LESSON 1: • If there are too many

Overview of Real-World Economics borrowers for the saved

funds, interest rates will
• One person’s expenditure
is another person’s go up and some of those
income. borrowers will drop out.
• It is this unalterable
• If there are too few
linkage between the
borrowers, interest rates
expenditures and incomes
will come down and prompt
of millions of thinking
potential borrowers who
households and businesses
stayed on the side-lines
that makes the study of
to step forward.
the economy both
interesting and unique.
• For the private sector to
be borrowing money, it

• This relationship means must have a clean balance

sheet and promising
that at a national level,
investment opportunities.
if one group is saving
money, another group must After all, private-sector
businesses will not borrow
borrow and spend that
unless they are sure they
money to keep the economy
can pay back the debt with
running.
interest.
• If everyone is saving and
no one is borrowing, all
• But with little or no
of the saved funds will
technological innovation
leak out of the economy's
before the industrial
income stream, resulting
revolution, which was
in less income for all.
essentially a
• In a normal economy, this
technological revolution,
function of matching
there were few investment
savers and borrowers is
projects capable of paying
performed by the financial
for themselves.
sector, with interest
rates moving higher or • Businesses also tend to
lower depending on whether minimize debt when they
there are too many or too see no investment
few borrowers. opportunities because the
probability of facing
bankruptcy is reduced
 drastically if the firm needed to solve the
carries no debt. problem.
• To begin with, there are
• Given the dearth of many different potential
investment opportunities causes for this problem
prior to the industrial depending on the stage of
revolution, it is easy to economic development, each
understand why there were requiring a different
so few willing borrowers. policy response.
• Today’s-developed
• The discussion above
economies all started out
suggests an economy is
as agrarian societies, and
always in one of four
the centuries-long paradox
possible states depending
of thrift finally ended
on the presence or absence
with the arrival of the
of lenders (savers) and
industrial revolution.
borrowers (investors).
• The invention of new
They are as follows:
products and the machines
(1) both lenders and
needed to make them
borrowers are present in
produced a huge number of
sufficient numbers,
investment opportunities
(2) there are borrowers but
for the first time in
not enough lenders even at
history.
high interest rates,
(3) there are lenders but • Private-sector businesses

not enough borrowers even that would not borrow

at low interest rates, and money unless they were

(4) both lenders and sure they could pay it

borrowers are absent. back found many promising

projects and started
• If borrowers are absent
borrowing.
because businesses cannot
find attractive investment • The financial sector also

opportunities, which was developed to meet the

the cause of the economic newfound demand for funds.

