MACROECONOMICS

Two divisions of economic theory:

 Microeconomics- study of the detailed
behavior of single economic unit such as
the household and the business firms
OBJECTIVE: Efficient allocation of productive
economic resources
 MACROECONOMICS
 Macroeconomics - study of the economy in the aggregate
(level of output, inflation, unemployment)
GOALS
 Full employment

 Price stability

 Economic growth

 External balance
 Measures of Economic Performance

 Gross National Product (GNP)- total market value of all

final goods and services produced by the nation’s
economic resources in one year
GNP= C + Ig + G + Xn
where:
GNP = value of the output C = household consumption
Ig = value of investment G = government purchases
Xn = X-M
X = value of export M = value of import
Measures of Economic Performance

Gross Domestic Product (GDP)

- measurement of all outputs of goods
and services produced in a given year
within the country’s domestic jurisdiction
- total value of output of goods and
services produced by the economy
Products Produced by the Economy

 Final Goods – goods produced which are ready for

consumption (clothing)
 Intermediate goods – need further processing before
they become final goods (steel)
 Crude materials- goods that enter the market for the
first time. They have not been manufactured nor
fabricated. They have to undergo further processing
before they become intermediate or final goods
(wheat, live animals sold in the market)
 Transactions Excluded in GNP
 purely financial transactions
 second hand sales
 illegal transactions

Purely Financial Transactions:

- public and private transfer payments
- buying and selling of securities
 VALUE-ADDED APPROACH
Production Stages for Buying Price Selling Price Value added
Product A

Farmer/Producer --- 17 17
Trader 17 18 1
Grain Miller 18 25 7
Wholesaler 25 27 2
Retailer 27 32 5
Total 119 32
 Ways to compute GNP
 INCOME /ALLOCATIONS APPROACH
- earnings derived from the different sectors and owners of
the factors of production are added

Income charges:
COE-Compensation of Employees (Wages and salaries)
R-Rents
I-Interest
Profits
Pr I-Proprietors’ Income (income from sole
proprietorship, partnerships and cooperatives)
CP-Corporate Profits (Dividends, Corporate Income
Taxes, Undistributed Corporate Profits)
 Ways to compute GNP

Non-income charges:

Capital Consumption Allowance (CCA)

Indirect Business Taxes (IBT)

 GNP = COE + R + I + Pr I + CP + CCA + IBT

 Ways to compute GNP
 EXPENDITURES /OUTPUT APPROACH
- Expenditures of all the sectors of society are added

C = personal consumption expenditures (expenditures of the

household sector on durables, non-durables & services)
Ig = gross private domestic investment ( expenditure of the
business sector on residential construction, non-residential
construction, producer’s durable equipment, etc))
G = government purchases of goods and services
(expenditure of the government sector, local and national)
Xn = trade balance or net export

GNP = C + G + Ig + Xn
 Ways to compute GNP

 GNP = Personal Consumption Expenditures + Gross

Private Domestic Investment + Government
purchases + Net exports +/- statistical discrepancy

Thus, GNP = Gross Domestic Product plus (+) or

minus (-) Net Factor Income from abroad
 The Three Kinds of Economy
 Expanding/Growing Economy
- when Gross Private Domestic Investment
exceeds or is greater than depreciation
In
Ig CCA
C In
Stock of Capital
Stock of Capital
G
Jan 1 Year’s GNP Dec 31
 The Three Kinds of Economy
 Static Economy
- when Gross investment and depreciation (capital
consumption allowance) are equal

Ig = CCA

C
Stock of Capital
Stock of Capital
G
Jan 1 Year’s GNP Dec 31
 The Three Kinds of Economy
 Declining Economy
- when Gross Private Domestic Investment is less
than depreciation
CCA
Ig
C
Stock of Capital
Stock of Capital
G
Jan 1 Year’s GNP Dec 31
 Other Social Accounts
GROSS NATIONAL PRODUCT
Less: Capital consumption allowance
Equals: NET NATIONAL PRODUCT
Less: Indirect business taxes
Equals: NATIONAL INCOME
Less: Social Security Contributions Incomes earned but not received
Undistributed Corporate Profits
Corporate Income Taxes
Plus: Transfer payments Income received but not earned
Equals: PERSONAL INCOME
Less: Personal taxes
Equals: DISPOSABLE INCOME
Less: Personal Consumption Expenditure
Equals: PERSONAL SAVINGS
Consumption, Saving &
Investment
 Personal Income and Consumption
   Personal income - the sum of compensation
for employees, incomes of unincorporated
enterprises, dividends received from corporations
and net earnings and rents of persons, and all net
current transfers.
 Disposable income - income that persons can
freely use either for consumption/expenditure or
for saving.
 Flow of Disposable Income
Consumption Income-
*Food
Consumption
*Clothing
*Education - Investment
*Medical Care Chain

Disposable
Income
Bank
Deposits

Income
Saving Earning
Activity

Cash
Hoarding
 Adjusting the GNP for Price Changes

 How to adjust the GNP?

