Chapter 10.

Macroeconomics When we study macroeconomics, we must familiarize ourselves with certain

ubiquitous terms and more importantly, what they mean. Once we appreciate the theory, we
get a sound understanding of the global events that affect everyday life.
This chapter covers topics on Macroeconomics that defined as the study of economy
as a whole. Topics to be discussed are the Gross Domestic Product (GDP) and Gross National
Product (GNP), inflation, government spending, fiscal and money policies, their purposes and B – Desired Learning Outcomes (DLOs)
limitations. This further explained the importance of labor and human resources, and ways to
At the end of the unit, the students must have:
solve unemployment problem. In this unit, it can help you understand the state of the
economy, and analyze policies at an influential level, and may help you in the conduct of 1. Explained the Gross Domestic Product (GDP) and Gross National Product (GNP),
macroeconomic research. inflation, government spending, fiscal and money policies, their purposes and
limitations.
A- Introduction
2. Analyzed the importance of labor and human resources and ways to solve
Macroeconomics is a ‘top-down’ approach and is in a way, a helicopter view of the unemployment problem.
economy as a whole. It aims at studying those aspects and phenomena which are important to
Topics
the national economy and world economy at large. To mention a few of them are the
country’s GDP (Gross Domestic Product) growth; inflation and inflation expectations; the 1. National Income Accounting: Approaches to GNP computation, National Income
government’s spending, receipts, and borrowings (fiscal policies); unemployment rates; Accounts
monetary policy, etc. (also have a look at Fiscal vs Monetary Policy). 2. Consumption, Savings, Government Spending, Investment, and Net Exports
3. Unemployment and Inflation
John Maynard Keynes is widely regarded as a pioneer in macroeconomics. In fact,
it is almost as if macroeconomics owes a lot to him. His understanding of macroeconomics so
to speak was influenced by the Great Depression of the late 1920s. In the late 1930s when the
Great Depression was nearing its end, Keynes came up with a piece of seminal research, ‘The C – Content Focus
General Theory of Employment, Interest and Money’ which focused on observing the
The Production Possibilities Frontier
depression and formulating the field of macroeconomics – the work and its offshoots are
considered as Keynesian economics. Before we go to a more specific subject matter of macroeconomics, let us first
review some of the basic subject in economics that are necessary in our analysis. We start by
Another great macroeconomist and a Nobel Laureate, Milton Friedman also did a
looking at the production possibilities frontier.
study on the Great Depression and debated the earlier premise Keynes – this piece and its
offshoots form part of Monetary economics, Since scarcity is a fact of economic life, we need to use our scarce productive
resources as efficiently as possible. If we succeed, we can say that we are operating at full
While Keynes explained the Great Depression through aggregate demand,
economic capacity since all resources are utllized in the production of goods and services
expenditure, levels of income, government financing and rates of unemployment, Friedman
needed by the people. Usually, there are some economic slack, but very so often, we do
explained the event through monetary stances – higher interest rates, contractionary monetary
damage to operate at peak efficiency. When this happens, we say we are operating on our
policy, a banking crisis and disinflation to deflation.
production possibilities frontier (or production possibilities curve).

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 Production possibilities frontier represents the outcome or production Over time, however, economic growth occurs when the economy realizes greater
combined that can be produced with a given amount of resources. production capabilities to produce capital and consumer goods. For this to happen, resources
(land, labor, and capital) must increase and/or technology must improve. Most countries
Farm Figure 8.1 Production
experience economic growth because of the advances of technology and increases the capital
Possibilities Frontier
Tractors (unit) stock through new investment (e.g. additional new machinery, equipment, factories, office
This curve illustrates the buildings, etc.).
range of possible
550 combinations of outputs of
tractors and rice from 550
500 units of tractors and no rice
to 700 tons of rice and no
The Circular Flow Model
tractors.
The dynamic market economy creates continuous, repetitive flows of goods and
400 Any point inside the curve services, resources, and money. The circular flow diagram, shown in Figure 8.1 illustrates the
(X) means unemployed
resources, while point
flow of resources and output from households to businesses, and vice versa. Observe that in
outside (Y) means the diagram we group private decision makers into businesses and households and group
unattainable production markets into the resource market and the product market.
200 because of scarce resources.