stagnation that lasted for • This self-financing

centuries before the process could continue as
industrial revolution, a long as the debt-financed
very different mind-set is projects were sound enough
to pay for themselves.
• Thus began a virtuous • The Philippine is the
cycle in which investments second largest producer of
created more jobs and the coconuts in the world.
income, which in turn • However, the agricultural
created more savings to sector suffers from low
finance more investments. productivity, weak
• Unlike the government- economies of scale and
financed investments in inadequate
earlier centuries that infrastructure. (The
eventually ran into government is working on
financing difficulties, restructuring and
private-sector-led modernizing the sector and
investments could sustain have been implementing
themselves as long as policies such as
attractive new products converting government land
were continuously brought to agricultural use.
to market. • Mining, the Philippines
• The result was the rapid are one of the richest
economic growth observed countries of the world in
since the industrial terms of minerals with and
revolution. unexploited mineral wealth
THE MAIN SECTORS OF THE estimated at more than USD
INDUSTRY 840 Billion (from
• The Philippines’ economy Inquirer).
is based on food • The Philippines reserves
processing; product of copper, gold, and zinc are
cement, iron, and steel; also among largest in the
and telecommunications world. In 2020 despite the
among others. difficulties that resulted
• According to the latest from the pandemic,
rates by the World Bank, agriculture was the only
the agricultural sector sector that showed periods
employed 22.5% of the of growth.
labor force in 2020 but • INDUSTRY SECTOR
contributed 8.8% of GDP in – Contributes 30.1% of GDP
2019, a share that has and employs 19.8% of the
been decreasing in recent workforce.
years. • Was the hardest hit by
the pandemic, specially
 the manufacturing, • 2020
construction, - The service sector
transportation, and was greatly
storage sector. impacted by the
• INDUSTRIAL FOOD PROCESSING pandemic.
• MOST HEAVILY AFFECTED
o One of the
INDUSTRIES:
Philippines’ main
(1) Tourism
manufacturing
(2) Accommodation
activities.
(3) Food and Beverages
• TERTIARY SECTOR (4) Transportation
• Represents 61% of GDP
and employs 57.6% of
the country’s
workforce.
• Developed
substantially,
particularly in
telecommunications,
call centers and
finance.
• GOVERNMENT GOALS FOR THE
SECTOR:
(1) Attracting
investments in human
resource
development, design,
R&D, finance, and
infrastructure.
(2) Bolstering
manufacturing-
derived services.
(3) Establishing new
ecosystem link with
manufacturing. (DTI,
Board of Investment)
 • MICROECONOMIC THEORY/
LESSON 2 PRICE THEORY
ECONOMICS AND SCARCITY - the flow of goods
and services from
• The word scarce is the business firms
closely associated with to the households,
the word limited or the composition of
economic as opposed to such a flow, and
the word unlimited or how the price of
free. Every society goods and services
faces the problem of in the flow are
scarcity. determined.
• Economic resources are • MICROECONOMICS
the various types of - Also studies the
labor, capital, land, flow of the
services of
and entrepreneurship use economic resources
in producing goods and from resource.
services. • ECONOMIC DEVELOPMENT
• as a course is
• Since the resources of dealing with
every society are economic
development and
limited or scarce, the
growth. The focus
ability of every society is exclusive on
to produce goods and the Asian economic
development and
services is also the balance of
limited. coverage between
economic theory
• Because of the scarcity, and institutional
all societies face the and empirical
discussions of the
problems of what to
theory.
produce, how to produce, • The general concept
for whom to produce, how of economic
development is
to ration the commodity
discussed,
overtime, and how to including the
provide for the concepts of income
per capita, human
maintenance and growth development, and
of the system. other indicators of
economic growth
• In a free-enterprise
and development.
economy, all these
problems are solved by
the price mechanism.
• MARKET
• the place or THE CIRCULAR FLOW OF INCOME
context in which AND OUTPUT IN A
buyers and sellers TWO- SECTOR ECONOMY
buy and sell goods,
services, and
resources. We have
a market for each
good, service, and
resources. bought
and sold in the
economy.
• PRODUCT MARKET
• The context which
the goods and
services for final
consumption are
• In the upper loop
bought and sold and
of this figure, the
the input market is
resources such as
the place or
land, capital and
context which
entrepreneurial
productive
ability flow from
resources are
households to
bought and sold.
business firms as
indicated by the
• RESOURCES
arrow mark.
• The available
• In opposite
inputs with which
direction to this,
an economy can
money flows from
produce outputs.
business firms to
Important
the households as
categories of
factor payments
resources include
such as wages,
labor, the effort
rent, interest and
and ability that
profits.
humans put into
producing output;
• In the lower part
capital, the
of the figure,
productive inputs
money flows from
that are produced
households to firms
and then used to
as consumption
produce other
expenditure made by
commodities; and
the households on
land (natural
the goods and
resources) the
services produced
inputs that the
by the firms, while
nature provides.
the flow of goods
• TECHNOLOGY
and services is in
• The method by which opposite direction
the resources are from business firms
combined to produce to households.
outputs.
 • Thus, we see that payments they make to
money flows from the suppliers of factors
business firms to such as workers.
households as • This will lead to the
factor payments and fall in total incomes of
then it flows from the households. Thus,
households to savings reduce the flow
firms. Thus, there of money ex-penditure to
is, in fact, a the business firms and
circular flow of will cause a fall in
money or income. economy’s total income.
• Economists therefore
THE CIRCULAR FLOW OF INCOME call savings a leakage
AND OUTPUT IN A from the money
TWO- SECTOR ECONOMY WITH expenditure flow.
SAVINGS AND INVESTMENT • But savings by
households need not lead
to reduced aggregate
spending and income if
they find their way back
into flow of
expenditure.

