Introduction to MACROECONOMICS

I.
II.
III.

OBJECTIVES OF MACROECONOMICS
NATIONAL INCOME ACCOUNTING
ROLE OF THE CENTRAL BANK & THE GOVERNMENT IN THE ECONOMY

I. OBJECTIVES: Every nation aims to have economic growth with the ff. objectives:
Objective # 1:
Increase in the level of output
A. GROSS NATIONAL PRODUCT (GNP) vs GROSS DOMESTIC PRODUCT (GDP)
B. PRICE INDEX
Objective # 2:
Increase in the level of Employment Rate
A. EMPLOYMENT vs UNEMPLOYMENT RATE
B. TYPES of UNEMPLOYMENT
Objective # 3:
Gently rising / stable level of Prices
A. PRICES & INFLATION RATE
B. CAUSES OF INFLATION
C. TYPES OF INFLATION
D. CALCULATING INFLATION RATE
Objective # 4:
Increase in the level of Trade Market
A. EXPORTS vs IMPORTS
B. PROTECTIONISM vs. LIBERALIZATION
II. NATIONAL INCOME ACCOUNTING
A. THREE (3) APPROACHES TO NATIONAL INCOME ACCOUNTING
1. FINAL EXPENDITURE
2. INCOME
3. INDUSTRY ORIGIN
B. PROBLEMS WITH GNP ACCOUNTING
III. THE ROLE OF THE CENTRAL BANK & THE GOVERNMENT IN THE ECONOMY
A. MONETARY POLICY
1. WHAT IS MONEY?
2. BANGKO SENTRAL NG PILIPINAS
3. THREE (3) MONETARY POLICIES & THEIR EFFECTS
B. FISCAL POLICY
1. THREE (3) FISCAL POLICIES & THEIR EFFECTS
2. THE MULTIPLIER EFFECT

I. OBJECTIVES: Every nation aims to have economic growth with the ff. objectives:
Objective # 1:
Increase in the level of output
A. GROSS NATIONAL PRODUCT (GNP) vs GROSS DOMESTIC PRODUCT (GDP)
Table 1: GNP vs GDP
GROSS NATIONAL PRODUCT (GNP)
GROSS DOMESTIC PRODUCT (GDP)
- total market value of all FINAL goods and - total market value of all FINAL goods and
services produced by CITIZENS of a services produced WITHIN a country,
country, regardless of where it was regardless of the citizenship of the person who
produced;
produced it.
- basis: NATIONALITY
- basis: COUNTRY of PRODUCTION
GNP = GDP + NFIA
GDP = GNP NFIA
NET FACTOR INCOME FROM ABROAD (NFIA)
= income of Filipinos abroad income of foreigners in the Philippines
2 types of GNP/ GDP:
1. NOMINAL/ CURRENT GNP/ GDP
= PcQc
where Pc = current price
Qc= current volume of goods
2. REAL GNP/ GDP
= nominal GNP/GDP
price index/ deflator
Per Capita Real GNP
=
Real GNP
Per Capita Real GDP
= Real GDP
Population
Population
Refer to Figure 1: GNP & GDP by Industrial Origin, At Current Prices (1986 to 2000)
Figure 2: Per Capita: GNP & GDP. At Constant 1985 Prices (1990 to 2000)
B. PRICE INDEX/ DEFLATOR
PRICE INDEX the measure of average price changes of goods and services over time
- measures the change in he cost of living for an average family
3 TYPES: 1. GNP/ GDP Deflator
- overall measure of prices in the economy
- GNP DEFLATOR = Nominal GNP/ Real GNP
2. PRODUCER PRICE INDEX
measure the prices that producers receive for products at all stages of the
production process
3. CONSUMER PRICE INDEX
- measures the change in prices for a fixed market basket of goods and services
purchased by an average urban household
Table 2 : COMPONENTS OF THE CONSUMER PRICE INDEX (Prentice Hall)
Food & Beverage
Housing
Clothing
Transportation
Bread, beef, pork,
Shelter, rent, water,
Mens shirt & slacks,
New & used cars,
chicken, fish,
electricity,
womens dresses,
gasoline, tires, auto
potatoes, bananas,
appliances, furniture,
underwear, shoes,
repair, spare parts,
milk, sugar,
dishes, tools,
slippers, accessories, airfare, bus fare, taxi
restaurant meals,
plumbing services
flag down, insurance
Medical Care
Recreation &
Education &
Other Goods &
Entertainment
Communication
Services
Prescription medicine,
Audio & video
School books, cellular Cosmetics, toiletries,
doctors fee, dental
equipment, sports
services & units,
haircuts, banking
services, eye check
equipment, toys, video
personal computer,
services, legal fees,
up, hospital services
games hardware
internet access
laundry needs
Objective # 2:
Increase in the level of Employment Rate
A. EMPLOYMENT vs UNEMPLOYMENT RATE

