjusted for purchasing power parity (PPP)
• Law of One Price: In an efficient market, an identical item like an
iPhone or a Big Mac should only have one price
• Ignores current exchange rates: PPP use implied rates based on an
index like the Big Mac Index or the (Starbucks) Tall Latte Index
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 Limitations of GDP/GNP:
• It is a monetary measure, therefore comparing GDP/GNP over a
period of time requires adjustment for changes in the price level.
• Increases in GDP/GNP often involve environmental damage such
as noise congestion or pollution.
• GDP/GNP is not adjusted for changes in the population (which
affects per capita income)
• Changes in the value of leisure time are not considered.
• It does not depict the whole picture of economic development.
• Not all activities are included in GDP.
• Not all activities included in GDP increases economic well-being.
• GDP does not reflect the black market.
• GDP measures only flows, not stocks.
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 Disposable Personal Income
• Also known as disposable income.
• It refers to the amount of money that households have available
for spending and saving after income taxes have been accounted
for.
• It is often monitored as one of the many key economic indicators
used to gauge the overall state of the economy.
• The difference between disposable and discretionary income is
that, disposable income represents income after tax, and
discretionary income refers to money left over after taxes and
necessities (food, rent, etc.) Therefore the money left over is at
your discretion on how to use, invest or save.

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 Determination of Personal Income:
Gross National Product xxx
(Depreciation allowance) (xxx)
(Indirect taxes) (xxx)
National Income or Net National Product xxx
(Retained earnings of corporations
or undistributed corporate profits) (xxx)
(Government income from capital) (xxx)
Transfer payments from government and abroad xxx
Personal Income (includes dividend payments
and net of SSS contribution) xxx
(Personal Taxes) (xxx)
Disposable Personal Income xxx
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Sample Problem: Determination of Personal Income
Assume the following figures which pertain to Country P (in billions of $)

National Income 7,036.40

Corporate profits with inventory valuation
and capital consumption adjustments 846.10
Net interest 435.70
Contributions for social insurance 621.90
Wage accruals less disbursements 3.50
Personal interest income 897.80
Personal dividend income 348.30
Government transfer payments to persons 954.80
Business transfer payments to persons 28.80
Personal tax and nontax payments 1,846.10

Required:
1. Compute for Personal Income
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2. Compute for Disposable Personal Income
Solutions Sheet

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 Business Cycle
• Business Cycles are short-term fluctuations in the economy
that affect production, trade, and economic activity in
general.
• Phases of a Business Cycle:
• Trough – marked by low levels of economic activity and underuse
of resources
• Recovery – marked by increasing economic activity
• Peak – period when economic activity is booming
• Recession – economic activities and employment levels contract.
It is a period of declining economic activity. Society’s resources are
underused, and because of this, potential national income will
exceed actual national income.

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 Business Cycle

Real GDP
Recession
Peak

Recovery Recovery

Trough Time
Expansion

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 Analyzing Business Cycles:
Aggregate Supply and Aggregate Demand
• Aggregate Supply reflects the real domestic output available
at each possible price level. The curve for aggregate supply
slopes upward (direct relationship). The assumption is that
the price level will not rise when productive resources are
substantially underused. However, at full employment, the
price level will rise with no increase in real output. In the
intermediate range, both the price level and real output
increase.
• Short-run aggregate supply curve – tends to flatten out as the
economy reaches full capacity.
• Long-run aggregate supply curve – new factories can be built,
which results in a continuously rising supply curve. It has a steeper
slope, which means an increase in demand can cause substantial
price increases.
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 Analyzing Business Cycles:
Aggregate Supply and Aggregate Demand
• Changes in the supply (Determinants of Aggregate Supply) is
cause by:
• Changes in input prices
• Changes in Productivity
• Changes in legal and institutional environment.

Aggregate supply is the total quantity of output firms will produce

and sell—in other words, the real GDP.