FREE MARKET
- Economies there
exists a set of
institutions such
as banks, insurance
companies,
financial houses,
stock markets where
• In our above analysis of
households deposit
the circular flow of
their savings.
income we have assumed
that all income which
the households receive, • All these
they spend it on institutions
consumer goods and together are called
services. A result, financial
circular flow of money institutions or
speeding and income financial market.
remains undiminished. We as-sume that all
the savings of
• When households save,
households come in
their expenditure on
the financial
goods and services will
market. We further
decline to that extent
assume that there
and as a result money
are no inter-
flow to the busi-ness
households’
firms will contract.
borrowings.
With reduced money
receipts, firms will • It is business firms
hire fewer workers (or who borrow from the
lay off some workers) or financial market
reduce the factor for investment in
capital goods such
 as machines, Therefore, planned
factories, tools savings must be
and instruments, equal to planned
trucks. investment if the
• Firms spend on constant money
investment in order income flow in an
to expand their economy is to be
productive capacity obtained.
in future.
• Thus, through • As a result of fall
investment in planned
expenditure by investment
borrowing the expenditure,
savings of the income, output and
households employment will
deposited in fall and therefore
financial market, the flow of money
are again brought will contract.
into the
expenditure stream • If the equality
and as a result between planned
total flow of savings and planned
spending does not investment is
decrease. disturbed by
• Saving a part of increase in
income means it is savings, then the
not spent on immediate effect
consumer goods and will be that the
services. In other stocks of goods
words, saving is lying in the shelves
withdrawal of some of the shops will
money from the increase (as some of
income flow. On the the goods will not
other hand, be sold due to the
investment means fall in consumption
some money is spent i.e., increase in
on buying new savings).
capital goods to
expand production • Owing to the
capacity. In other deficiency of
words, investment demand for goods and
is injection of some the accumulation of
money in circular stocks, retailers
flow of income. will place small
• For the circular orders with the
flow of income to wholesalers.
continue unabated, Consequently,
the withdrawal of smaller amount of
money from the goods will be
income stream by way produced and
of saving must equal therefore fewer
injection of money capital goods like
by way of investment ma-chinery will be
expenditure. indeed with the
 result that fixed expenditure is
investment will greater than
tend to fall. savings, rate of
interest will rise
• Thus, the ultimate so that at a higher
effect of either the rate of interest
fall in planned savings increase
investment or the and become equal to
increase in planned planned investment
savings is the same, expenditure.
namely, the fall in
income, output, OPPORTUNITY COST
employment, and • Scarcity implies that
prices with the individuals must make
result that the flow choices. For example,
of money will scarcity forces each one
contract. of us to: 1) choose how
• On the other hand, we will allocate our time
if the equality between leisure and
between planned work; 2) choose the mix
savings and planned of things that we will
investment is consume; and 3) choose
disturbed by the between consumption now
increase in and consumption in the
investment demand, future.
the result will be • Because of scarcity,
increase in income, every time we make a
output, and choice about how to use
employment. them, we are also
Consequently, the choosing to forego other
flow of money income options.
will expand. • Every choice has an
• It is thus clear associated opportunity
from the above cost. For each choice,
analysis that the the opportunity cost is
flow of money income the value of the best
will continue at a alternative that could
constant level only have been chosen but was
when the condition not.
of equality between Opportunity cost is what
planned saving and that must be given up
investment is obtaining another thing.
satisfied. • Regret can be measured by
• If savings exceed subtracting the payoff
investment of a choice from the
expenditure, rate payoff of the best
of interest falls so option.
that, at a lower • The best decision,
rate of interest, therefore, is that
investment option with the smallest
increases and both regret.
become equal. On the • In economics, the
contrary, if opportunity cost concept
investment
 can be illustrated
through the diagram
called, the Production
Possibility Frontier
(PPF) or also called
Production Possibility
Curve (PPC).
• The production
possibility frontier
shows the maximum
combinations of two
commodities that the
economy can produce at
full employment of its
available resources.
• The PPF can be either
graphically shown as a
downward sloping curve
to illustrate the
concept of constant
opportunity cost or
shown as a concave
downward line which
illustrates the concept
of increasing
opportunity cost.

