WHY ECONOMICS IS IMPORTANT

Students may ask. “why do we need to study economics?” To know how important the subject is, all they
need to do is read the front page of the newspapers to see that the most important news is economic in nature.
Watch the news on TV and for sure, economic news always presents important issues.
Economics will help the student understand why there is a need for everybody, including the government,
to budget and properly allocated the use of whatever resources are available. It will help one understand how to
make more rational decision in spending money, saving part of it and even investing some of it.
On the national level, economics will enable the students to take a look on how the economy operates and
to decide for themselves if the government officials and leaders are effective in trying to shape up the economy
and formulate policies for the good of the nation.

SCIENTIFIC APPROACH IN THE EMPIRICAL TESTING OF AN ECONOMIC THEORY

Economics is a study that attempts to explain how an economy operates and how the consumer attempts
to maximize his/her wants within limited means. Using tools such as logic, mathematics, and statistics, the student
needs to approach the empirical testing of an economic theory in a scientific manner. This scientific approach
involves the following steps:

1. State the propositions or conditions that are taken as given and do not need further investigation, as
the basic starting point of investigation. These propositions will serve as the premises upon which the
theory is established.
2. Observe facts in connection with the activity that we want to theorize.
3. Apply the rules of logic to the observed facts to determine casual relationships between observed
factors and to eliminate facts that are unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypotheses may be tested as to whether they are
valid or not.
5. Use statistics and econometrics as empirical proof in testing the hypotheses.

POSITIVE ECONOMICS VERSUS NORMATIVE ECONOMICS

Positive economics deals with what is – things that are happening such as the current inflation rate, the
number of employed labors, and the level of the Gross National Product. Normative economics, on the other hand,
refers to what should be – that which embodies the ideal such as ideal rate if population growth or the most
effective tax system. Positive economics is an overview of what is happening in the economy that is possibly far
from what is ideal. Normative economics focuses on policy formulation that will help to attain the ideal situation.

MEASURING THE ECONOMY

We will always get to read in the newspapers how our economy has grown in recent years. Before we go
into the essence of applied economics, it is beneficial that the students get to learn first how the growth of the
economy is measured. The national government is always happy to inform the people that the country’s Gross
Domestic Product (GDP) has grown in rates, much higher than in the previous administration. We will now go
into a short discussion of what the GDP is all about.
The government plans for a better economy from a perspective of =what the economy has been. Shaping
the economy’s future is changing past and present perspectives extended to the future. Looking ahead is grounded
on past and present performance and health of the economy. The heart of the economy is production whose value
measures both resource input and output of people. The interplay of resources and outputs tells how well the
economy has performed.

COUNTING ALL THROUGH GNP

As the mirror of all products, Gross National Product (GNP) is the market value of final products, both
sold and unsold, produced by the resources of the economy in a h=given period. Market value is determined by
supply and demand while the economy’s resources are those belong to Filipino citizens and corporations. Not all
resources belonging to the economy are in the economy, like the capital and entrepreneurship that brought the SM
mall to China. Conversely, not all resources in the economy belong to the economy like the capital and
entrepreneurship brought to the country by multinationals like Nestles’ and Procter and Gamble(P&G). in
addition, the value of final products already includes the values of its components from the lower production
stages. For example, the price of your leather wallet already includes the value of leather that I turn includes the
value of animal hide. In other words, counting the values of products from the raw material to the intermediate
and on to the final production stages, double counts and overstates the value of the economy’s production.
Likewise, the value of any product in a certain period should no longer be counted in succeeding periods to avoid
double counting and overstatement that can mislead decision-making.

GNP/GDP: EXPENDITURE APPROACH

One way to account GNP and classify its components is by end-use expenditure. Products are final when
they have reached the highest levels of processing in the economy for different uses in the given period. They are
household and individual consumption (C), and government expenditure on goods and services including labor
(G) and exports (X). Products, regardless of production stages, are also considered final when basically stocked
(unused) as capital goods and inventories of raw materials and intermediate products. Classified as investments
(I), they are stock of values for future use and therefore, have reached the highest possible production stages for
the given period. On the other hand, their important components (M) are excluded since import products are
produces in other hand, their imports components (M) are excluded since import products are produced in other
economies. To restate the GNP equation:

GNP = C + I + G + ( X – M )

