Chapter 4 Personal Income- Personal Tax

Indicator for National Revenue Discretionary Income

Gross National Product Personal income- Personal Tax- Consumable

Expense
 Market value of all final products produced
by the resources of the economy during Gross Domestic Product
specified period of time
 Made in Philippines
 Gawa ng pinoy
 Limitations: GDP= C+I+G+(X-M)

 Exclude Imported Goods

C= Consumption
 Final Stage of Production
 Finished gods I= Investment

 Time when GNP and GDP computed G= Government Spending

 Kung kaylan ginawa dun ibibilang
X= exports
 To avoid double accounting
 Formula of GNP M= imports
i. GNP=GDP+FE
GDP per Capita = GDP
 FE- factor contribution
Total Population
abroad
ii. RGNP= Current GNP * 100
CHAPTER 5
CPI
 CPI- Customer Price Index Consumption

iii. GNP per Capita= GNP  is the act of using goods and services to satisfy
Total Population human wants
 Kinds of GNP  It is not the monopoly of households since
 Current GNP- using current inflation businesses and the government also uses goods

 Real GNP- effects of inflation are removed and services to attain some needs.
Household consumption
Personal Income
 Directly satisfies human wants and one of the
Savings+ Income + Investment determinants of national factor income.

Disposable Income
Business consumption
 Does indirectly inasmuch as business activities
provide the households with economic income
to meet consumption expenditures.
The Consumption Function
1. Consumption and Income
 Y=Cb+ C
 Y= factor Income
 Cb= Borrowings from economy stock
savings
 C= Change in Consumption
2. The Multiplier Concept
 The process of generating income
through the circular flow exchange
between the households and the firms.
 Multiplier coefficient- measures the
average number of times every peso of
inflow circulation
3. Consumption and Savings
 Generating more income means savings
outflows to retire more debts and
reduce what the economy owes to past
savings
Factors of Consumption
1. Framework
 Personal consumption is household’s
realized demand to satisfy current
needs.
2. Taste or Preference
 Depends on how the product satisfies
one’s desires.
3. Population
 Determines consumption needs and,
therefore, affects consumption
expenditures with a given income.
4. Income- the level of income can increase with
more infusions in the circular flow.
5. Price Level- individual product demand is
inversely proportional to price due to the
change in purchasing power and substitution
with other products.
6. Innovation and Promotion- can expand the line
of consumers’ choice and extend the influence
of demand factors on consumption and
propensity to consume income.
7. Engel’s Law and the Compositional Change in
Consumption Expenditure- the name Ernest
Engel in the 19th century found a relation
between the level of family income and the
composition of its consumption spending.
Theories in Consumption
 KEYNESIAN THEORY
o John Maynard Keynes
o Current real income is the most
important determinant of consumption
in the short run
CHAPTER 6
Investment
 Money committed or property acquired for
future income
 To mean additions to real stock capital
 Fixed Investment – is spending on new capital,
machinery, plat
  Working Capital –is spending on stocks capital goods in the economy which can
inventories of Finished Goods and Raw diminish due to usage and depreciation.
materials Investment Demand Determinants:
Types of Investment
1. Interest Rate
 Traditional Investment  Investment demand is inversely
 Putting money into well-known asset proportional to the interest rate level
with the expectation of capital with other factors as constant (ceteris
appreciation paribus) resulting in an investment
 Alternative Investment demand curve that is downward
 Hedge fund, managed futures, real sloping.
states 2. Acceleration Principle
Investment Expenditure  The level of investments is a function of
desired changes in output.
 Is a capital spending mainly derived not from
3. Innovations
current income and consumption but from
 long- run factor which can shift the
accumulated savings and other sources external
investment demand curve.
to the circular flow.
 Joseph Schumpeter describes
 It also simply assumed as an exogenous
innovation as the introduction of an
component of National Income. (pre- payment
unfamiliar product and untested
of long run consumption)
technology.
 Investment increases the capital stock and
4. Profit
the expenditures for which generate
 The basic reason why a business invests
income as inflows to the system.
and therefore, profit trends influence
Consumption Expenditure business investments in the long- run.

 Is spending on current consumption or Economic crisis happened in 1984.

consumption of non- durable goods. 5. Expectations

 delves into underlying changes to
 Business and household investments tend
anticipate turning points in the business
to increase the economy’s stock of capital
environment and decides at present the
and total output; whereas, depreciation has
magnitude and type of investment he
the opposite effect as it represents capital
should make.
consumption.
Investment and the Stock Adjustment Process
Savings
 The capital stock is not a headcount but rather
 Money in bank
the aggregate production capacity of existing
  the unspent portion of income during the 2. Population growth which may change the level
period intended for spending of savings depending on the wellbeing of the
 Consuming less out of a given amount of economy.
resources in the present in order to consume
more in the future CHAPTER 7

 Gradually diminishes the inflow that the system

Demand estimation
circulates and generates into income.
 It is only when income is fully generated that  Aggregate supply can be met by aggregate

the debt balance is reduced to zero. demand.

Types of Savings Consumption

 Personal Savings  Is the largest component expenditure which can

 What people save, avoiding to consume account to about 65 to 70 percent of GNP?

all their income There is a close relationship of aggregate

 Remains on bank accounts consumption expenditure to the level of

 National Savings disposable income.

 Personal savings plus the business Consumption Function

saving and public savings

 Schedule that relates consumption to
 Business Savings – measured
disposable income.
by the value of undistributed
 Disposable income is measured on the
corporate profits
horizontal axis; consumption is measured
 Public Savings tax revenues less
on vertical axis.
public expenditure
John Maynard Keynes
Savings- Investment Equilibrium

 aggregate real consumption is a function of the

 Implies that increasing, decreasing or
maintaining the level of investment expenditure aggregate level of income (The General Theory
of Employment, Interest and Money)
will respectively increase, decrease or maintain
the level of income and savings assuming INCOME= CONSUMPTION + INVESTMENT

ceteris paribus.
Investment is the most volatile of the major
Determinants of Savings:
components of aggregate expenditure.
1. The price level of which can affect expenditures
Multiplier the number of times money has changed
and savings.
hands and generates income.
Full employment equilibrium- is an ideal objective 2. Financial impact
because at that level of income, there is no
3. Supply impact
available and useful resource that is wasted.

Inflationary gap- aggregate demand would exceed

equilibrium income leading to pressures for higher
prices.

Deflationary gap- aggregate demand would fall

short of equilibrium income leading to less income
produced in the economy.

Fiscal Policy- when the government uses its powers

to influence total spending either directly by
changing its purchases of goods and services or
indirectly by altering the disposable income of
persons through changes in the level of taxation or
transfer outlays.

Deficit budget- during periods of deflation or

recession, economic policy dictates deficit budget.
It means that the government can or should spend
more than what it collects through the taxes.

Tax cuts- taxes imposed in person or in businesses

are cut.

Inflationary period- economic policy dictates a

surplus or balanced budget.

Surplus budget- it means that the government

should spend less than its budget.

Major macroeconomic effects of government

expenditure and tax policy:

1. Expenditure impact