INEFFICIENT POINTS
- POINTS WITHIN OR
BELOW THE
PRODUCTION
POSSIBILITY LINE.
EFFICIENT POINTS
- POINTS ALONG THE
PRODUCTION
POSSIBILITY LINE.
• The application of
technology helps
the economy produce
commodities
outside of the PPF.
(efficiency).
• A rightward shift
of the PPF means
economic growth.
LESSON 3 AND 4 likewise accelerated since
ECONOMIC DEVELOPMENT IN ASIA the late 1970s when its
government shifted to an
open-door policy that
• East Asian stands out promoted foreign
because of the dynamic investment and exports.
economic growth and • However, the remarkable
development it has economic record of the
achieved throughout the Asian economies was marred
postwar period. by the Asian financial
• The development process crisis.
begun in Japan when it • Triggered by the collapse
opened its economy to of the Thai baht in July
increased trade and 1977, equity markets and
investment. currencies throughout
• The rapid Southeast Asia came under
industrialization quickly great pressure, and the
spread to the neighboring ensuing currency
economies of South Korea, devaluations led to
Singapore, Taiwan, and foreign capital flight.
Hong Kong. • Consequently, in a matter
• Economic growth in these of two month or so, Asia’s
newly industrialized once vibrant economies
economies (NIEs), were plunged into deep
sometimes called the Asian recession.
“Tigers” averaged 8 • This collapse forced and
percent a year in the unprecedented reappraisal
three decades prior the of policies ranging from
Asian Financial Crisis in corporate government to
1997. exchange rate management.
• The industrialization • After the sharp economic
experiences of Japan and contraction in 1998, the
these Asian “Tigers” region rebounded rapidly.
formed the basis of the In South Korea, for
“East Asian Development example, industrial
Model”, which has now an production and GDP
accepted part of economic increased dramatically in
development literature. 1999 while stock market
• Inspired by the success in values doubled in Thailand
Japan, and the NIEs, and Malaysia.
Indonesia, Malaysia, • The primary equity market
Thailand, and the indexes in Seoul, and
Philippines developed Singapore returned to
strategies that promoted their pre-crisis levels.
the inflow of foreign • However, as the US economy
capital and encouraged slowed in 2001 and 2002,
exports. and war in Iraq and the
• These outward-oriented spread of SARS virus took
economic policies fueled place in 2003, prospects
rapid growth during the for the region were
1980s. adversely affected.
• China’s economic growth
and development has
 HOW IS DEVELOPMENT population can be used to
ECONOMICS DISTINCT FROM deflate it to per-capita
OTHER ASPECTS OF terms. An improvement in
ECONOMICS? the living standards and
how they change over time.
• Economic development • To have some idea about
concentrates on economies the living Standards and
that have lower per-capita how they change overtime,
incomes. we look at GDP and GNP
• Economic development growth rates.
considers the experience • However, the experiences
of the industrial of many economies have
countries as relevant for shown that economic growth
analyzing the process of can occur without any
economic growth. improvement in the quality
• Development economist also of lives of its people.
make use of analytical • Human development
tools and methods indicators, such as life
developed in a variety of expectancy, infant
other branches of mortality, and the average
economics such as growth level of educational
theory, macroeconomics, attainment have lagged
microeconomics, labor, those of the other
industrial organization, countries in the Asian
international trade, region.
fiscal, and monetary • In order to include other
policies. factors that measure
• It looks at all the other economic development, the
branches of economics concept of GDP and GNP
within the context of need to be broadened.
economic development. • Use of GDP and GNP and
• It uses the tools exchange rate comparisons
developed in other lead to patterns of growth
branches of economics to over time.
analyze the problems and • Other methods such as
challenges of economic purchasing power parity
development. can also be used to
compare standards of
living.
MEASURING GROWTH AND • When we speak of economic
DEVELOPMENT development, we usually
• The concept of economic mean economic growth
development is a broader accompanied by an
and much more encompassing improvement in the
view than economic growth people’s quality of life.
and relates to levels of • To a large degree,
social and humanitarian economic development
achievement and income results from economic
distribution, as well as a growth.
narrower measure of per-
capita income.
• An improvement in the
living standards of the
OTHER MEASURES MAKING COMPARISONS BETWEEN
COUNTRY
HUMAN DEVELOPMENT INDEX (HDI)
(1) HEALTHY LIFE EXPECTANCY Using the GDP measure,
(2) INFANT MORTALITY RATE there are two methods used
(3) LEVEL OF EDUCATIONAL for
ATTAINMENT (ADULT comparing incomes between
LITERACY AND EDUCATION countries:
ENROLLMENT RATES)
(1) purchasing power
HEALTHY LIFE EXPECTANCY parity (PPP) method
(2) exchange rate Method
- Summarizes the
expected number of PPP METHOD
years to be lived in - develops a cost index
“full health” for comparable baskets of
- The years of ill- consumption goods in the
health are weighted local currency and then
according to compares this with prices
severity and in the United States for
subtracted from the the same set of
overall life commodities. A country’s
expectancy rate to PPP is the number of
give equivalent units of the country’s
years of healthy currency required to buy
life. the same amount of goods
and services that a dollar
GREEN GNP would buy in the US.

