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Introduction to Macroeconomics
Jason P. Alinsunurin/ Lecturer, EC102
The Circular Flow Diagram
A world composed of only households and firms A world composed of only households and firms A world composed of only households and firms A world composed of only households and firms 
FIRMSFIRMSFIRMSFIRMSHOUSEHOLDSHOUSEHOLDSHOUSEHOLDSHOUSEHOLDS
PAYMENTS FOR GOODS AND SERVICESGOODS AND SERVICESFACTOR SERVICESFACTOR PAYMENTS:WAGES, INTEREST, RENT, PROFIT
 
Other economic activities/ agents not captured in CFD•
Government spending
 –Spending of the government; payment to firms
•
Government payments for factors (inputs
)
 –
Payment of government to workers, rentals tobuildings, etc.
•
Transfer payments
(payments wherein one partyis not obliged to deliver a good or service in returnfor a payment)•
Taxes
 –Taxes paid on income, property, goods and services,.
•
Transactions with the foreign sector 
 –Exports and imports
The Economic Output
•
Gross Domestic Product (total value of all finalgoods and services produced of an economy)
 –
Market Value: price per unit of the good multipliedby the quantity produced
•Vi=Pi * QiGDP only measures final goods (vs. intermediategoods)
•When it is divided by the total population, wewould be getting the average per capita income or GDP of each person in the economy•Thus the per capita GDP can be more comparablewith other countries
How do we measure GDP?
•Expenditure Approach-Calculating the sum of allexpenditures on final goods
 – 
Σ
(Price per unit* quantity sold)
•Income approach-Measures the contribution of different factors of production to the value of a good.
 –
GDP= wages + rent + profits + rent
•Value Added-Calculated by taking the differencebetween the salesand the sales from other firms
 –
Value Added= sales –purchases from other firms
The Approaches would be equivalent
•The three approaches just represents different viewsof the transaction.•In any sale of a final good or service, one party makesa payment (expenditure) and another party receives apayment (income)
 –
Expenditure approach-GDP is calculated from the sidemaking the payment
 –
For the income approach, we simply identify how theincome is divided.
 –
For value added: firms pay factor payments tohouseholds. The payment is the income of households.
 –
STATISTICAL DISCREPANCY-captures reporting andrecording errors that cause GDP estimates to differ.
 
The Expenditure Approach
•
GDP= C + I + G + NX
 –C is the personal consumption expenditure, I is for Gross Domestic Capital Formation or InvestmentSpending, G is for Government Spending and NX isfor Net Exports.
 –NX= X-M
, where X is for Exports and M is for Imports.
•
GNP= GDP +
Net factor incomefrom the rest of the world (eg:remittances)
•Compensation of employees
 –
Salaries and wages
•Net operating surplus-an item that lumps together sources of income other than labor 
•Depreciation
 –
Consumption of existing capital stock, and allowancefor wear and tear.
•Indirect taxes less subsidies
 –
Taxes on the use or purchase of goods and services,and also grants of the government to firms.
Items in Income approachItems in the Value Added or Industrial Origin Approach
•Aggregated into industries
 –
Agriculture, fishery and forestry
•Production of agricultural crops, ornamental plantsand livestock. Aquaculture, municipal fishing, andharvest of marine products. Also logging andgathering of forest products –
Industry
•Mining, quarrying, manufacturing, constructions andutilities. –
Services
•Transportation, trade, finance, real estate, privateservices, government services
Nominal and Real GDP
•Prices change•How are we going to take account of the effects of changes in prices?
The Philippine GDP Accounts
Nominal and Real GDP
•GDP at current prices: Nominal GDP•GDP at constant prices: Real GDP
30000 15000 
NominalGDP
20000 200 100 10000 100 100 
BukoPie
10000 100 100 5000 50 100 
Icecream
ValuePriceQuantityValuePriceQuantity
Good
Year 2Year 1
Price index
•Measures the cost of purchasing a given bundle of goods in one period relative to the cost of purchasing a given bundle of goods in the baseyear.•Ex: price index is 125---prices are 25% higher inthat year compared to the base year.•GDP Deflator 
Real GDP= (Nominal GDP/ GDP Deflator)*100
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