03/05/2021 - Lecture 1

“Where is 4Q 2020 growth coming from? Microeconomics vs Macroeconomics

Demand Side
- Consumption = -7.2
- Investment = - 29.0
○ Investments refer to both
domestic and foreign
investments
- Gov’t Spending = +4.4
- Exports = - 10.5
- Import = -18.8
Microeconomics
:Growth of each sector for the year 2020
- Consumption = -7.8 ● Individual Income
- Gov’t Spending = 9.8 ○ Income Households/Businesses
- Investments = -35 ● Supply and Demand of Labor
- Net Exports = -36% ● Supply and Demand of Goods
○ Individual Units: Households,
Supply Side Consumers, Businesses
- Services Sector = -2.5 ● Deals with households and firms
- Industry Sector = -8.4 decisions
- Agriculture Sector = -2.5 ○ Policies, gov’t decisions,
monetc
Growth of each sector for the year 2020 ● Individual Prices
- Services = -8.8 ○ Prices of goods and services
- Industry = -13
○ External shocks almost always Macroeconomics
affect the industry sector first
- Agriculture = - 0.0006* ● National Income
○ GDP, GNP
Contributions to GDP growth rate ● Total Employment in the Economy
Multiply the share of each of the sector ○ Unemployment &
to the GDP growth rate Underemployment
● Aggregate Supply and Aggregate
Challenges Facing Future Growth Demand of Goods
1. Quarantine measures continue to hinder ○ Cumulative Supply &
growth Cumulative Demand of Goods
2. Inflation: Prices of basic commodities ● Deals with Aggregate Decisions
such as meat products ○ Policies, gov’t decisions, etc
3. Weather disturbances serve as an ● Overall Price Level
adversity to the economy ○ Concept of inflation rate, if
4. Receptiveness of people to the vaccine changes in prices over time
5. High cost of transportation ∞§∞
 leads to higher/lower inflation [Redistributing income from the rich using
taxes ( a progress tax system where poor pay
rates. less in comparison to the rich)]

Goals of Macroeconomic Policy

1. Full Employment 5. External Balance

Countries should be mindful of its
- Situations where all available exports/imports. “If we have
resources are employed to
produce goods and services
[To attain full employment and to make sure
all resources are employed to produce goods
and services we try to minimize incidence of
unemployment & underemployment]
“So why Macroeconomics?
:Underemployment - When workers cannot
fully utilize skills and competencies in terms
of employment ● The world before the Great Depression
○ No government intervention:
2. Price Stability market forces were allowed to
- Objective of the nation is to clear the market
keep the inflation rate low to ○ Classical economics: laisse-faire
maintain price stability.. Especially ○ The Great Gatzby, 1925,S.
for basic commodities
[That’s why we have a price monitoring Fitzgerald
every now and then especially after a
calamity to keep the prices of basic
● The Great Depression
commodities in check especially when it
comes to its availability and affordability. ○ Longest, widespread, and
deepest depression of the 20th
3. Economic Growth century.
- Economy must operate at ○ Unemployment in the US and in
maximum capacity some countries rose up to
[How the economy should operate at
maximum capacity (all its resources are
25-33%
maximised) where all sectors of the ○ Real GDP was very low
economy are benefitting from this so called ○ Classical economics failed to
growth
explain the prolonged
- Output growth
[Service sector is monitored with output unemployment during the Great
growth and productivity growth Depression.
○ The Grapes of Wrath, 1939
○ Keynesian Economics explains
that there should be government
4. Equitable distribution of income
intervention to keep the
- Narrow the gap between higher
economy in check.
and lower income groups
[Keynesian Economics: Gov’t
- Improved standard of living intervention & importance of
[By making basic services accessible to the ]role of gov’t decisions]
everyone (healthcare and education)
- How: Taxation
Markets in the Macroeconomy
1. Goods and Services Markets
a. Buying and selling of goods in a
market.
b. Savings and investments.
c. Captured by the aggregate
(overall) demand and aggregate
supply.
2. Money Market
a. Pertains to the borrowing and
lending activities
b. Interest Rates (Main tool, Helps
control inflation & amount of
investments going in and out of
the economy, so capital inflow
and capital outflow is its main
target)
3. Labor Market
a. interaction between laborers and
employers. (Helps understand
how employer respond to gov’t
interventions (lower taxes, etc)
Role of the government
“GIven that gov’t intervention, until what extent
should govt intervene
Keynesian Economists believe there are only
two general roles of the govt - implementing
policies & direct and implementing this policies
● Government Policies
○ Fiscal policy (pertain to taxes,
gov’t spending and how they
can stimulate the economy, and
addressing macroeconomic
issues
○ Monetary policy (pertains to
interest rates & money supply)
● Direct and implement these policies