Table 3: Employed vs Unemployed

EMPLOYED
Any person 16 years or older who:
1. works for pay for someone else or
for own business;
2. works without pay for 15 hours or
more per week in a family enterprise;
and/ or
3. has a job but has been temporarily
absent with or without pay due to
sickness, maternity leave, etc.
Employment rate (%) (LF)
=
employed
x 100
labor force
Employment Rate (%) (popn)
=
employed
x 100
population

UNEMPLOYED
Any person 16 years or older
who:
1. is not working;

Not in the LABOR FORCE

People who are not looking
for a job either because:
1. they do not want a job;
or

2. is available for work; and

2. they have
looking for one.

3. has made specific efforts

to find work during the
previous month
Unemployment rate (%) (LF)
=
unemployed x 100
labor force
Unemployment Rate (%) (popn)
=
unemployed x 100
population

given

Labor Force
= employed + unemployed
Population
= employed + unemployed
+ not in the labor force

B. TYPES of UNEMPLOYMENT
Table 4: TYPES OF UNEMPLOYMENT
TYPES
DESCRIPTION
EXAMPLE
FRICTIONAL
Occurs when people are laid off or take Clerk when owner of
time off from working
business retires
Accepted as part of an economy that is
working properly
SEASONAL
Occurs as a result of harvest schedules or Construction worker laid
vacations, or when industries slow down
off during rainy season
for a season;
A normal part of a healthy economy
STRUCTURAL
Occurs when workers skills do not match Automobile assembly line
the jobs that are available;
worker when the company
Can be overcome through retraining;
moves the factory to
An expected part of a properly working,
another country
continually advancing economy
CYCLICAL
Rises during economic downturns, or Steel worker is laid off
recessions, and falls when the economy
when a recession causes a
improves;
large decrease in the
A recurring part of the business cycle but
demand for steel
indicates that the economy is not working
properly
Refer to Table 5: Business Cycles
Guide Questions:
1. Which type of unemployment has the computer revolution likely caused?
2. Which type of unemployment best describes the situation of a farmer during
rainy season?
Objective # 3:
Gently rising / stable level of Prices
A. PRICES & INFLATION RATE

up

Inflation/ Deflation:
- rate of growth (+) or decline (-) of the overall level of prices from year to year;
- happens when many price rise simultaneously
Philips Curve increase in unemployment = decrease in Demand = surplus = decrease in Prices
B. CAUSES OF INFLATION
1. DEMAND - PULL
A rapid increase in the level of income increases the demand for various goods and
services. Since the increase in demand is drastic, production/ supply cannot easily cope
with the increase in demand, thus resulting to deficit.
When demand is greater than supply, prices tend to increase
2. SUPPLY/ COST - PUSH
An increase in the cost of production results to an increase in the prices of goods and
services.
C. TYPES OF INFLATION
1. MODERATE

- 1 digit % increase in prices (1 9%)

- normal part of economic growth
- 2 -3 digits % increase in prices (10 999%)
- unpredictable and may be destructive
- 1000% very rapid increase in prices
- short term, periods of recession or depression
- may be caused by political events such as wars
- caused by persistent unemployment particularly
during depression

