MACROECONOMICS

- It is a branch of economics that deals with aggregate economy or economy as a whole.

3 Macroeconomic Problems

 Economic Growth
 Unemployment
 Inflation

Economic Growth

- is the increase in the real output of an economy or the increase in the Real Gross Domestic Product

Advantages of Economic Growth

1. Increase in the standards of livings

- increase in the economic growth leads to more investments which will create more jobs. Increase in
the employment rate will lead to higher level of income which will result to higher standard of living

Increase in Fiscal Dividend (Tax Collection)

- increase in the economic growth will create more jobs leading to a higher level of income. Due to
such increase, the government will now be able to collect more taxes coming from the income of its
citizens.

Investment

- this refers to investments on capital (equipment, machineries, tools). Higher economic growth
encourages more investments in the country

Disadvantages

1. Externalities
- Effect to the third party
- Positive Externalities
- Negative Externalities
2. Inflation
- When there is an increase in the economic growth, it is expected that there will be inflation due to
the increase in the demand of the products; this is also called as Demand Pull Inflation.
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Gross Domestic Product is also known as aggregate demand. An increase in the GDP means an increase
in the Aggregate demand. An increase in demand given the demand is constant result to increase in the
price. Such increase in the price, in macroeconomic term, is called the demand pull inflation (e.g.
increase in GDP of Japan, increase in prices of goods)

Gross Domestic Product

- Measures the total market value of final goods and services produce by an economy within a
specific period of time.
- To get the total market value-Price x Quantity produced by an economy
- Only the final product are being measure in GDP to avoid double counting (e.g. ingridients of
making pandesal are flour, yist, egg etc.; in counting the pandesal, it is already presumed that the
ingredients in making such is already counted)
- For a period of time- measuring GDP cound be quarterly(Quarter I, II, III, IV) or annual

Nominal GDP vs Real GDP - Nominal GDP also known as GDP at current prices

Real GDP also known as GDP at constant prices or GDP adjusted to inflation

Year Price Quantity NGDP (Current RGDP (*Base Year

Pricex Current Pricex Current
Quantity) Quantity)
2010 10 100M 1B 1B
2011 20 300M 6B 3B
2012 30 600M 18B 6B

*base year price will be the price for 2010 which is P10
Based on the table, there are different values of NGDP and RGDP, however, in determining the
economic performance of a country, RGDP is being used since it reflects the true economic performance
of a country by using the base year as the price(because of this, the GDP is will not be affected by the
increase in the prices of goods or inflation. Remember that in measuring the economic performance,
output produced by the country is important.

Year Price Quantity NGDP (Current RGDP (*Base Year

Pricex Current Pricex Current
Quantity) Quantity)
2010 10 100M 1B 1B
2011 20 75M 1.5B 750M
2012 30 600M 18B 6B

Based on the table above, in 2011, the quantity produced is only 75M but because of the increase in
price on the same year, the NGDP still increases from 1B to 1.5B while economic growth decreases in
RGDP from 1B to 750M. this only shows that RGDP, shows the true economic performance of the
country.

Different approaches in measuring GDP

1. Final Expenditure Approach- is the summation of the expenditure of the different sector in the
economy.
Household Sector- Consumption (C) on Durable and Nondurable goods and services.
Business Sector- Investment (I) on capital
Governement Sector – Government Expenditure (GE)
Foreign Sector- Net Export (NE) to get the net export=X-M

GDP=C+I+GE+NX
2. Factor Income Approach- is the summation of the income payments of the different factors of
production(Land-Rent, Labor-Wages, Capital- Interest, Entreprenuership-Normal Profit)
3. Value-Added From Industrial Origin Approach-summing up theall value added of the goods
SUPPLY CHAIN PRICE OF PALAY VALUE-ADDED
FARMER 5000 5000
TRADER 5500 500
MILLER 6000 500
WHOLESALER 7500 1500
RETAILER 8500 1000
CONSUMER 9000 500
P9,000

In -Added From Industrial Origin Approach, the Final Price of the Product is equal to value-added.

The final price of the product is P9,000 which is equal to the value-added which is P9,000.
GDP vs GNI

Gross National Income measures the total market value of final goods and services produce by the
citizen of a country within a specific period of time.

GDP refers to the place where the goods and services are produced. Hence, products produced by
foreigners in the Philippines are included in GDP but not the product produced by OFWs.

GNI refers to the person who are producing the goods and services irrespective where they are
producing, therefore, OFWs’ product are included in GDP while the foreigner’s producing in the country
are not.

GDP per Capita

GDP per Capita=RGDP/No. of Pop

P10= P100M/10M

Interpretation: Every Filipino contributes P10 in the GDP of the Philippines.

Shortcomings of GDP

Some of the economists claim that GDP does not show the true economic performance of a country
since it only reflects the output produced by the economy. Other countries devise economic indicator
that will measure the economic performance as well as the welfare of its citizens(example: Gross
National Happiness)

GDP does not include the output coming from the informal sector, secondhand sale, and subsistence
economy.

UNEMPLOYMENT

- Refers to those who are willing and able to work but cannot find job

Labor force- refers to those 15-60 yrs old and those who are willing and able to work.

Okun’s Law- by Arthur Okun states that the 2-3% increase in the RGDP results to 1% decrease in the
unemployment. Hence, there is an inverse relationship between Unemployment rate and economic
growth.

Types of unemployment

1. Frictional Unemployment- refers to those who are searching for job or those transferring from one
job to another. (Examples are the fresh graduate students who are searching for job, ENDO)
Solution of the government: Job Fairs
2. Structural Unemployment- due to skills mismatch (example: farmers who become unemployed
since the land which they originally tilled was converted into subdivision, such subdivision projects
needs construction worker and not farmers). Solution of government- TESDA
3. Cyclical Unemployment- due to recession or depression and the government has no solution for
such

Inflation

- Increase in the general prices of commodities

Consumer price index- measures changes in the price level of weighted average market basket of
consumer goods and services purchased by household.

(imagine that you have P1,000 pesos for your grocery, the push cart represent the consumer price
index. )

Real wages

- Wages which are adjusted for inflation, the prevailing minimum wage in NCR which is P537 is a
nominal wage

Types of inflation
1. Cost-push inflation- increase in the prices of goods due to the increase in the cost of production.
Example: since the imposition of TRAIN LAW, taxes on goods and services increases, tax is
considered a production cost. Increase in the cost of production will result in the increase in the
prices of goods and services.
2. Demand-pull inflation- increase due to the increase in the demand for a product.

Solution of Government

Cost of living Allowance (COLA)