Rice (ton)

350 500 580 700

If an economy is operating at any point along the production possibilities curve, it
means that all its available resources are utilized and they are used as efficiently as possible.
This condition is referred to as full-employment. Output therefore is the maximum
combination level that can be produced given the existing limited resources and technology of
the economy when they are fully utilized. It follows then that output cannot increase if
resources and technology remain constant, thus point Y is unattainable now.

When economists discuss the concept of ‘scarcity’, they refer to the economic reality
that resources are limited and that any given point in time, output is also limited. This brings
us to the reality that the production of one particular good or category of goods can increase
but only at the expense of decreasing the production of other goods or category of goods
(opportunity cost). Trade – off therefore happens, which means that in order for an economy
to produce an additional unit of output of one goods it has to forego the production of other
goods. Figure 8.2. Circular Flow Model of Macroeconomics

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 This figure illustrates the flow of resources and payments for their uses as well as Nominal vs real values
the flow of goods and services and payment for them. Thus, the household sector sells
When we refer to nominal values, such as nominal prices, earnings, wages, or
resources to and buys products from business sector while the business sector buys resources
interest rates, we refer to the peso value of the prices, earnings, wages, or the absolute value
from and sells products to the household sector.
of the interest rates. A person earning P385.00 a day is said to be earning a nominal wage of
The upper half of the circular flow diagram represents the resource market: the place P385.00 or an interest rate at 12 percent per annum charged by banks on loans in the nominal
where resources or the services of resource suppliers are bought and sold. In the resources cost of borrowing money annually.
market, households sell resources (i.e. land, labor, capital) and businesses buy and use them in
Real values, on the other hand, are always values in comparison, or relative, to other
the production of goods and services. Households own all economic resources either directly
related economic variables. Thus, a person earning nominal wage of P385 in 2020 may be
as workers or entrepreneurs or indirectly through their ownership of business corporations.
only earning a real wage of P192.50 relative to today’s doubled prices, since say 2008.
They sell their resources to business, which buy them because they are necessary for
Applying the concept of interest rates, a 12 percent nominal interest rate is only 2 percent real
producing goods and services. This is presented by the inner arrow from the household sector
interest if prices are rising by 10 percent.
going to the businesses sector. The funds that businesses pay for the resources are costs to
businesses but are flows of income in the form of wage, rent, interest, and profit to the
households. This is represented by the outer arrow from the business sector going to the
household sector. Productive resources therefore flow from households to businesses, and Positive vs normative
money flow from businesses to households.
As we have discussed in Chapter 1 of the Module, positive economic statements are
The lower half of the model represents the product market: the place where goods facts or relationships which can be proven or disproven. A normative economic statement is
and services produced by businesses are bought by and sold to the households (i.e. land, someone’s opinion or value judgment about economic issue. Such a statement can never be
labor, capital) to produce and sell goods and services. This is represented by the inner arrow proven. A normative statement is one which people commonly argue about. Not that a
from the business sector going to the household sector. In return, the households receive positive statement does not have to be a true statement; the statement could be disproven. It
income from selling their resources to the businesses. Consequently, the household use the would be false positive statement. Also keep in mind that predictions, such as ‘The Lakers
(limited) income they have received from the sale of resources to buy goods and services that should win the NBA this season’, or ‘COVID-19 could kill billions of people in 2021’ are not
the business produced in the form of consumption expenditure. This is represented by the considered normative statements, but prediction or hopes (or wishful thinking…) unrelated to
outer arrow from the household sector going to the business sector. The monetary flow of facts or value judgments.
consumer (household) spending on goods and services yields sales and revenues for
businesses. Businesses compare those revenues to their costs in determining profitability and
whether or not a particular good or service should continue to be produced and sold.

The circular flow model depicts a complex, interrelated web decision making and
economic activity involving businesses and households. For the economy, it is the circle of
life. Businesses and households are both buyers and sellers.

Important Concepts and Definitions in Macroeconomics

It is helpful to clarify a few concepts, which are important in our economic analysis.

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 Gross Domestic Product and Gross National Product

The most widely used measurement of economic performance throughout the world
is the Gross Domestic Product (GDP). GDP is the total market or money value of all final
goods and services produced in an economy over a period of one year. Given this definition,
GDP excludes production abroad by Philippines businesses. Gross National Product (GNP),
on the other hand, is the total market or money value of all final goods and services produced
by a nation’s residents (e.g. Filipinos), no matter where they are located. For example, GNP
includes SMC earnings on its foreign operations, but GDP does not.

