 Macroeconomics is the study of the economy

as a whole
 Economic performance  economic growth
 Economic Indicators:
Prices  inflation, interest rate, foreign
exchange rate
Work  employment/unemployment
Income  GDP and GNP [GNI]
GNI = Gross National Income
Inflation refers to the increase in the average
prices of a basket of goods and services.

Inflation rate indicates how fast the increase

is.
Consider the following:
January 2023, Π = 8.7%
March 2023, Π = 6.6%
May 2023, Π = 6.1%
June 2023, Π =5.4%
Consumer price index (CPI) is the indicator
for the average prices of a defined basket.

1. Current basket has 270+ to 690+ items

depending on the province
2. Prices are collected in 82 provinces,
including NCR and 2 major cities
3. Current reference year is 2018 (previous,
2006; 2000)
Consumer price index (CPI) is the indicator
for the average prices of a defined basket.

Broad categories of food and non-alcoholic

beverages (41.5%); housing, water, electricity,
gas, & other fuels (23.7%); and transport (5.6%)
constitute about 71% of the Philippine CPI.
Other items such as rice and corn, fruits and
vegetables, meat, and natural gas & petroleum
account for 20% of the Philippine CPI.
Food Inflation refers to inflation on the food
items in the CPI.

Inflation rate Food inflation rate

January 2023, Π = 8.7% 10.7%
March 2023, Π = 6.6% 9.3%
May 2023, Π = 6.1% 7.4%
June 2023, Π =5.4% 6.7%

Year 2022, Π = 5.8% 5.9%

Q: Who collects the price statistics?

A: Philippine Statistical Authority (PSA)

Data collection is monthly. Data release is

after one(1) month (during 1st week of the
month).
Inflation CPI this year – CPI last year
= x 100
rate CPI last year
Example Year CPI Inflation rate
(2018=100)
May 22 113.9 5.4
Jun 22 114.9 6.1
Jul 22 115.8 6.4
Aug 22 116.3 6.3
Sep 22 116.8 6.9
Oct 22 117.9 7.7
Nov 22 119.0 8.0
Dec 22 119.4 8.1
Jan 23 121.4 8.7
Feb 23 121.4 8.6
Mar 23 121.1 7.6
Apr 23 120.9 6.6
May 23 120.9 6.1
Headline Inflation refers to the overall inflation
in the country (i.e., inflation rate)

Core Inflation excludes selected food & energy

items in the headline inflation

Year-to-
Area May 2022 April 2023 May 2023
Date*

Headline 5.4 6.6 6.1 7.5

Core 2.8 7.9 7.7 7.8
1. Reduces the value of our money
1. Reduces the value of our money
2. Changes the relative prices of goods and
services; erroneous valuation
3. “Shoe leather” & “Menu” costs
1. Reduces the value of our money
2. Changes the relative prices of goods &
services; erroneous valuation
3. “Shoe leather” & “Menu” costs
4. Redistributes wealth (there are gainers &
losers to a price change)
5. Increases tax payables & tax revenues
1. Reduces the value of our money
2. Changes the relative prices of goods &
services; erroneous valuation
3. “Shoe leather” & “Menu” costs
4. Redistributes wealth (there are gainers &
losers to a price change)
5. Increases tax payables & tax revenues
6. Difficult to make long-term plans
Why do prices increase?

1. DEMAND-PULL FACTORS  AD
2. SUPPLY-PUSH FACTORS  AS
 Aggregate Demand (AD): the total amount the
different sectors in the economy are willing to
spend in a given period.

 AD is affected by fiscal and monetary policy

 AD is downward sloping: higher price index

means lower aggregate spending; vice versa
 Aggregate Supply (AS): total amount of goods
& services that producers are able to produce
in the economy in a given period. AS is
affected by the cost level and the productive
capacity of the economy.
Keynesian theory asserts that AD is needed to push
the economy to move to its full potential.
Active stabilization Policy

If government does not intervene, fluctuations

in the economy are going to destabilize
businesses and other activities.
In turn, the disruptions are going to result in
an increase in unemployment and decrease in
incomes.
Why do prices increase?

