SS 203-4

Basic Economics with Taxation

and Agrarian Reform

by:

DR. VICENTE S. BETARMOS, JR.

First Semester 2020 – 2021
 Lesson 3 Inflation, Unemployment, Consumption, Savings, Money and
National Income

Intended Learning outcomes

At the end of the lesson you must have:

1. Explained inflation, unemployment, consumption, and savings

2. Explained the meaning of money and components of GNP and GDP.

Activate Prior Knowledge:

Let’s try this!

Direction: Arrange the jumbled letters to form a word.

ATINIONFL = 1.
MPSUTIONCON = 2.
SAGSVIN = 3.
NATINAOL COMEIN = 4.
EMENLOYTMPUN = 5.

Acquire New Knowledge:

Direction: Watch news on television and read news articles in the net to grasp national
issues!

It is said that standard of living condition and inflation has a high correlation, like the low
prices of various commodities considered as high standard of living, and the opposite of it is
known as inflation – high prices. Inflation is difficult to consider because price rise unevenly,
some commodities rise, others decline while others do not change at all. This scenario persists in
a day to day basis. Every time this occurs, many will be affected, one factor is the labor industry.
Often causes unemployment a greater problem for policy makers – and when this happen other
sectors of the economy are also affected. Added to this are uncontrollable conditions like wars,
famine, natural calamities, and pandemic. In order to realize this we have to understand what is
inflation and employment.
Inflation – is a rising general level of prices. A situation of continual increase in various prices. It
creates less saving and does not stimulate further investment.

Formula for Inflation:

𝐶𝑃𝐼 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 − 𝐶𝑃𝐼 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠

𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = 𝑥 100
𝐶𝑃𝐼 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠

Types of inflation

1. demand – pull inflation – the demand pulls the price (e.g. goods and services)
2. cost – push inflation – the cost production pushes the price
3. structural inflation – the presence of new infrastructure projects pulls the price

Losers and Gainers of Inflation

Losers Gainers
Fixed income earners Businesses
Pensioners Speculators
Creditor Debtor
Savers Producers

Unemployment – occurs when a person of working age (15 years above) is willing to
work but cannot find a job. Willingness to work is an important consideration to
determine unemployment.

Categories of Labor

1. Unskilled – work primarily with their hands

2. Semiskilled – operate machines with minimum training
3. Skilled – operate complex equipment and perform tasks with little supervision
4. Professional – highest level of knowledge-based education and managerial skills

Types Employment

• Employed Workers – persons working in their field of specialization.

• Underemployed Workers – persons not working on their field of specialization
• Unemployed Workers – persons willing to work but cannot find a job.
• Discouraged Workers – persons tired of finding a job and decided not to work.

Causes of Unemployment

Frictional and structural unemployment are two different types of unemployment that occur in
an economy. Frictional unemployment is not a direct result of economic factors and occurs when
workers search for jobs. Conversely, structural unemployment is caused by shifts in the economy
that make it difficult for workers to find employment
Differences

 Frictional unemployment involves people transitioning between jobs; it has nothing to

do with the economic cycle and is voluntary.
 Frictional unemployment is typically a temporary phenomenon, while structural
unemployment can last for years.

 Structural unemployment is a direct result of shifts in the economy, including changes

in technology or declines in an industry.
 Structural unemployment is very concerning to economists, while frictional
unemployment is considered inevitable and not factored into the unemployment rate.

Cyclical Unemployment

Cyclical unemployment is caused by the contraction phase of the business cycle. That's when the
demand for goods and services falls dramatically. It forces businesses to lay off large numbers of
workers to cut costs. Cyclical unemployment creates more unemployment.

Money, Consumption and Savings

Money – is anything that is commonly used and generally accepted as medium of exchange or as
a standard of value (Kent, 1970).

Functions of money
1. medium of exchange – anything that is used or understood as medium of exchange
2. standard of value – this is known also as unit of account, exact value
3. store of value – it can be kept or saved
4. deferred payment – it can be paid later

Consumption – is the amount of money spent on goods and services which yield direct
satisfaction.

Factors that affect consumption

1. distribution of income
2. rate of interest
3. the desire to hold cash
4. price level
5. population
6. income
7. taxes
8. attitude and values

Savings – When consumers decides not to spend, this will become savings. There are various
reasons why people save or another.
1. To provide for old age (like insurance services)
2. To provide for children’s education
3. To accumulate wealth and use for investments

Measuring National Output and Income

National Income measures the money value of the total flow of goods and services produced by
the government (economy) over a period of time most specifically – annually. This can
be either be produced by the residents and non-residents of the country both domestic
 and abroad (citizens only). This maybe in the form of wage or salary, interest, rent, profit,
and income from abroad.