2. GALLOPING
3. HYPERINFLATION

4. STAGFLATION

D. CALCULATING INFLATION RATE

INFLATION rate of Year A =
Ex. 2000 Inflation Rate

=
=

YEAR
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

CPI (ALL)
77.5
85.0
93.0
100
117.5
138.9
149.8
173.2
190.5
286.4
352.6

=
CPI (F&B)
78.5
86.0
94.0
100
115.6
132.6
162.0
162.5
176.5
271.5
332.0

CPI of Year A - CPI of Year B

x 100
CPI of Year B
CPI of 2000
- CPI of 1999
x 100
CPI of 1999
227.7
- 210.0
x 100
210.0
8.4% (percentage change in prices from 1999 to 2000)
CPI(clothing) CPI (H&R) CPI (FLW) CPI(services)
79.5
71.0
75.4
76.6
83.0
80.5
83.6
83.1
91.3
90.9
89.4
91.9
100
100
100
100
117.9
118.3
127.6
121.00
144.2
137.4
173.8
152.0
154.7
211.5
171.2
153.3
178.2
180.5
240.0
192.9
194.5
200.3
281.6
216.8
303.7
266.6
426.8
311.9
387.3
334.3
548.3
366.0

GNP & GDP

Current Prices

(in millions)

Constant 1985

4,000

1,050,000

3,500

1,000,000

3,000
2,500

950,000

2,000

900,000

1,500

850,000

1,000

800,000

500

750,000

0
1996

1997

GDP

1998

1999

2000

1996 1997 1998 1999 2000

GNP

GDP

GNP

Final Expenditure Approach

+
+
+

Personal Consumption
Government Expenditure
Gross Capital Formation

C
G

(Net Capital Formation + Depreciation)

Net Export
(Export Imports)

=
+

Gross Domestic Product

Net Factor Income From Abroad

NX
GDP
NFIA

(Y Filipinos Abroad Y Foreigners in the Phil)

+
=

(Statistical Discrepancy)
Gross National Product

SD
GNP

Industry Origin Approach

Agriculture Sector

Agri

(Agriculture, Forestry, Fisheries)

Industrial Sector

Industry

(Mining, Manufacturing, Water, Construction, Electric)

Service Sector

Service

(Trade, Services ,Transportation, Communication)

=
+
=

Gross Domestic Product

Net Factor Income From Abroad
Gross National Product

GDP
NFIA
GNP

Whats in the CPIs Basket?

5%
6%

6% 5% 5%

Housing
Food/Beverages
Transportation

40%

17%

Medical Care
Apparel
Recreation

16%

Other
Education and
communication

Components of the CPI

Housing

Food &
Beverage

Medical Care
Transport

Shelter
Rent
Water
Appliances
tools

Bread
Chicken
Vegetables
Restaurant
rice

cars
Tires
Jeepney fare
Bus fare
gasoline

Medicine
Physicians
fees
Dental services
Hospital Eye
care

Apparel

Recreation

Education

Others

Shoes
Watches
Womens dress
Mens shirts
accessories

Audio
equipment
Video rentals
Toys
Sports
equipment

School books
Cellular phone
services
Personal
computers
postage

Toothpaste
Cosmetics
Banking
service
Haircuts
Legal services

III. THE ROLE OF THE CENTRAL BANK & THE GOVERNMENT IN THE ECONOMY
A. MONETARY POLICY
1. WHAT IS MONEY?
MONEY anything that is generally accepted as a medium of exchange
Commodity money takes the form of a commodity with intrinsic value.
u Examples: Gold, silver, cigarettes.
Fiat money is used as money because of government decree.
u It does not have intrinsic value.
u Examples: Coins, currency, check deposits.
Money has four functions in the economy:
u Medium of exchange
u Store of value
u Unit of account
u Standard of deferred payment
Liquidity Properties of Money:
Easily transportable
Readily accepted and easily exchanged for goods
Easily divisible
TYPES of MONEY in the ECONOMY
3 RESAONS TO HOLD MONEY

M1

Transactionary
Coins, currencies, demand deposits,
travelers checks

Transactionary

Payment of bills, debts

M2

Broad
Everything in M1, savings, time
deposits, mutual funds

Precautionary

Emergency money, savings,

M3

Beyond
M2 + large time deposits

Speculative

Stocks, portfolio investment,

mutual funds

2. BANGKO SENTRAL NG PILIPINAS

a. CENTRAL BANK a bank which controls a countrys money supply through monetary policies.
b. FUNCTIONS of the CENTRAL BANK
1. CLEARING HOUSE FOR INTERBANK PAYMENTS
2. REGULATOR OF THE BANKING SYSTEM
3. LENDER OF LAST RESORT
4. MANAGER OF EXCHANGE RATES AND FOREIGN EXCHANGE