Employment and
unemployment rates and
information are gathered from
this market

4. Bond Markets
a. Captures the market for debt
instruments (that are used for
raising capital)

It is used for raising the capital

government also participates in

the bond markets through
investment funding on
infrastructure projects
 Basically the cycle shoes the circular
flow of income, and how income flows
in and out of the economy Firms
also pay taxes (Corporate
income/indirect (ad valorem & sales tax)
03/08/2021- Lecture 2
National Income Account
Circular Flow of Income & Spending
: The interaction of domestic activity
● Households, Government and Firms
purchase from the rest of the world

Objectives of the circular flow of income

● Measure of Income:
○ measuring the amount of
income that goes in and out of
the economy
● Show us the three important sectors
● GDP
households, govt and firms
○ Market value to all final goods
and services produced within
Households provide factors of
the domestic borders in a given
productions to firms & govt. Inreturn
period.
firms pay the households back,
households receive income in terms of
Approaches in measuring GNP accounts
wages (labor), dividends(capital),
A. Final expenditure approach
interest (also capital), profits (for the use
● Aggregate final expenditure of
of land)
all sectors
B. Factor-income approach
Firms use these factors of production to
● Sum of payments made to
produce goods and services which in
owners of factors of production
return go back to the economy to the
C. Industrial origin approach
govt through the households in the form
● Sum of gross value-added of all
of goods & services.
industries
● GVA - value of total sales less
Whenever households purchase goods
purchases from other firms
and services income goes to firms.
● Value Added
Households also pay taxes to the govt
 ○ Enhancement a company gives
its product or service before
offering it to its customers
○ Value can be enhanced through
manufacturing, marketing or
processing

Final Expenditure approach

- Sum of all expenses made by all sectors Factor Income Approach
of the economy - sum of all income from all sectors
1. Compensation of employees (salaries or
1. Personal consumption expenditure (C) wages)
- Personal spending 2. Rental Income
3. Interest Income
2. Gross Domestic Investment (I) ^^Income of Households ^^
- Expenses made by the financial
sector 4. Corporate income
a. Dividends (income received by
a. Fixed capital formation stockholders)
i. Durable capital b. Corporate income tax
equipment c. Undistributed corporate
ii. Residential & profits/retained earnings
non-residential ^Income of Private Sector^
construction
b. Increase in business inventory 5. Proprietor’s income/income of
unincorporated business
^Govt Income^
3. Government Spending (G)
a. Purchases of goods & service 6. National income = 1 + 2 + + 3 + 4 + 5
b. Salary of government 7. Indirect business tax (tax is income of
employees government
c. Transfer payments 8. Net national product = All + 7
- Subsidies 9. Capital consumption
allowance/depreciation cost + All then
4. Net Exports (NX) minus subsidies
Exports - imports 10. (minus) subsidies

GDP = 1 + 2 + 3 + 4 = GNP

5. Net Factor income from abroad

a. Income from Filipinos working
abroad - income from foreigners
working here.

GNP = GDP + 5
 ● The existence of black or underground
markets
○ Unlicensed economic activities
○ Sale of mostly illegal goods and
services
○ Not factored in since it is
invisible to the public.
Industrial origin approach
1. GVA of agricultural sector Other Economic concepts
2. GVA of industrial sector
a. Mining and quarrying Nominal GDP
b. Manufacturing
c. Construction ●
d. Electricity, gas & water
3. GVA of service sector
Real GDP =
a. Transport, communication &
————————————————-
storage
b. Commerce
(Given) Price index OR deflator
c. Services
Implicit price index current
4. GDP = 1+ 2+ 3
5. NFIA ○
GNP =GDP + NFIA

Price Index =
Limitations of GDP and GNP ————————————————-

● It does not faithfully represent the whole IPI base

economy of a country
● There are many informal sectors in the ○
economy.
○ Sidewalk vendors, labanderas, ○ Personal Income Formula
street food vendors.
○ These informal sectors are not ■ National Income
taxed nor have any formal ■ Transfer Payements
business documentation. ■ (Minus) Social Security
○ Thus the product and services Payments
produced by the informal ■ (Minus) Undistributed
sectors are not factored in the Corporate Profits
final expenditure. ■ (Minus) Corporate
● Unregistered household activities Income Tax
○ Household help ○
○ Not taxpayers - salaries are Personal Income
under the minimum wage
 Question
Other Concepts
● Economic Growth Short-run vs long run
○ Pertains to either GDP or GNP
○ Economic growth vs economic development