Gross Domestic Product (GDP)

This is the value in terms of money, of all the goods and services that are produced
domestically (within the nation). Why is this important? The country’s actual worth is
determined by its ability to produce domestically – that it makes use of the resources available
Source: WallStreetMojo
within it to make widgets that people are willing to spend for. Thus, it measures the level of
Figure 8.3 Macroeconomics Scope economic activity in the country.

Gross Domestic Product The GDP from the above is the Nominal GDP print/number. When this figure is
adjusted for inflation by removing the rate of inflation using a GDP deflator (a measure of the
Measuring the performance of the economy is one of the main concerns of rate of inflation in the economy), we get the Real GDP print.
macroeconomics. Suppose the government says that the economy performed better this year
despite the world recession because of COVID-19 pandemic and etc. But, suppose you said it
did not because prices have gone up and unemployment has risen to a double digit figure.
Which statistic would you seek to tell how well the economy doing? The answer requires
some understanding of the national income accounting.

What Is National Income Accounting?

National income accounting is a bookkeeping system that a government uses to

measure the level of the country's economic activity in a given time period. Accounting
records of this nature include data regarding total revenues earned by domestic corporations,
wages paid to foreign and domestic workers, and the amount spent on sales and income taxes
by corporations and individuals residing in the country.

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 On the demand side, Household Final Consumption Expenditure (HFCE) declined
by -4.8 percent, along with the following items: Gross Capital Formation (GCF), -18.3
percent; Exports, -9.0 percent; and Imports, -8.3 percent.

On the other hand, the Government Final Consumption Expenditure (GFCE) grew
by 16.1 percent in the first quarter of 2021.

The Net Primary Income (NPI) from the Rest of the World continued to decline by -
75.8 percent, bringing the Gross National Income (GNI) to drop by -10.9 percent during the
period (PSA, 2021).

Gross National Product (GNP)

This too measures the level of economic activity in a country and is very similar to
GDP. The difference is that another component known as ‘Net Factor Income from Abroad’
(NFIA) is added to the value of GDP.
Figure 8.4. The Philippine Gross Domestic Product (at constant 2018 prices). The year-on- Factor Income is the income received from the four factors of production namely:
year growth rates (in percent), Quarter 1 2018-2019 to Quarter 1, 2020-2021. Land, Labour, Capital, and Entrepreneurship. This factor income can be received from abroad
by utilizing the factors of production and remitting incomes, paid abroad by having foreign
The Philippine Gross Domestic Product (GDP) posted a decline of -4.2 percent in the
companies utilizing the factors of production in your country or both. Netting both of them
first quarter of 2021. The main contributors to the decline were: Construction, -24.2 percent;
(factor income received minus factor income paid) we get NFIA.
Other Services, -38.0 percent; and Real Estate and Ownership of Dwellings, -13.2 percent.
Thus GNP is also a measure of a nation’s economic activity but GDP is more often
On the other hand, contributors to growth were led by: Financial and insurance
used for different reasons.
activities, 5.2 percent; Public administration and defense; compulsory social activities, 7.5
percent; and Human health and social work activities, 11.7 percent. Other industries which GNP = GDP + NFIA
managed to grow during the period were: Information and communication, 6.3 percent;
Manufacturing, 0.5 percent; and Electricity, steam, water, and waste management, 1.9
percent.

Among the major economic sectors, Agriculture, Forestry, and Fishing (AFF)
declined by -1.2 percent in the first quarter of 2021. Likewise, Services and Industry
contracted by -4.4 percent and -4.7 percent, respectively during the period.

5
 States). From 2001, these countries include the Euro area, Japan, the United Kingdom, and the
United States.
Philippines GNP for was $0.00B, a 100% decline from 2019.
Philippines GNP for 2019 was $415.75B, a 5.18% increase from 2018.
Philippines GNP for 2018 was $395.27B, a 6.42% increase from 2017.
Philippines GNP for 2017 was $371.43B, a 3.78% increase from 2016.

Demand and Supply in Macroeconomics

In general, there are considered to be two schools of economic thought: ‘demand-

side’ and ‘supply-side’. This is very widely debated and economists generally fall into one of
these categories. This is even more visible when it comes to macroeconomics than
microeconomics. Here, demand and supply mean a broad range of things since both of them
are aggregate by nature.

Demand-side economics which Keynes advocates try to impact real GDP by

increasing aggregate demand. Measures like improving income/wage levels, stable
unemployment, government spending to boost the spending abilities of the people, industry
Data Source: Worldbank, 2021 and corporate investment in capital goods and other factors.