Table 2.1 presents Philippine GNP statistics whose components are classified by expenditures account.
Capital Formation id=s Investments (I) by both the private sector and government that consists of fixed capital
and inventory changes. Fixed Capital includes capital goods (buildings, machineries, equipment) while inventory
changes are stocks (unused)for future use from all stages produced in that year. Net Factor Income from abroad is
net export of factor services equal to Factor Income from abroad less the factor payments of other countries.
Factor payments are for the direct services of resources like remittances of our overseas contract workers for labor
exports. Likewise, profit remittances to the home countries of multinational companies like Nestle and Procter
and Gamble (P&G) represents our payments for importing their capital and entrepreneurship. These factor
payments to other countries represent additional imports excluded from our GNP. On the other hand, payments
for non-factor services as part of trade balance (X- M) are for services using all factors (resources) of production.
Profit brought home by a Filipino construction firm for construction in Saudi Arabia is an example of non-factor
service export receipt.
Table 2.1. National Product
(by Type of Expenditure)
in Million Pesos
Type of Expenditure At Current Prices

2010 2011 2012

1. Household final 6,442,033 7,132,581 7,837,881
consumption expenditure
2. Government final 875,291 941,836 1,112,586
consumption expenditure

3. Capital formation 1,849,380 1,985,897 1,950,524

a. Fixed capital 1,847,748 1,817,183 2,047,957
(1) Construction 949,406 904,508 1,074,169
(2) Durable equipment 692,519 698,745 751,133
(3) Breeding stock and - - -
orchard development 173,494 178,640 181,123
(4) Intellectual property - - -
products 32,328 35,293 41,531
b. Changes in inventories 1,632 168,710 (97,433)
4. Exports 3,133,507 3,103,018 3,254,460
a. Exports of goods 2,259,876 2,03,503 2,120,180
b. Exports of services 873,632 1,068,515 1,134,279
5. Less: Imports 3,296,732 3,457,065 3,590,563
a. Imports of goods 2,635,752 2,826,136 2,873,855
b. Imports of services 660,980 630,928 714,708
6. Statistical discrepancy 0 0 0

Gross domestic product 9,003,480 9,706,268 10,564,886

Net factor income from the 1,848,952 1,891,937 2,043,843

rest of the world

Gross national product 10,852,432 11,598,205 12,608,730

Source: National Statistical Coordination Board

However, a better indicator of domestic employment opportunities is Gross Domestic Product. Gross
Domestic Product (GDP) is defined as the market value of final products produced within the country. The
resources in the economy include capital and entrepreneurship belonging to other countries brought to the
domestic economy by foreign businesses. In Table 1.1 GDP is net of GNP after deducting Net Factor Income
from abroad or by deducting factor income from abroad and adding back Factor Payments to other countries. In
other words, a negative sign to Net Factor Income from abroad changes the sign of Factor Income from abroad
from positive to negative and Factor Payments to other countries from negative to positive. The table shows that
Household Consumption is the biggest GDP expenditure (74%) followed by Capital Formation (19%) led by the
construction industry. In other words, our economy mostly produces consumer goods and buildings and other
construction structures. The dominance of household consumption reflects households’ propensity to consume
more and save less. On the other hand, construction is both private investments by the rich and public capital
spending by government largely financed by borrowings.

Net Inflow = inflow – Outflow to – Net Inflow = - Inflow + Outflow

GNP/ GDP: Income Approach

Another way to account GNP and classify its components is by resource uses and contributions that make
up the production stages. As basic factors of production, resources (land, labor capital, and entrepreneurship) add
value products (e.g., leather) as processed into higher forms (e.g., shoes). If all payments for resource
contributions (rent, wage, interest, and profit) went to resource owners, GNP would simply be the sum of all
factor payments from the raw material to the final product stage. In figure 1.1, the value of, say, the final product
(P700) is equal to the intermediate product (P300) plus the factor contributions (P400) that transformed the latter
into its final form. Following the arrow directions, the value of the intermediate product (P300) is from the factor
contributions at the intermediate stage (P200) and the raw material stage (P100). In other words, factor
contributions made the raw material (P100) and the intermediate product (P200) through the value added by
factor contributions. The same logic applies to the final product whose material purchase is a product of factor
contributions from the lower stages. In conclusion, all products and their values are the contributions of these
essential (basic) factors of production.