03/10/2021 03/15/2021

Economic Growth
● The consequences for human welfare
involved in questions like these are
simply staggering: Once one starts to
think about them, it’s hard to think about
anything else.
- Robert Lucas

Standards of Living
● GDP Per Capita ● Pioneering advocate - helping workers
○ GDP/Population ● the term proletariat
● “Unemployment is a cause of short-run
● GDP - real vs nominal fluctuations
○ Real refers to constant prices
○ Nominal refers to market prices

● GDP growth rate

Earliest cycle theory

Periodic crisis
Importance of long term economic growth
 Empirical Studies have linked business cycles to
● Labor market search (And

AFK

Short run goals

Business Cycles ● High gdp growth (short run)
● Low rate of inflation
● “Business cycles are a type of ● Low rate of employment
fluctuation found in the aggregate
economic activity of nations that Long run goal - sustained GDP growth
organize their work mainly in business
enterprises: a cycle consists of
expansions occurring at about the same National Income accounts
time in many economic activities, Nominal vs Real GDP
followed by similarly general
recessions, contractions, and revivals,
which merge into the expansion phase of
the next cycle.”
- Burns and Mitchell (1946)
Nominal GDP
● GDP measured in current prices; in
Factors that could lead to expansion or recession
current Philippine pesos
● Classical - employment
● It generally increases over time -
● Monetarist - money, inflation
production of most goods increases over
● Keynesian - aggregate demand
time; prices of most goods increases
● Austrian - bank credit
over time
● Schumpeterian - innovation
Real GDP
● Real Business cycle theory
● Quantity measure, i.e. measures changes
● Real Business Cycle Theory - shocks
in GDP due to changes in quantity
● GDP measured in constant prices
● Effect of increasing prices is eliminated
 ● Identify a base ----------------

Tools for fiscal policy

GDP Deflator
● Price measure - measures changes in
GDP due to changes in prices
● One goal of the government is to keep
changes in the overall price level small
● The government needs to track changes
in the overall prices
● To calculate, use quantity in the base
year as weight
● GDP Deflator =
1/100[(Nominal GDP/Real
GDP*100]1/100
1. Taxation
● Includes income, (direct tax)
capital gains from investments,
property and sales
2. Government Spending
● Includes subsidies, transfer
payments (social security
payments, grants, etc)
Expansionary fiscal policy

Real GDP = (Nominal/GDP Deflator)

Government Policies
Increase in Government spending
● How can we manage GDP (in the short
● Spending creates jobs and alleviates
run?)
unemployment
● Whoever receives the funds has more
Fiscal Policy
money to spend therefore increases
● The word “fiscal” refers to budget
demand, and economic growth.
● Fiscal policy is the use of taxes,
(Increase in income, demand, & GDP)
government transfers, or government
● Employment will increase as output
purchases of goods and services to shift
expands and aggregate price level will
the aggregate demand curve.
rise
● The objective of fiscal is to create
healthy economic growth through
Decrease in tax
setting the level of government spending
● Tax cut increases consumers disposable
and taxation.
income
● Consumption goes up as consumers
have more purchasing power
● Firms increase revenue and production
● Stimulates GDP growth
Contractionary Fiscal Policy

● When economy is suffering from

inflation, government wants to decrease
AD
● Its goal is to slow economic growth and
to stamp out inflation. The long-term
impact of inflation can damage the An example of expansionary fiscal policy
standard of living as much as a recession
● One way to reduce such inflationary
pressures is by a contractionary fiscal
policy: reducing gov’t spending, transfer
payments, or raising taxes (increasing
withdrawals from the economy).

Imposition of Tax
● When taxes are reduced, money is
withdrawn from the economy’s
spending stream.
● This results to the decreased
consumption, less demand for goods and
a decline in GDP
● Fights inflation through decreasing the
capability to consume due to less
disposable income and minimizing
spending Answers how much of the budget deficit is part
● Same effects for decrease in government o the gdo
spending.
Budget deficit/surplus =
Ballon effect tax revenue collection - government spending