Figure 8.5. Philippines GNP Historical Graph Supply-side economics tries to impact real GDP by increasing aggregate supply.
Measures like adjusting tax rates, deregulation, infrastructure support, benefitting educational
levels, privatization and a number of others form part of supply-side economics.
GNI (formerly GNP) is the sum of value added by all resident producers plus any
Broadly speaking, GDP and thus GNP can be said to comprise the following four
product taxes (less subsidies) not included in the valuation of output plus net receipts of
fundamental components of the aggregate demand side of economics.
primary income (compensation of employees and property income) from abroad. Data are in
Consumption (C); Investment (I); Government Spending (G)
current U.S. dollars. GNI, calculated in national currency, is usually converted to U.S. dollars
and; Net Exports (X-M)
at official exchange rates for comparisons across economies, although an alternative rate is
Private consumption of goods and services forms part of Consumption (C) which is
used when the official exchange rate is judged to diverge by an exceptionally large margin
how much households expend to purchase final goods and services and not intermediate ones.
from the rate actually applied in international transactions. To smooth fluctuations in prices
Examples of final goods and services are cars, refrigerators, milk purchased by households
and exchange rates, a special Atlas method of conversion is used by the World Bank. This
and they’re like. Intermediate goods are those which can be used for further production or can
applies a conversion factor that averages the exchange rate for a given year and the two
be resold. Examples include the milk shop purchasing the milk which we consider as a final
preceding years, adjusted for differences in rates of inflation between the country, and through
good etc. The curd we buy from the shop is a final good unless the milk made by us using the
2000, the G-5 countries (France, Germany, Japan, the United Kingdom, and the United
curd is meant to be sold. Thus they are distinguished based on their use and not based on the
product itself.

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 Investments (I) include purchases of machinery, equipment, capital-intensive
purchases, households’ spending on homes, etc. Buying shares of companies does not form
part of the above mentioned ‘investment’ nor do change hands of assets which we already
have with us.
Government Spending (G) as the name suggests talks about public spending which
shows itself in different forms like expenditures on the defense sector; building roads, public
schools, and hospitals, etc. Although the government does spend on unemployment benefits
etc. in some countries like the US these don’t count in calculation of aggregate demand for
GDP.
Net Exports (X-M) is Exports (X) minus imports (M). There’s no need for an
explanation for that! Net Exports are similar to Balance of Trade (BoT) but a subtle point to
note is that balance of trade includes exports and imports only of goods (goods are also
known as ‘visible items’ in macroeconomics while services are known as ‘invisible items’). In
the modern age, services are increasingly forming a major part of one’s economy. Have a look
at how many IT companies are already there, the apps you use and whatnot.
Thus, GDP consists of all the above components. I am sure you would allow me to
write it as:
GDP (Y) = C + I + G + (X-M)
Macroeconomic – Balance of Payments (BoP)
We looked at the Balance of Trade a while ago. A country also maintains its Balance
of Payments (BoP). BoP is simply an overall record of the receipts and payments of a country
with the other countries. Typically transactions made by consumers, corporates and the
governments of one country with the others’ are recorded.
There are two types of accounts that every nation has. The ‘Current Account’ and
‘Capital Account.’
1. Current Account
The Current Account (CA) of a country is a record of the monetary value of its
exports and imports (goods, services, and unilateral transfers) and forms part of the BoT.
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When the exports are greater than its imports, its current account records a surplus and when
exports are lesser than its imports, it records a deficit – quite obvious! These are generally
short-term transactions. The US, UK, India and a majority of the countries in the world run a
current account deficit. Japan and Germany are a few examples of nations running a current
account surplus.
Just to put this in an equation’s perspective,
CA = Net Exports of goods and services + Net unilateral transfers + NFIA
2. Capital Account
This is a record of the monetary value of purchases of foreign assets and liabilities
like sovereign debt, investments made by and into the country, corporate debt from abroad,
etc. although I wouldn’t like to elaborate too much on this, the talk about Foreign Direct
Investment (FDI) and Foreign Portfolio Investment (FPI) into countries and the building up of
FX Reserves (like buying US government debt and thus, dollars) to stabilize a country’s
currency falls into the capital account.
Cap A/C = Net FDI + Net FPI + Net of other Portfolio flows (debt flows etc.) +
change in reserves
If you are familiar with accounts, this is like a company’s balance sheet which has an
assets and liabilities side where both should tally and the difference be zero.
BoP = CA + Cap A/C
The above should be equal to zero.
 If CA > Cap A/C the country faces a Current Account Surplus or a Capital
Account Deficit
 If CA < Cap A/C the country faces a Current Account Deficit or a Capital
Account Surplus
National Income Accounting Equation
The national income equation represents the relationship between national income
and the economy’s expense, along with other attributes, as shown in the following equation:
 National Income (GDP) = C + I + G + NX (X-M)
Where:
Y – National income, C – Personal consumption expenditure, I – Private investment,
G – Government spending, X – Exports, M – Imports