3. THREE (3) MONETARY POLICY TOOLS & THEIR EFFECTS

1. OPEN MARKET OPERATIONS

2. RESERVE REQUIREMENT

3. DISCOUNT RATE

EXPANSIONARY (Easy)
CB purchase bonds
RR (min.% of total assets
which commercial banks are
required to hold in money
balance)
DR (interest rates)

CONTRACTIONARY (Tight)
CB sells bonds
RR

DR

This diagram illustrates how the Bangko Sentral ng Pilipinas can use each of its Three (3)
monetary policy tools to expand (increase) or contract (decrease) money supply in the economy
Figure 3: MONETARY POLICY TOOLS & THEIR EFFECTS (Prentice Hall)

Cause: BSP increases

circulation
of
bonds
through bond sales.
Effect: Banks decrease
their reserves to buy
bonds
OPEN MARKET OPERATION

Cause: BSP increases

the discount rate.
Effect:
Banks
are
discouraged to borrow
from the BSP.

DISCOUNT RATE

DISCOUNT RATE

Cause: BSP increases

Reserve Requirements
Effect: Banks increase
their reserves inside BSP.
RESERVE
REQUIREMENT
Cause: BSP decreases
Reserve Requirements
RESERVE Effect: Banks decrease
REQUIREMENT their reserves inside
BSP.

Cause: BSP decreases

the discount rate.
Effect:
Banks
are
encouraged to borrow
from the BSP.
OPEN MARKET OPERATION
Cause:
BSP
decreases
circulation of bonds through
bond purchase
Effect: Banks increase their
reserves by selling bonds

Guide Questions:
What can the BSP do to reserve requirements in order to reduce money supply?

C. FISCAL POLICY
1. TAXATION SYSTEM in the PHILIPPINES
2. TWO (2) FISCAL POLICIES & THEIR EFFECTS
This flowchart shows the expected effects of the governments expansionary fiscal policies, intended
to encourage economic growth & contractionary fiscal policies designed to slow economic growth.

Figure 4: FISCAL POLICY TOOLS & THEIR EFFECTS (Prentice Hall)

EXPANSIONARY FISCAL POLICIES

CONTRACTIONARY FISCAL POLICIES

Increase Spending

Cutting Taxes

Decreasing Spending

Raising Taxes

Company profits
increase

Business
investment
increases
AND
Consumer
Spending rises

Company profits
decrease

Business
investment

Worker pay
rises

Worker pay
falls

decreases
Consumer
Spending falls

Aggregate demand increases

Aggregate demand decreases

Prices rise

Prices fall

Suppliers of goods increase production

Suppliers of goods cut production

Unemployment levels drop

Unemployment levels rise

Guide Questions:
1. What kind of fiscal policy can lead to a decrease in production?
2. What effect do rising prices have on unemployment?
3. Why would a nation want to slow economic growth?

3. THE MULTIPLIER EFFECT :

This chart shows how the multiplier effect might work if the government spent an
additional P10billion to avoid recession.
Figure 5: An EXAMPLE of a MULTIPLIER EFFECT (Prentice Hall)

The government, to stimulate the economy, buys an extra

P10billion in goods and services from private companies.
(government expenditure)
P 10 BILLION

Those businesses spend the P10billion on

wages, raw materials, & investment in plant & equipment.
P 10 BILLION

The workers, suppliers, manufacturers, builders, bankers, &

stockholders who receive the P10billion spend 80% of it, or P8
billion.
P 8 BILLION

The household and other recipients of the P 8 billion spend

80% of that, or P6.4 billion, largely on consumer goods and
services.
P 6.4 BILLION

The sellers of the goods and services spend 80% of the P6.4
billion,
or P 5.1 billion, on wages, raw materials, finished goods, and
supplies.
P 5.1 BILLION
Guide Questions:
1. In this example, how much of the governments original P 10 billion did
private businesses spend?
2. How much national income has the governments original P10 billion generated?
Transition Term SY 2014-2015

Fe Elisha Isidro-Banez