1. DEMAND-PULL FACTORS  AD

Increase in market size (i.e., population

increase): The aggregate demand curve
shifts up-right [vice versa]
Government spending on infra projects:
The aggregate demand curve shifts up-
right [vice versa]
Consumption spending of households
rises [vice versa]
 GDP
Fiscal and Monetary Policy raise AD,
thus GDP along with inflation increase
 GDP
Too much AD can be inflationary (AS is fixed)
Why do prices increase?

2. SUPPLY-PUSH FACTORS  AS

Increase in oil price (affects energy prod

and transport): The aggregate supply
curve shifts up-left [vice versa]
Obsolescence and destruction of capital
goods: The aggregate supply curve shifts
up-left [vice versa]
Cost of production and productivity
GDP
 GDP
Applying fiscal or monetary policy when the
problem is AS can mean more problems.
 GDP
Applying fiscal or monetary policy when the
problem is AS can mean more problems.
Putting AD and AS together…
AS1 AS2

GDP
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is PhP 50. PH selling to US.

At US$ 1 = PhP 50, an American needs US$ 1.00 to buy

the good. Joe can afford the good; he buys it.
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is PhP 50. PH selling to US.

At US$ 1 = PhP 50, an American needs US$ 1.00 to buy

the good. Joe can afford the good; he buys it.
At US$ 1 = PhP 45, an American needs USD 1.11 to buy
the good. He needs more dollars.
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is PhP 50. PH selling to US.

At US$ 1 = PhP 50, an American needs US$ 1.00 to buy

the good. Joe can afford the good; he buys it.
At US$ 1 = PhP 45, an American needs USD 1.11 to buy
the good. He needs more dollars. The dollar is weaker
in this case, so the peso is stronger. Joe may not be
interested in buying to the Philippine good.
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is PhP 50. PH selling to US.

At US$ 1 = PhP 50, an American needs US$ 1.00 to buy

the good. Joe can afford the good; he buys it.
At US$ 1 = PhP 45, an American needs USD 1.11 to buy
the good. He needs more dollars. The dollar is weaker
in this case, and so the peso is stronger. Joe may be
less interested in buying to the Philippine good.
At US$ 1 = PhP 55, an American needs USD 0.91 to buy
the good. He needs less dollars.
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is PhP 50. PH selling to US.

At US$ 1 = PhP 50, an American needs US$ 1.00 to buy

the good. Joe can afford the good; he buys it.
At US$ 1 = PhP 45, an American needs USD 1.11 to buy
the good. He needs more dollars. The dollar is weaker
in this case, and so the peso is stronger. Joe may be
less interested in buying to the Philippine good?
At US$ 1 = PhP 55, an American needs USD 0.91 to buy
the good. He needs less dollars. The dollar is stronger
in this case, and so the peso is weaker. Joe may be
more interested in buying the Philippine?
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is $1. US selling to PH.

At US$ 1 = PhP 50, a Filipino needs PhP 50 to buy the

good. Jose can afford the good; he buys it.
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is $1. US selling to PH.

At US$ 1 = PhP 50, a Filipino needs PhP 50 to buy the

good. Jose can afford the good; he buys it.
At US$ 1 = PhP 45, a Filipino needs less pesos to buy the
good. The pesos is stronger, and the dollar is weaker.
Jose may be more interested in buying to the US good.
Other policies:
 Dollar in Local Currency
US$ 1 = PhP 45 US$ 1 = PhP 50 US$ 1 = PhP 55
The price of the good is $1. US selling to PH.

At US$ 1 = PhP 50, a Filipino needs PhP 50 to buy the

good. Jose can afford the good; he buys it.
At US$ 1 = PhP 45, a Filipino needs less pesos to buy the
good. The pesos is stronger, and the dollar is weaker.
Jose may be more interested in buying to the US good.
At US$ 1 = PhP 55, a Filipino needs more pesos to buy
the good. The peso is weaker, and the dollar is
stronger. Jose may be less interested in buying the US
good.
 0
10
20
30
40
50
60
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Peso to Dollar: Historical Trend

2020
2021
2022
Other policies:
 Exchange Rate and Trade Policy

◦ Depreciated currency (i.e., weak exchange rate) will

promote exports (because export will be cheaper to
sell) and discourage imports (because import will be
more expensive to buy).