To calculate national income, the following approaches or methods are used:

1. Value-added approach – the net value added from each of the economic sectors,
agriculture, marketing and services.

GDP = Value of Output – Value of Intermediate Consumption Figure 8.6b Example of calculating National Income using value-added approach (Suppose
rice is the only final product of an economy: It goes through the three (3) stages
of production)

2. Income Approach – this involved income of labors (wages and salaries), profit of
private sector businesses, and rent income from ownership of land. This approach is
measured by adding up the pretax income generated by the individuals and
companies in the economy. It consists of income from wages, rent of buildings and
land, interest on capital, profits, etc. in an accounting year. The income method
shows the national income distribution among different earning groups in the
economy.

GDP = Compensation of Employees + rents + Profits + net interest +

indirect taxes + Depreciation

Figure 8.6a Example of calculating National Income using value-added

 Compensation of employees - is the largest of the national income accounts. It
approach
comprises mainly of income earned from wages, salaries and certain
supplements paid by firms and government to suppliers of labor.
 Rental Income of Persons – another source of income from rent and royalties
received by property owners who permit others to use their assets during the
period of time.
 Profits – This include those earned by self-employed proprietorship and
partnerships who simultaneously run their businesses and at the same time pay
themselves for labor services rendered to their firms.

8
 Figure 8.7a Example of Calculating GDP in an Income Approach. Suppose that
Included in profits are all income earned by stock holders of corporations in the Production of Rice the sales and expenses are illustrated in
regardless of whether stockholders receive it. Amongst are: dividends, the table above.
undistributed corporate profits, corporate income tax.

 Net interest – household both receive and pay interest. Persons who make loans
to businesses earn interest income.
 Indirect business taxes – this business taxes are levied as a percentage of the
prices of goods and services sold and therefore become part of the revenue
received by the firms. These taxes include the Value added Tax (VAT), excise
taxes on certain goods, and customs duties. Indirect taxes are not income
payments for the use of resources. Instead, these are taxes imposed on the goods
and services produced by firms which are passed on the final consumers through
higher prices. Firms collect indirect taxes abd remit these funds to the
government.
 Depreciation – Consumption of fixed capital is an estimate of the depreciation
of capital. This is an allowance for the portion of capital worm out in producing
GDP. Over time, capital goods, such as buildings, machines, and equipment,
Figure 8.7b Example of Calculating GDP in an Income Approach.
wear out and become less valuable or obsolete. Depreciation is therefore a
portion of GDP that is not available for income payments.
3. Expenditure approach – pertains to the consumption expenditure, government
expenditure, net exports. In this method, the national income is measured by adding
up the expenditures made by individuals, companies, and the government. Thus, it
Sales 20, 000.00 combines consumer spending, investments made by companies, net exports, and
Expenses: government spending to calculate the national income.
Wages 8, 000.00
GDP = Consumption (C) + Investment (I) + Gov’t Expenditures (G)+Net
Rents 4, 000.00
Exports (X-M)
Interest 2, 000.00
TOTAL 14, 000.00  Personal Consumption Expenditure (C) – This comprises to the total
Profit 6, 000.00 spending made by households for durable goods, nondurable goods, and
GDP = Sum of 20, 000.00 20, 000.00 services.
Payment to Factors  Gross Private Domestic Investment (I) – This national account includes
‘gross’ (all) ‘private’ (not government) ‘domestic’ (not foreign) spending of
businesses for investment in assets that are expected to earn profits in the future.