Assume first that the economy produce only one commodity
 First, select the base year – as a reference point or as bench
mark
By comparing the prices of previous and ensuing years with the
base year price, we can determine how much prices have
increased (or decreased) from the base year, in percent.
 Second, determine the price index
Price in a given year
Price Index = Price in the base yearX 100
 PRICE INDEX
 The price index in the base year is 100 percent but
expressed in decimal, thus, it is equal to 1

GNP of certain year

Real GNP = Price index (as decimal)
of the same year
 Adjusting the GNP for Price Changes
(1) (2) (3) (4) (5)
Year Output Price Unadjusted/ Price Index (%) Adjusted or real G
(Q) (PhP) Nominal/Money GNP (PhP)
GNP (PhP) (3)/(4)
(1) X (2)
1 5 10 5 x 10 = 50 1010 x100 = 100 501 = 50
decimal = 1
2 7 20 140 2010 x 100 = 200 1402 = 70
decimal = 2
3 8 25 200 2510 x 100 = 250 2002.5 = 80
decimal = 2.5
4 10 30 300 30/10 x 100= 300 300/3 = 100
3
5 11 28 308 28/10 x 100 = 280 308/2.8 = 110
2.8
 Adjusting the GNP for Price Changes
(1) (2) (3) (4) (5)
Year Output Price Unadjusted/ Price Index (%) Adjusted or real G
(Q) (PhP) Nominal/Money GNP (PhP)
GNP (PhP) (3)/(4)
(1) X (2)
1 5 10 5 x 10 = 50

2 7 20 140

3 8 25 200

4 10 30 300

5 11 28 308
Adjusting the GNP for Price
Changes
Year Quantity Price GNP
(1) (2) (3) (2) x (3)

       
1 100 P15 P1,500
2 100 30 P3,000
3 100 45 P4,500
4 100 60 P6,000
5 100 75 P7,500
Year Nominal GNP Price Real GNP
Index

       
1 1,500 50 1500/50 x 100 = 3000
2 3,000 100 3000/100 x 100 = 3000
3 4,500 150 4500/150 x 100 = 3000
4 6,000 200 6000/200 x 100 = 3000
5 7,500 250 7500/250 x 100 = 3000
 COMPARING GNPs

YEAR\GNP X Y Z TOTAL TOTAL

(Q) (PhP)
1 100 200 300 600 335,000*

2 200 300 100 600 300,000

3 300 100 200 600 310,000
Px = 400 Y1 = 100 (400) + 200 (500) + 300 (650) = 335,000
Py = 500 Y2 = 200 (400) + 300 (500) + 100 (650) = 300,000
Pz = 650 Y3 = 300 (400) + 100 (500) + 200 (650) = 310,000
 Adjusting the GNP for Price Changes
(1) (2) (3) (4) (5)
Year Output Price Unadjusted/ Price Index (%) Adjusted or real
(Q) (PhP) Nominal/Money GNP (PhP)
GNP (PhP) (3)/(4)
(1) X (2)
1 5 10 50 _____________ _____________

2 7 20 140 _____________ _____________

3 8 25 200 _____________ _____________

4 10 30 300 _____________ _____________

5 11 28 308 _____________ _____________

 THE BUSINESS CYCLE:
UNEMPLOYMENT AND INFLATION

ea k
Level of P
Growth
Business a k

ery
Pe Trend
Activity Re

v
a k

o
e ce
Recovery
P

c
ss

e
io

R
n
Re
c
ess

gh
io n

o u
Tr

ug h
Tro

Time
 Phases of the Business Cycle

 Peak – economy is at full employment and national

output is very close to capacity; price level is likely
to be rising
Recession – output and employment both decline; price
tend to be inflexible or sticky in a downward
direction; price level is likely to fall only if the
recession is severe and prolonged (depression)
Trough – output and employment “bottom” out at their
lowest level
Recovery – the economy’s levels of output and
employment expand toward full employment
 Types of Unemployment

Unemployment (labor) refers to the number of

persons unemployed as a percentage of the civilian
labor force

 Frictional Unemployment
 Cyclical Unemployment
 Structural Unemployment
Measurement of Unemployment
Three Groups of Population
 Minor