◦ Appreciated currency (i.e., strong exchange rate)

will promote imports (because import will be
cheaper to buy) and discourage exports (because
export will more be expensive to sell).
 Aggregate Demand (AD): the total amount the
different sectors in the economy are willing to
spend in a given period.
AD is affected by fiscal policy and monetary
policy

 AD management is necessary to stabilize the

business cycle, induce income growth, and
create jobs (employment). AD needs the right
mix of fiscal policy and monetary policy
 Fiscal Policy: use of taxation (or subsidy) and
government expenditures
 Monetary Policy: management of money, credit,
and banking system

 Other Policy:
◦ Exchange Rate Policy: regulation and management of
the currency and currency reserves
◦ Trade Policy: use of tariffs, quotas, and other regula-
tions to encourage or restrict trade
 Aggregate Supply (AS): total amount of goods
& services that producers are able to produce
in the economy in a given period.
AS is affected by production cost and potential
output (productive capacity/productivity)
 Production cost  prices (of inputs)
 Potential output  volume (of inputs) and technology

Productivity is the average quantity of goods and

services produced per unit of labor  volume

Real GDP = Y; then, Y/L = productivity


 Outward or Inward  Upward or Downward

Potential Output Change Production Cost Change

 Fiscal Policy  Impact on AD is direct
 Monetary Policy on the spending channel

 Proposition
…can be used to affect
AS, albeit indirectly. That
is, spending to ultimately
support production cost
in & potential output of
the economy
Labor Force refers to the economically active
population in a country.
…people who are 15 years old-above and
either “Employed” or “Unemployed” in accor-
dance to the official definition of govt.
Those not counted in the Labor Force are in
the category “Not in the Labor Force”
Employed refers to those who have work and
those who have a job
Employed refers to those who have work and
those who have a job for at least one (1)
hour during the reference period and for pay
or profit, or without pay like work on the
farm or business enterprise that is being
operated by a member of the same house-
hold related by blood, marriage or adoption.
In short, a person is considered employed if
one is a paid employee, self-employed, or
unpaid worker in a family farm or business,
and worked for at least 1 hour
Those who have job but not at work…

because of temporary illness/injury, vacation

or other reasons.
Those who have job but not at work…

because of temporary illness/injury, vacation

or other reasons.
because the person expects to report for
work within 2 weeks from date of interview
or to start operation of a farm or business
within 2 weeks from date of interview
Person is employed as

Full-time: works 40 hours

Part-time: works less than 40 hours

Requirement in the definition is at least 1

hour during the reference period
Unemployment: textbook
Unemployed refers to those who have no
work or business and are actively looking
for work.
Unemployment: Government
Unemployed refers to those who have no
work or business and are actively looking
for work. Also considered as unemployed
are those who have no work or business
but are available to work yet not looking
for a job because of their belief that no
work is available or because of temporary
disability/illness, bad weather, pending job
application, or waiting for job interview
Unemployment: Government
Unemployed refers to those who have no
work or business and are actively looking
for work. Also considered as unemployed
are those who have no work or business
but are available to work yet not looking
for a job because of their belief that no
work was available or because of
temporary disability/illness, bad weather,
pending job application, or waiting for job
interview
Unemployment: Government
Unemployed refers to those who have no
work or business and are actively looking
for work. Also considered as unemployed
are those who have no work or business
but are available to work yet not looking
for a job because of their belief that no
work was available or because of
temporary disability/illness, bad weather,
pending job application, or waiting for job
interview
Unemployment: Government
Unemployed refers to those who have no
work or business and are actively looking
for work. Also considered as unemployed
are those who have no work or business
but not looking for a job because of their
belief that no work was available or
because of temporary disability/illness,
bad weather, pending job application, or
waiting for job interview
Underemployment
Underemployed refers to all employed who
express the desire to have additional hours
of work in their present job, or additional
job (like a second), or have a new job with
longer working hours.
Visibly underemployed persons are those
who work for less than 40 hours during the
reference period and want additional hours
of work.
Labor Force (LF) refers to the economically
active population in a country, 15 years and
older, who are employed or unemployed.
OFWs are not considered part of the labor
force in the Philippines; they are excluded in
the working age population.