9
 Government Consumption Expenditure and Gross Investment (G) – This 4. Exports 55,000,000 14.86%
category includes the value of goods and services government at all levels 5. Less: Imports 15,000, 000 4.05%
purchases measured by their costs. For example, spending police and public GDP 370, 000,000 100%
school teachers enters the GDP accounts at the prices the government pays for
them. In addition, the government spends for investment in additions to its stock
Figure 8.8 Example of Calculating GDP in an Expenditure Approach. The table
of capital, such as schools, highways, bridges, hospitals, ports, airports, and
shows an assumption the expenditure components of the Philippine
government buildings.
GDP

It is important to understand that consumption expenditures and gross Nominal or Current GDP vs Real GDP
investment exclude transfer of payments because they do not represent newly
produced goods and services. Instead, transfer of payments are paid to those Nominal or Current GDP is the value of all final goods and services based on the
entitled to social security benefits, veterans’ benefits, and other welfare benefits prices existing during the time period of production. Nominal GDP is also referred to as the
provided by the government like the Pantawid Program of DSWD (4Ps). current market price of goods and services produced in a given time period. Nominal GDP
grows in three ways:
 Net Exports (X-M) – The last component of GDP under the expenditure 1. Output rises and prices remain unchanged
account is net exports, expressed as X-M. Exports (X) are expenditures by 2. Price rise and output is constant
foreigners for Philippine goods produced domestically. Imports (M) are the 3. Both output and prices rise.
dollar amount of the Philippines’ purchases from foreign countries like
automobiles from Japan and USA, oil products from Saudi Arabia, and other The problem therefore, is how to adjust GDP so that it only reflects changes in
goods produced abroad. Because we are using expenditures for the Philippine output and not changes in prices. This adjusted GDP allows meaningful comparison over time
output to measure GDP, you might ask why imports are subtracted from exports. when prices are changing.
The answer is the result of how government actually collects data from which
Changing prices can have huge impact on how we compare peso figures. Suppose a
GDP is computed, and GDP only measure the Philippine economic activity-
newspaper reports that, a film entitled The History of the Philippine Economy is the most
foreign sales must be deducted.
popular movie of all time. You would wonder how could it be? What about the movies of
Miss Kim Chiu or Mr. Coco Martin? Reading the article reveals that the claim is based on the
current price of the gross box office receipts. This gives a recent movie with higher ticket
prices an advantage over a movie released in 2000, when an average ticket price was only
P150.00. A better measure of popularity would compare a ‘real’ box-office receipts by
multiplying actual attendance figures for each movie by a base year movie price.
Components Total Spending % to GDP
Measuring the difference between changes in output and changes in price level
(2020)
involves making an important distinction between nominal GDGP and real GDP. Real GDP
1. Personal Consumption 30,000,000 8.11%
is the value of all final goods and services produced during a given time period based on
2. Government Consumption 100,500, 000 27.16%
the prices existing in a selected base year. The Philippine uses 2000 as the base year.
3. Capital Formation 200,000, 000 54.05%

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 We can therefore convert nominal GDP to real GDP by using the following formula:

Nominal GDP
Real GDP = x 100
GDP Deflator
Suppose GDP rises from P20, 000 in 2010 to P35, 000 in 2020, the current year. If
the GDP deflator is 125 in 2020, what is the real GDP in 2010? To convert the current GDP,
we simply substitute the values to our formula.

35,000
Real GDP2020 = x 100 = 28, 000
125

Importance of National Income Accounting

 The statistics provided by national income accounting can be used to simplify
the procedures and techniques used to measure the aggregate input and output of
an economy.
 The data provided is used to frame government economic policies, and it also
helps in recognizing the systemic changes happening in the economy.
 National income accounting provides information on the trend of economic
activity level. Various social and economic phenomena can be explained
through the data, which helps the policymakers in framing better economic
policies.
 Central banks can use the national income accounting statistics to vary the rate
of interest and set or revise the monetary policy.
 The data on GDP, investments, and expenditures also helps the government to
frame or modify policies regarding infrastructure spending and tax rates.
 The national income accounting data also shows the contribution of different
sectors, relative to each other, towards economic growth.
Figure 8.9. Unemployment rate of the Philippines in from 1999 to 2020
Source: Statista 2021. Unemployment rate in the Philippines 2020. Published by Aaron
O'Neill, Apr 1, 2021
In 2020, the unemployment rate in the Philippines was at approximately 2.16
percent and on a steady downward trend from 3.6 percent in 2014.
The Philippines’ economy relies heavily on remittances from overseas, i.e. money
sent home by Filipino emigrants and workers in other countries. In 2016 alone, approximately
30 billion U.S. dollars were received as remittances in the Philippines, and the amount seems
to increase significantly every year. This makes the Philippines one of the leading countries
worldwide when it comes to receiving remittances, only surpassed by India and China.
The Philippines’ economy is stable, not only because of remittances, but also
because of a flourishing services sector, which is now the main generator of GDP in the
country; tourism and IT in particular contribute to economic growth. More than half of the
Philippines workforce is employed in services.