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 Short-run Aggregate Supply Curve

Shift in the Short-run Aggregate Supply Curve

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 Main causes in the shift in SR Aggregate
Supply (Due to changes in Business Cost)
1. Change in unit labor costs
• Increase: Shift to the left
• Decrease: Shift to the right
2. Changes in other production costs
• Increase: Shift to the left
• Decrease: Shift to the right
3. Changes in technology
Advances: Shift to the right
Decline: Shift to the left
4. Commodity prices (raw materials)
• Increase: Shift to the left
• Decrease: Shift to the right
5. Exchange rates
• Depreciation in exchange rate:
increased cost in imported products:
Shift to the left
• Appreciation in exchange rate:
decreased cost in imported products:
Shift to the right
6. Government taxes
• Increase: Shift to the left
• Decrease: Shift to the right
7. Changes in physical stock
Increase: Shift to the right
Decrease: Shift to the left
8. Government subsidies
• Increase: Shift to the right
• Decrease: Shift to the left
9. Price of imports
• Cheaper imports/ Reduction in
tariffs/ Increase in size of import
quotas: Shift to the right
• More expensive imports/
Increase in tariffs/Decrease in
size of import quotas: Shift to
the left 35
 Economic Effects of a Fall in
Short-run Aggregate Supply
CAUSES: MACRO CONSEQUENCES:
1. Brain-drain – an outward 1. May cause higher
migration of workers inflation
2. Collapse in business 2. May reduce real
capital investment GDP/national output
spending 3. May reduce total
3. Higher production costs employment
4. Effects of a major natural 4. May increase a BoP
disaster/shock current account deficit

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 Long-run Aggregate Supply Curve

Shift in the Long-run Aggregate Supply Curve

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Main cause in the shift in LR Aggregate
Supply (Due to Economic Growth)
• Positive economic growth results from an increase
in productive resources, such as labor and capital.
It is represented by a shift to the right in the LRAS
cure.

• Negative economic growth decreases the real GDP

and causes the LRAS curve to shift to the left.

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 Why is SRAS Upward sloping and LRAS is vertical?
1. Sticky wages
Wages don’t adjust immediately to prices. If price increases,
companies hire the (still cheap) labor, and supply more goods. Later
on, in the long run, wages adjust and output declines to LRAS.
2. Sticky prices
To remain competitive, companies try not to increase prices when
price level increases. Low prices attract customers, and firms
increase production to fill demand. As time passes, high costs will
make firms increase price. Demand declines, and output declines to
LRAS
3. Misperceptions
Companies think that only the prices of their goods and services
increase, and so gladly increase production. Over time, they realize
that their costs increase, and so output declines to LRAS.
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 Analyzing Business Cycles:
Aggregate Supply and Aggregate Demand
• Aggregate Demand reflects the real domestic output
demanded at each possible price level. The curve for
aggregate demand slopes downward (inverse relationship). As
the price level falls, real purchasing power increases, interest
rates decline, and foreign purchases increase.
• Changes in the aggregate demand (Determinants of Aggregate
Demand) is cause by change in the demand of any component
of Real GDP
• Changes in the demand for consumption goods and services
• Changes in investment spending
• Changes in the government’s demand for services
• Changes in the demand for net exports.

GDP represents the total amount of goods and services produced in

an economy while aggregate demand is the demand or desire for
those goods. As a result of the same calculation methods, the
aggregate demand and GDP increase or decrease together.
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 Aggregate Demand Curve

Shift in the Aggregate Demand Curve

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 Reasons for a Downward Sloping (Inverse
Relationship) Aggregate Demand Curve
• Wealth effect
• As the price level rises, the wealth of the economy (measured by money
supply) declines in value. As buyers become poorer, they reduce their
purchases of all goods and services.
• As the price level falls, the purchasing power of money rises. Buyers
become richer and will be able to purchase more goods and services
than before.
• Interest rate effect
• If price level is high, households will require more money and the
increase in demand for money causes interest rate to rise.
• If price level is low, there will be a decrease demand for money which
causes interest rates to fall.
• Net exports effect
• If domestic price level is high, domestic goods are expensive and foreign
goods are cheap, so exports will decrease and imports will increase. This
causes GDP to fall.
• If domestic price level is low, domestic goods are cheap and foreign
goods are expensive, so exports will increase and imports will decrease.
This causes GDP to rise.
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 Shift in the Aggregate Demand
• Changes in the Components of Aggregate Demand
(C, I, G, X)
• Increase: Shift to the right
• Decrease: Shift to the left
• State of Economy
• Depression: Shift to the left
• Boom: Shift to the right
• Interest Rates
• Increase: Shift to the left
• Decrease: Shift to the right
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 Demand–Pull Inflation
• The economy is at equilibrium with AD meeting AS
• LRAS intersects AD and AS at the point of
equilibrium
• Demand shifts, and prices .
Suppliers pay overtime and run
factories 24/7 to increase supply
• An inflationary gap opens
• Eventually machines break down
and people stop working overtime.
Supply pulls back
• New equilibrium with P but =Q
• When an economy does this, it is
said to be overheating.
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 Cost–Push Inflation
• The economy is at equilibrium with AD meeting AS
• LRAS intersects AD and AS at the point of
equilibrium
• Costs increase across the board.
Suppliers raise prices across the
board, and quantity demanded
decreases
• A recessionary gap has opened
• GDP decreased even though
inflation increased. This is called
stagflation: stagnation with
inflation