Not in the Labor Force (NLF): students, house-

wives (homemaker), disabled, and retirees.
15-above age + 0-14 age = population
LF + NLF + OFW + 0-14 age = population
LF + NLF = working age
population
LF = economically
working age
population
LF = employed and
unemployed
Unemployment rate:

# of unemployed
ur =100x
labor force

Employment rate:
# of employed
er =100x
labor force
Labor Force Participation Rate:

LF
LFPR =100x
working age pop

LF
=100x
LF + NLF

LFPR excludes the OFW in the calculation.

OFW are excluded in the working age
population.
Q: Who collects the labor statistics?
Q: Who collects the labor statistics?

A: Philippine Statistical Authority (PSA)

Data collection in January, April, July, and

October. Data release after two(2) months
(2nd week of month)
October 2020 October 2020
 May 2023p
INDICATOR 90% Confidence Interval)
Estimate Standard Error
Lower Limit Upper Limit

Population 15 Years Old and Over (1,000) 77,170 2,107 73703.92 80635.22

1,316 48263.2 52592.71

Labor Force 50,428
55 353.0008 534.7812
New Entrants to the Labor Force 444
1,261 46185.92 50335.07
Employed 48,260
340 5101.317 6219.789
Underemployed 5,661
219 3326.076 4046.224
• Visible Underemployment1 3,686
192 1658.173 2290.633
• Invisible Underemployment2 1,974
137 1942.713 2392.203
Unemployed 2,167
912 25240.73 28242.5
Not in the Labor Force 26,742

Labor Force Participation Rate (%) 65.3 0.5 64.6 66.1

Proportion of New Entrants (%) 0.9 0.1 0.7 1.1
Employment Rate(%) 95.7 0.2 95.3 96.1
Underemployment Rate (%) 11.7 0.6 10.7 12.8
Visible Underemployment Rate (%) 7.6 0.4 6.9 8.3
Invisible Underemployment Rate (%) 4.1 0.4 3.5 4.7
Unemployment Rate (%) 4.3 0.2 3.9 4.7
…is the market value of all final goods &
services produced within a country in a
given period of time.
…is the market value of all final goods &
services produced within a country in a
given period of time.
…is the market value of all final goods &
services produced within a country in a
given period of time.
…is the market value of all final goods &
services produced within a country in a
given period of time.
…is the market value of all final goods &
services produced within a country in a
given period of time.
…is the market value of all final goods &
services produced within a country in a
given period of time.
…is the market value of all final goods &
services produced within a country in a
given period of time.

GDP in current prices  nominal GDP

vs
GDP in constant prices  real GDP
Example:
Quantity Price Total
Year 1 10 chairs 10 P100
20 tables 25 P500
P600
Example:
Quantity Price Total
Year 1 10 chairs 10 P100
20 tables 25 P500
P600

Year 2 10 chairs 15 P150

20 tables 25 P500
P650
Example:
Quantity Price Total
Year 2 10 chairs 10 P100
20 tables 25 P500
P600

Therefore, there is zero growth rate (0%) in Year 2.

Zero growth rate does not mean zero output.
 Consumption (C)
+ Government Purchases (G)
+ Investment (I)
+ Net Exports (NX) = Exports (X) – Imports (M)

GDP = Y = C + G + I + NX
 GDP = C + I + G + X – M

Suppose C = 400
I = 120
G = 100
X = 150
M = 200

 GDP = 400 + 120 + 100 + 150 – 200

GDP = 570
 i. HH Final Consumption Expenditure
ii. Gov Final Consumption Expenditure
iii. Gross Capital Formation
Iv. Net Exports

GDP = Y = C + G + I + NX
National Accounts
2010 2011 2012 2013 2014
CON 3,946 4,166 4,443 4,695 4,948
GOV 570 582 672 724 737
INV 1,184 1,217 1,152 1,497 1,514
EXP 2,886 2,813 3,053 3,020 3,385
IMP 2,884 2,868 3,008 3,169 3,354

Source of data: Philippine Statistical Authority. Figures are in

2000 constant prices. For these years: C is about 70% of GDP;
G is about 10% of GDP; I is about 20%
of GDP
i. Agricultural sector (A)
ii. Industrial sector (I)
Iii. Service sector (S)