Bureau of Labor Statistics (US Department of Labor) reported that both the
ECONOMIC FLUCTUATIONS, UNEMPLOYMENT AND INFLATION unemployment rate, at 6.1 percent, and the number of unemployed persons, at 9.8 million,
were little changed in April. These measures are down considerably from their recent highs in
The world economy is in recession; the US economy has not recovered from April 2020 but remain well above their levels prior to the coronavirus (COVID-19) pandemic
recession, the worst in the (3.5 percent and 5.7 million, respectively, in February 2020).

11
 Despite COVID – 19 pandemic, the unemployment reduces due to notable job gains
in leisure and hospitality, other services, and local government education were partially offset
by employment declines in temporary help services and in couriers and messengers.
The Business Cycle
A Central concern of macroeconomics is the upswings and downswings in the level
of real output or economic fluctuations called business cycle. The business cycle is the
fluctuations in the level of economic activity alternating between periods of depression and
boom conditions. In other words, it consists of alternating periods of economic growth and
contraction. Generally, business cycles are innate to market economies. A key indicator of
cycles is the rise and fall in the real GDP, which mirrors changes in employment and other
key indicators.
The Four (4) Phases of the Business Cycle
Peak
Real GDP
Year
One business cycle
Figure 8.10 Theoretical Business Cycle Model
12
This figure illustrates the hypothetical business cycle consisting of four phases: peak,
contraction/recession, trough, and expansion/recovery. This fluctuation of real GDP can be determined
in comparison with a potential GDP Line, as indicated by the broken line moving upward. If real GDP
is above potential GDP, the economy is at full employment while if it is below the potential GDP the
economy will have unemployed resources.
The business cycle is characterized by four phases. Figure 8.9 illustrates a theoretical
business cycle model. Although business cycles vary in duration and intensity, each cycle is
divided into four phases: peak or boom, contraction or recession, trough, and expansion or
recovery. It begins with a peak, drops to a bottom, rises steeply, and then reaches another
peak. Observe that once the trough is reached, the upturn starts again. The question however
as to how long the economy will stay at the peak level or trough cannot be easily determined
by economics forecasters.
Two peaks are illustrated in our hypothetical business cycle model. At each of these
peaks the economy is at, or close to, full employment. In other words, as we have explained
using the production possibilities frontier, the economy is operating at or near the production
possibilities curve, thus real GDP is at highest level. A contraction of the economy follows
each peak. A contraction or recession is a downturn in the business cycle during which real
GDP declines, business profits fall, and the percentage of the labor force without jobs rises,
and the production capacity is underutilized resulting to high unemployment rate.
Generally, an economy is said to be at a recession if the decline in real GDP is at
least two consecutive quarters (six months). In other words, during a recession, the economy
is operating further inside its production possibilities frontier.
UNEMPLOYMENT
One of the main goals of every economy is to achieve a high level of employment.
We noted in our discussion of the production possibilities frontier that the economy is at full
employment if its operation is at production possibilities curve. This means that all available
resources of the economy are fully utilized in the production of goods and services. However,
if there are unused or idle resources, we say that there is unemployment. In such a case, the
economy is operating inside its production possibilities frontier.
 Unemployment, in its stricter sense however, refers to the unemployed labor
resource, which is measured by the unemployment rate during a particular period of time.
Unemployment is simply the percentage of people in the labor force who are without jobs and
are actively seeking job (Tucker, 2008). In the case of the Philippines the labor force
comprises each member of the household 15 years of age or older who is employed or
actively seeking for employment during a given period of time. In other words, it is the
population 15 years old and over who contribute to the production of goods and services in
the country. It includes those who are either employed or unemployed. Those who are neither
employed nor unemployed are considered not in the labor force.
For instance, persons who are not working and are not available and are not looking
for work because of reasons other than those previously mentioned. Examples are
housewives, students, disabled or retired persons and seasonal workers. The unemployment
rate is computed using the formula below:
Number of unemployed
Unemployment Rate = x 100
Labor Force
Figure 8.11 The Unemployment Rates in the Philippines from January 2020, October 2020, and
January 2021.
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Figure 8.11 illustrates that 4 million Filipinos were unemployed in January 2021.