 Not in the labor Force

 Labor Force

Unemployment Rate
Unemployed X 100
Labor Force
 Inflation & Deflation
Causes of Inflation
 Demand Pull Inflation
 Cost Push
 Wage Push
 Profit Push
 Commodity
 Structural Inflation
Redistributive effects of inflation
1. Fixed money income groups
Inflation redistributes real income away from fixed
income receivers
2. Among Savers
As prices rise, the real value or purchasing power
of consumers decline, so that saving deteriorate.
3. Debtors and Creditors
Inflation tends to benefit borrowers (debtors)
but tends to penalize the creditors (lenders)
 Determination of National Income

 Aggregate Demand = Aggregate Supply

C + I + G + (X - M) = Y

Aggregate demand – represents the total amount that

all economic agents want or plan to spend on domestic
goods and services
 Simple Income Determination
 4 sectors Expenditures
 Household Personal Consumption (C)
 Business Gross Investment (Ig)
 Government Government Expenditures (G)
 Foreign Export-Import (Xn)
Income Determination
 Given a two-sector economy model with the
following functions:
 Personal Income/Disposable Income (Y)
 Consumption  C = a + bY
 a = value of Consumption at zero income
 b = slope , that is, the amount spent for every peso income
 = marginal propensity to consume (mpc)
 1- b = marginal propensity to save (mps)
 Thus: mpc + mps = 1
 Savings Y–C
 S = Y - (a+bY)
 = Y – a - bY
 = - a + (1-b)Y
Income Determination
 Example
 C = level of consumption
 = 100 + 0.75 Y
 S = I; I = 150 (level of investment)
 Simple Income Determination
Condition for equilibrium:
Aggregate Demand = Aggregate Supply
Y=C+I C = 100 + 0.75 Y
Y = 100 + 0.75 Y + 150 C = 100 + 0.75 (1000)
Y = 250 + 0.75 Y C = 850
Y – 0.75Y = 250
0.25 Y = 250 S=Y-C
Y = 250/0.25 S = Y – (a + bY)
Y = 1000 S = Y – a – bY
S = - 100 + (1-0.75) 1000
S = - 100 + 0.25 (1000)
S = 150
 
 The Consumption Schedule

45° line
Consumption

Consumption = Consumption
Disposable Income

Consumption at
0 income

Disposable Income
 Saving
The Savings Schedule

Saving=0
+ Saving

- Saving
Disposable Income
 The Consumption Schedule
45° line

Consumption
Consumption, Saving

Saving

Disposable Income
 Simple Income Determination

C = a + bY
where:
C= level of consumption
a = level of consumption when income (Y) is
zero
b = marginal propensity to consume (MPC)
b = change in the level of consumption/ change in
the level of income
= slope of the consumption function
1 > b >0
Y = level of income
 If there is no Tax: Y = Yd
Y = Personal Income
Yd = Personal Disposable Income

Then: Y = C +S
Where : Y = Personal Income (Personal Disposable Income)
C = Personal Consumption
S = Personal Savings

S = Y – C ; C = a + bY , but Y = Y, then; = - a + (1-b) Y

1- b or (1-MPC) = Marginal Propensity to Save (MPS)

= Slope of the savings function
= Change in savings/change in disposable income
C C,I

C+I

C
C= a +bY

S= -a + (1-b) Y

I
Y
Y Y
Y* Y*
 Simple Income Determination
( Consumption, Savings & Income Determination)

Given a model: Y = C ;where: C = a + bY

Condition for equilibrium: aggregate demand= aggregate supply
or Injections = Leakages
(I,G) = (T,S)

If a = 100 Y = a + bY
b = 0.75 Y = 100 + 0.75Y
Y = 400
S = -a + 1-b)Y
= -100 + (1-.075)Y
= -100 + 0.25Y
= -100 – 0.25(400) = 0
Given a two sector model: Y = C + I
Where : C = 100 + 0.75Y
I = 150

Y = 100 + 0.75Y + 150 change in income Y = 1000-400

Y = 250 + 0.75Y = 600
Y – 0.75Y = 250 change in income Y = multiplier (k) x I
0.25Y = 250 k = 1/MPS = 1/1-b
Y = 250/0.25 k = 1/0.25 = 4
Y = 1000 change in Y therefore is : 4(150) = 600

S = -100 + 0.25(1000) = 150

To check : I + G = S =T ; but: G & T = 0 ; so: I = S

150=150

Multiplier = measure the change in the level of income due to the

change in aggregate demand
 Theories of Consumption
1. Absolute income theory – consumption is a function of
the current level of income (John Maynard Keynes)

2. Relative income theory – consumption is a function of

what one is accustomed to (James Duesenberry)

3. Permanent income theory – consumption is a function of

permanent income and transitory income (Milton
Friedman)