GDP = Y = A + I + S
i. Agricultural sector:
Farming, hunting, and forestry
Fishing
ii. Industrial Sector:
Mining and quarrying
Manufacturing
Construction
Electricity, Gas, and Water
iii. Service sector (S)
Transport, storage, and communication
Trade and repair of motor vehicles
Personal and household goods /service
Financial intermediation
Real estate, renting, and business activities
Public admin, defense, social security
Other services
 Agriculture, Fishery, and Forestry
+ Industry (includes Manufacturing; Mining
and Quarrying, etc.)
+ Services (includes Transportation; Trade;
Financial Intermediation; Real Estate, etc)

GDP = Y = A + I + S
National Accounts
2010 2011 2012 2013 2014
AGRI 663 680 699 707 720
INDU 1,860 1,894 2,031 2,219 2,387
SERV 3,179 3,336 3,582 3,839 4,071

Source of data: Philippine Statistical Authority. Figures are in

2000 constant prices.
During these years: Agriculture is about 10% of GDP; Industry is
about 30% of GDP; and Services is about 60% of GDP
GDP as the market value of final goods and
services… can be also calculated via income:
GDP = wages + interest + rent + profit and
other income

Equation shows the four key sectors in the circular

flow model in terms of income of the factors of
production
National Income Accounting
Recall
Expenditure Approach
GDP = C + I + G + NX
Industry Approach
GDP = Agriculture + Industry + Services
Income Approach
GDP = wages + profit + interest + rent + incomes
Gross National Income (GNI)
…the same as Gross National Product (GNP)

GNI = GDP + Net Primary Income (NPI)

NPI = receipts and payments of employee

compensation paid to nonresident workers
and investment income (i.e. receipts and
payments on direct investment, portfolio
investment, other investments, and receipts
on reserve assets).
National Accounts
2010 2011 2012 2013 2014
CON 3,946 4,166 4,443 4,695 4,948
GOV 570 582 672 724 737
INV 1,184 1,217 1,152 1,497 1,514
EXP 2,886 2,813 3,053 3,020 3,385
IMP 2,884 2,868 3,008 3,169 3,354

Source of data: Philippine Statistical Authority. Figures are in

2000 constant prices. For these years: C is about 70% of GDP;
G is about 10% of GDP; I is about 20%
of GDP
National Accounts
2010 2011 2012 2013 2014
CON 3,946 4,166 4,443 4,695 4,948
GOV 570 582 672 724 737
INV 1,184 1,217 1,152 1,497 1,514
EXP 2,886 2,813 3,053 3,020 3,385
IMP 2,884 2,868 3,008 3,169 3,354
NPI 1,860 1,148 1,195 1,304 1,398
Source of data: Philippine Statistical Authority. Figures are in
2000 constant prices. For these years: C is about 70% of GDP;
G is about 10% of GDP; I is about 20%
of GDP
National Accounts
2010 2011 2012 2013 2014
AGRI 663 680 699 707 720
INDU 1,860 1,894 2,031 2,219 2,387
SERV 3,179 3,336 3,582 3,839 4,071

Source of data: Philippine Statistical Authority. Figures are in

2000 constant prices.
During these years: Agriculture is about 10% of GDP; Industry is
about 30% of GDP); and Services is about 60% of GDP
National Accounts
2010 2011 2012 2013 2014
AGRI 663 680 699 707 720
INDU 1,860 1,894 2,031 2,219 2,387
SERV 3,179 3,336 3,582 3,839 4,071
NPI 1,860 1,148 1,195 1,304 1,398

Source of data: Philippine Statistical Authority. Figures are in

2000 constant prices.
During these years: Agriculture is about 10% of GDP; Industry is
about 30% of GDP); and Services is about 60% of GDP
Growth rate and ave. income
GDP GDP this year – GDP last year
= x 100
Growth GDP last year
Rate

GDP per GDP this year

=
Capita Population this year
Growth rate and ave. income
GNP GNP this year – GNP last year
= x 100
Growth GNP last year
Rate

GNP per GNP this year

=
Capita Population this year
10 8.5 8.3
7.7 7.6
8 7.2 7.0
6.2 6.1 6.2 6.4
7.7
6 5.0 4.9 7.2
6.7 6.6 6.8
4.1 6.1
3.7
4 5.0 5.2
4.4 4.8
4.2
3.6 3.7
2 2.9