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 How to fix Inflation?
• Demand-Pull Inflation. Inflation is caused by too much
demand of goods and services. Since a country’s output has
a capacity limit, the only way to reduce this type of inflation
is to reduce aggregate demand with contractionary
economic policies.
• Cost-Push Inflation. An increase in production costs is
fueling inflation. Government can’t directly address, but
must focus on reducing costs and improving productivity.
• Structural (Built-in) Inflation. Inflation resulting from
capacity constraints (bottlenecks) in the economy. Only
solution is to fixing these constraints.

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Try to Answer – 1:
Which of the following could cause the
change in the short run aggregate
supply as shown in the graph here?

a. An increase in the bargaining

power of labor unions
b. A decrease in productivity.
c. An increase in energy prices.
d. The expectation of lower inflation
in the future.
e. An increase in disposable income.
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 Try to Answer – 2:
Which of the following best describes something that would
cause an increase in output along a short-run aggregate
supply curve?

a. An increase in the price of a single good.

b. An increase in business taxes.
c. An increase in the consumer price index.
d. Firms spend less on capital equipment.
e. A decrease in the wage rate.

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 Try to Answer – 3:
What happens to inflation and unemployment as you move to
the left along the short-run aggregate supply curve?

a. Inflation doesn’t change and unemployment doesn’t

change.
b. Inflation decreases and unemployment doesn’t change.
c. Inflation increases and unemployment doesn’t change.
d. Inflation increases and unemployment decreases.
e. Inflation decreases and unemployment increases.

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 Try to Answer – 4:
How does a decrease in the price level affect real wealth and
aggregate demand?

a. Inflation doesn’t change and unemployment doesn’t

change.
b. Inflation decreases and unemployment doesn’t change.
c. Inflation increases and unemployment doesn’t change.
d. Inflation increases and unemployment decreases.
e. Inflation decreases and unemployment increases.

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Try to Answer – 5:
The graph to the left illustrates a
change in the aggregate demand
curve. Which of the following could
have caused the change?
a. An increase in consumer spending.
b. An increase in consumer
confidence.
c. An increase in interest rates.
d. An increase in government
spending.
e. An increase in exports.

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 Economic Indicators
• Variables that in the past have had a high correlation with
aggregate economic activity.
• Economists use a variety of economic indicators to forecast turns
in the business cycle.
• They may lead, lag, or coincide with economic activity.
• A leading indicator is a forecast of future economic trends. It is
predictive in nature, input-oriented, signal future events, and
indicate sentiments.
• A lagging indicator changes after the economic activity has
occurred. It follows after an event, and is output-oriented.
• A coincident indicator occurs at the same time as the conditions
they signify. They change at the same time as the economy.
• The best known leading and lagging indicators are the composite
indexes calculated by The Conference Board, a private research
group with more than 2,700 corporate and other members
worldwide.
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 Examples of Leading
Indicators:
• Average workweek for
production workers
• Prices of publicly traded stocks •
• Average weekly initial
unemployment insurance
claims
• New orders for consumer
goods and materials
• New orders for nondefense
capital goods
• Building permits for homes
• Vendor performance (slower
deliveries diffusion index)
• Money supply
• Index of consumer
expectations
• Interest rate spread (10-year
Treasury bonds national-funds
rate)
Examples of Lagging Examples of
Indicators: Coincident Indicators:
• Average duration of • Employees on
unemployment in weeks nonagricultural payrolls
Change in index of labor • Personal income minus
cost per unit of output transfer payments
• Average prime rate charged • Industrial production
by banks (based on value added
• Ratio of manufacturing and and physical output)
trade inventories to sales • Manufacturing and trade
• Commercial and industrial sales
loans outstanding
• Ratio of consumer
installment credit
outstanding to personal
income
• Change in CPI for services
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