Raw Material Purchased Intermediate Product

(P100) Purchase
(P300)
+ +

Resource Resource Resource

Contributions/Income Contributions/Income Contributions/Income
(P100) (P200) (P400)

= = =

Value of Raw Material Value of Intermediate Product Value of Final Product

(e.g.,animal hide,P100) (e.g., leather, P300) (e.g.,wallet, P700)

Figure 2.1. Value-Added Flow

Table 2.2 presents the Philippine GNP statistics whose components are classified by factor contribution of
the economy’s producing sectors. The biggest contributor of GNP is the Service Sector (48%) serving all
industries. Next is the import-dependent Industrial Sector (44%) providing industrial input across sectors. The
smallest sector is Agriculture, Fishery, and Forestry combines (8%), needing import complements to provide for
the food requirements of the population. Net Factor Income from the rest of the world is factor income apart from
the factor contributions of sectors. It includes the OFW remittances and transfer payments from abroad.
Table 2.2. National Product
(by Type of Expenditure)
in Million Pesos
Major Industry Group At Current Prices

2010 2011 2012

1. Agriculture, hunting, forestry and fisher 1,108,718 1,235,012 1,250,616
Agriculture and forestry 928,588 1,052,167 1,056,964
Fishing 180,130 182,845 193,652
2. Industry 2,932,279 3,042,060 3,284,508
Mining and quarrying 128,727 143,027 121,435
Manufacturing 1,930,779 2,047,718 2,170,918
Construction 551,230 520,969 618,077
Electricity, gas and water 321,543 330,346 374,077
3. Services 4962,483 5,429,196 6,029,763
Transportation, storage and
communication 586,197 7,255 685,251
Trade and repair of motor vehicles,
motorcycles, personal and household 1,563,786 1,695,908 1,868,423
goods Financial 622,404 684,088 763,699
Intermediation 979,129 1,105,120 1,236,489
Real estate, renting, and business activities
Public administration and defense, 372,304 404,323 455,476
compulsory social security 838,663 912,502 1,020,455
Other services

Gross domestic product 9,003,480 9,706,268 10,564,886

Net factor income from the rest of the 1,848,952 1,891,937 2,043,843
world

Gross national product 10,852,432 11,598,205 12,608,729

*Housing includes real estate and ownership of dwellings.

Source: National Statistical Coordination Board
LESSON 2.2 ECONOMICS AS AN APPLIED SCIENCE
Applied economics is the application of economic theory and econometrics in specific settings with the
goal of analyzing potential outcomes. As one of the two sets of fields of economics (the other sets of being a
core1), it is typically characterized by the application of the core, referring to economic theory and econometrics,
as a means of dealing with practical issues in fields that include demographic economics, labor economics,
business economics, agricultural economics, development economics, education economics, health economics,
monetary economics, economics history, and many others. John Neville Keynes is attributed to be the first to use
the phrase “applied economics” to designate the application of economic theory to the interpretation and
explanation of economics phenomena.
We should be able to improve human welfare among Filipinos by the investigation and analysis of
economic problems in the real world. Applying economic theory in our lives means trying to address actual
economic issues and be able to do something about it. The concept of scarcity and choice should encourage us as
individuals to help in our own way to provide solutions to the country’s economic problem.

APPLIED ECONOMICS IN RELATION TO PHILIPPINE ECONOMIC PROBLEMS

A solid understanding of economic principles and how they are applied in real-life situations can serve as
significant tools to help address the country’s economic problem. For example, understanding the existence of
scarcity can help Economics students analyze how to maximize the use of available resources in order to
overcome scarcity. Knowledge of economic theories such as Law of Supply and Demand can help in analyzing
why prices are high and what the government can do to help bring down prices.

The Philippines’ Basic Economic Problems

The Philippine economy has grown significantly during President Benigno Simeon Aquino’s
administration. With a growth rate of the country’s Gross Domestic Product of 6.8% in 2012, improving to 7.2%,
and slowing down to 6.1% in 2014, these rates are an improvement of past rates preceding President Aquino’s
term. It is also higher than its Asian neighbors such as Malaysia, Thailand, South Korea, Hongkong, India, and
Indonesia (CIA World Factbook 2013).
Despite this admirable growth, people, especially the poor, have been complaining of non-inclusive
growth. Millions of Filipinos are claiming they experience hunger, or they still live below the poverty level.
Unemployment is still the main problem of the Philippine economy despite improvements reported by the
National Statistics office. Unemployment rate in the Philippines decreased to 6.4% in the second quarter of 2015
from 7.0% in the previous year. Philippines’ unemployment rate average is 8.85% from 1994 until 2017, reaching
an all-time high of 13.90% in the first quarter of 2000 and a record of low of 6.0% in the fourth quarter of 2014.
In July 2015, the Labor Force Survey (LFS) released by the Philippine Statistics Authority (PSA) showed the
country’s unemployment rate at 6.4 or an estimated 2.68 million individuals.