0 1.1
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
-2

-4

-6.7
-6

-8
GDP Growth Rate GNI Growth Rate
-10
National Accounts
Business Cycle
Business Cycle
 0
25
50
75
100
125
150
1970
1971
1972
1973
1974
1975
1976
1977
1978

Fig. 2.1. Short and transitory impact of crisis

1979
1980
1981
1982
1983
1984
1985
1986
1987
Business Cycle

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
 0
25
50
75
100
125
150
1970
1971
1972
1973
1974
1975
1976
1977
1978

Fig. 2.2. Extended but transitory impact of crisis

1979
1980
1981
1982
1983
1984
1985
1986
1987
Business Cycle

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
 0
25
50
75
100
125
150
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

Fig 2.3. Permanent (negative) impact of crisis

1980
1981
1982
1983
1984
1985
1986
1987
Business Cycle

1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
 0
50
100
150
200
250
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979 per capital 2000.
1980
1981

1980 = 100
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Business Cycle

1992
1993
1994
GDP per capita (USD, 2015 = 100),

capita of each year divided by GDP

normalized 2000 (that is, GDP per

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2000 = 100

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
 Active stabilization Policy

 Fiscal Policy and Monetary Policy are used to

raise AD when the level of aggregate economic
activity is too low or limited (i.e., expansionary
policy) and are used to stabilize AD when the
level of aggregate economic activity is (too)
high (i.e., contractionary policy)
 Countercyclical Macroeconomic Policy
 Fiscal Space; Monetary Space
 Against stabilization Policy

Government intervention is not effective because

fiscal and monetary policy take a long time to
effect. If government intervenes, the problem
might get worse (too late, too little, or even not
the right intervention).
Better if government focuses on goals like long-
term economic growth through the expansion
of productivity; that is, it focuses on AS.
 GDP = C + I + G + NX
 Net Domestic Product (NDP)
NDP = GDP - depreciation
 National Income (NI)
NI = GDP – depreciation – indirect taxes
 Disposable Income (DI)
DI = C + transfers
 Income can either be spent or saved,
Y=C+S Note: 1 = MPC+MPS

 Given Macro Identity: GDP = C + I = Y

 Then, C + S = C + I
S=I Equilibrium Condition
 At Equilibrium, Expenditure = Income,
E=Y

 GDP = C + I + G Expenditure
Y=C+S+T Income

 C+I+G=C+S+T
(S – I) = (G – T)
There is a tendency to focus on income (GDP)
and the growth of income (GDP growth rate).

People in general (including economists) tend to

use GDP as a measure of the level of economic
welfare or the standard of living in the country.
The welfare of a nation can scarcely
be inferred from a measurement of
national income.

Simon Kuznets

Colin Clark Richard Stone

Yet, the gross national product does not
allow for the health of our children, the
quality of their education, or the joy of
their play. It does not include the beauty
of our poetry…it measures neither our
wit nor our courage…neither our compas-
sion nor our devotion to our country. It
measures everything [ ] except that which
makes life worthwhile.

Robert F. Kennedy
GDP does not show other essential
items important to people’s welfare
or well-being:

 quality of the environment

 leisure time, social relations, culture
 childcare and housekeeping that are
non-marketed are also not counted
 distribution of income and wealth
It is problematic to equate increasing
income with increasing
happiness.

Richard A. Easterlin
But why care about GDP at all?
Income is a means to an end, not the
end in itself

High GDP  high Income being

able to purchase needs
Enables us to afford better schools, food
and health care; live in better housing;
construct better facilities and infrastruc-
ture, etc.
Gross National Happiness – value the collective
happiness in in terms of 4 pillars:
1. Sustainable and equitable socio-economic
development
2. Environmental conservation
3. Preservation and promotion of culture
4. Good governance
GNH was institutionalized in Bhutan (2018). It
was promoted by King Jigme Singye Wangchuk
in 1972; it shares the same philosophy as
sufficiency economy of King Bhumibol
Adulyadez (of Thailand)
• Income  purchasing capacity
Health  longevity
Education  literacy
• Human Development Index (HDI) introduced by the
UNDP in 1990; then revised in November 2010
Misery Index = inflation rate plus
unemployment rate

or

Misery Index = inflation rate plus

joblessness rate