- Green system of national EXCHANGE RATE METHOD

accounting — the more — Uses the exchange rate
recent between the local
approach developed to currency and the US.
address the shortcomings dollar to convert the
of GDP and GNP. currency into its US.
- Green GNP- is the dollar equivalent.
informal name given to
national A country’s GDP and GDP
income measures that are per capita would then be
adjusted to take into valued accordingly, in US
account the depletion of dollars.
natural resources and
environmental
degradation.
- GNP is adjusted to
include the damages to the
global environment, such
as global warming and
depletion of the ozone
layer. But these damages
are hard to estimate.
LESSON 5
GROWTH AND ASIAN EXPERIENCE Embodies technical progress
has something to do with the
PRODUCTION POSSIBILITY changing nature of the
FRONTIER (PRODUCTION inputs into production
POSSIBILITY CURVE) process.
These would include more
- A production highly skilled and computer-
possibility literate workers.
frontier (PPF)
shows the maximum DISEMBODIED TECHNICAL
possible output PROGRESS:
combinations of two - Improved technology which
goods or services an allows increase in the output
economy can achieve produced from given inputs
when all resources without investing in new
are fully and equipment.
efficiently
employed Disembodied technical
EFFICIENCY progress
- refers to lack of - relates to the way factors
waste. are combined together in the
workplace, such as
- An inefficient management and
washing machine organizational innovations.
operates at high
cost, while an COMPONENTS OF INCOME AND
efficient washing GROWTH
machine operates at • Traditionally labor and
lower cost, because capital were introduced as
it’s not wasting the only variables
water or energy. determining the level and
the growth of output.
- An inefficient • Y = f (K,L).
organization
• As labor and capital grow
operates with long
overtime, so will income.
delays and high
costs, while an
• Law of diminishing returns
efficient
governs the growth
organization is
process. As each worker
focused, meets
acquires more capital, it
deadlines, and
follows that there would
performs within
be diminishing returns to
budget.
that capital.
TECHNICAL PROGRESS:
EBODIED VS. DISEMBODIED • a production function
gives the technological
EMBODIED TECHNICAL PROGRESS: relation between
- Improved technology which quantities of physical
is exploited by investing in inputs and quantities of
new equipment. New technical output of goods. The
changes made are embodied in production function is one
the equipment. of the key concepts
• of mainstream neoclassical
theories, used to define
marginal product and to
distinguish allocative
efficiency, a key focus of
economics.
• One important purpose of
the production function is
to address allocative
efficiency in the use of
factor inputs in
production and the
resulting distribution of
income to those factors,
while abstracting away
from the technological
problems of achieving
technical efficiency, as
an engineer or
professional manager might
understand it.