Common terms used in measuring the national income

1. Gross Domestic Product – is the measure of the final goods and services produced within
the boundaries of the state (Philippines) to include income of foreign nationals
2. Gross National Product - is the measure of the final goods and services produced within
and outside the boundaries of the state (Philippines) by its citizens.
3. Market Value – is the current price of goods and services produced.
4. Value Added – the cost added to the prevailing price of various goods and commodities (ex:
from 100 pesos – 125 pesos)
5. Consumption – the use of goods and services, usually named as the expenditure made by the
consumers (newly produced goods – consumables) excluding purchase of home (for this is
an investment)
6. Investment – the production of additional income generating output in production (ex. land,
machinery and capital) the income after production called interest and the production
inputs used is called as investment.
7. Consumer Durables – the purchases of appliances, furniture and fixtures that may last for
several years, though accounted only in the current year.
8. Government Expenditure – the sum of all government payments in a given year.
9. Net factor Income from Abroad – the difference of the income earned by citizens who owns
the productive factors abroad and the income of foreigners who owns the same within the
boundaries of the state. If the result is positive, this means the citizens abroad earns more
than the foreigners working here.

Ways of Calculating National Income (GNP and GDP)

GNP GDP
 Production within the Philippines by  Production within the Philippines
its citizens (domestic) by its citizens (domestic)
 Production outside of the  Production within the Philippines
Philippines by its citizens (abroad) by foreign nationals

1. Income approach – The current use of the factors of production like land, labor, capital
and entrepreneurial activity sums up under this approach. Such income like, profit, rent,
interest rates and dividends makes up the income in a single year.

2. Product or expenditure approach – this sums up the expenditure of some institutional

sectors like, households, businesses, corporation (private and public), government
expenditures. Data used in the computation include household final consumption
expenditure, investment or capital formation, government final consumption
expenditure, imports and exports.

3. Industrial origin or value added approach – this approach pertains to income from the
sectors of production, manufacturing and industry. These industries include agriculture,
hunting, forestry, mining, fishing, and the service sectors (hotels, restaurants, real estates
and other business activity.)
 Application

Direction: Questions for discussion. Discuss with your group (at most 4)

1. What will be the effect of inflation to the income of the people?

2. How does change in income affect consumption? And how does price level affect
consumption?
3. What is measured by GNP and GDP?

4. Why is money important? Why is money said to be a store of value?

Summary

Economics is a social science that deals with the proper allocation and distribution of
scarce resources for the maximum or optimum satisfaction of human wants. Economics as a study
divided by two branches namely: Microeconomics deals with the relationship and behavior of
consumer (household) and the firm’s economic activities. Macroeconomics the whole economy.

Resources/References

A. Books

Azanza, Patrick, et al (2001). Economics, Society and Development: A textbook in

Economics. Manila: National Book Store, Inc.
Briones, Leonor M. Philippine Fiscal administration. Vol. 1.
Case, Karl E., Ray C. Fair, and Sharon M. Oster. Principles of Economics 1oth edition. USA:
Pearson Education Inc. 2012.
De Leon, Hector S. (2006 rev). Textbook in Agrarian Reform and Taxation. Manila: Rex
Book Store, Inc.
De Leon, Hector S. and Hector M. De Leon Jr. (2009). The Law on Income Taxation with
Illustrations, Problems and Solutions. Manila: Rex Book Store, Inc.
Gabay, Bon Kristoffer G. et al. (2007). Economics: Its Concepts and Principles (with
Agrarian Reform and Taxation). Manila: Rex Book Store, Inc.
Medina, Roberto G. Principles of Economics. Manila: Rex Book Store, Inc. 2003.
Salvatore, Dominick and Eugene Diulio (2003). Schaum’s Easy Outlines: Principles of
Economics. USA: Mc Graw-Hill Co.
Sicat, Gerardo (2003). Macroeconomics. Manila: National Bookstore, Inc.

B. Electronic Sources

Steven Nickolas “Frictional vs. Structural Unemployment: What’s the Difference?”

https://www.investopedia.com/ask/answers/050115/what-difference-between-frictional-
unemployment-and-structural-
unemployment.asp#:~:text=Frictional%20unemployment%20is%20not%20a,for%
20workers%20to%20find%20employment. Updated May 13, 2020
William Spaulding. Economics: An Illustrated Introduction to Microeconomics,
Macroeconomics, International Economics and Behavioral Economics.
https://thismatter.com/economics/economic-systems.htm