This is higher than the 3.8 million unemployed in October 2020 and the 2.4 million in January
2020. The figure in January 2021 translates to an unemployment rate of 8.7%, as businesses
struggle to open amid the coronavirus pandemic (PSA, 2021).
However, the latest interview of Xinhua Net News (March 2021) to the PSa Head
Dennis Mapa that Philippines' unemployment rate in March 2021 fell to 7.1 percent amid the
COVID-19 pandemic. The unemployment rate in February was 8.7 percent. The number of
unemployed Filipinos aged 15 years and over in March 2021 was estimated at 3.44 million,
and a reduction of about 747,000 unemployed persons from February 2021. This implies that
there was a month-on-month increase of about 2.18 million Filipinos who had job or business,
from 43.15 million in February 2021 to 45.33 million Filipinos in March 2021.
4 Types of Unemployment and Their Causes
There are four main types of unemployment in an economy—frictional,
structural, cyclical, and seasonal—and each has a different cause.
1. Frictional unemployment. Frictional unemployment is caused by temporary
transitions in workers’ lives, such as when a worker moves to a new city and has
to find a new job. Frictional unemployment also includes people just entering the
labor force, such as freshly graduated college students. It is the most common
cause of unemployment, and it is always in effect in an economy.
2. Structural unemployment. Structural unemployment is caused by a mismatch
in the demographics of workers and the types of jobs available, either when there
are jobs available that workers do not have the skills for, or when there are
workers available but no jobs to fill. Structural unemployment is most obvious in
industries undergoing technological advancements. For example, in the farming
industry, much of the work is becoming mechanized, which means that fewer
farmers are needed and many are let go. When these farmers go to cities to find
work, they may find no other similar jobs in which to apply their skills.
 3. Cyclical unemployment. Cyclical unemployment is caused by declining
demand: when there is not enough demand in an economy for goods and
services, businesses cannot offer jobs. According to Keynesian economics,
cyclical unemployment is a natural result of the business cycle in times of
recession: if all consumers become fearful at once, consumers will attempt to
increase their savings at the same time, which means there will be a decrease in
spending, and businesses will not be able to employ all employable workers.
4. Seasonal unemployment. Seasonal unemployment is caused by different
industries or parts of the labor market being available during different seasons.
For instance, unemployment goes up in the winter months, because many
agricultural jobs end once crops are harvested in the fall, and those workers are
left to find new jobs.
INFLATION
Inflation or the rate of increase in the prices of goods was steady at 4.5% in April
2021, according to the data posted by Philippine Statistics Authority on May 2021. The
latest figure is unchanged from the March 2021 rate and more than double the 2.2%
posted in April 2020. Year-to-date, inflation settled at 4.5%, still beyond the
government's target range of 2% to 4%.
Inflation defined
What exactly is inflation? You may read it in the newspapers or heard on
television, or radio or in social media. Inflation is defined as a broadly based rise in the
price level. In other words, inflation is the rise in the general level of prices of goods and
services in an economy over a period of time. Thus, if there is inflation there is a general
upward movement of goods and services in an economy. Inflation is usually measured by
the Consumer Price Index (CPI).
When the price level rise, each unit of currency (say peso) buys fewer goods and
services;consequently, we can also say that inflation is erosion in the purchasing poer of
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money – that is, a loss of real value in the internal medium of exchange and unit of
account in the economy.
The chief measure of price inflation is the inflation rate, an annualized
percentage change in the general price index (the CPI) of time. We can therefore compute
the inflation rate using the formula below:
CPI ∈current year−CPI ∈ previous year
Price increase in CPI = x 100
CPI ∈ previous year
Inflation can have positive and negative effects on an economy. Negative effects
of inflation include:
1. a decrease in the real value of money (or the purchasing power of money) and
the other monetary items overtime.
2. uncertainty about future inflation may decrease investment and saving; and,
3. high inflation may lead to shortages of goods if consumers begin hoarding out of
concern that prices will rise in the future.
However, positive effects include a mitigation of economic recessions, and debt
relief by reducing the real level of debt.
Theories of Inflation
There are two theories that economists tell us what causes inflation. These are
demand – pull inflation, and cost-push inflation.
Demand – Pull Inflation. The most popular type of inflation is demand-pull
inflation, which is a rise in the general price level resulting from an excess of aggregate
demand (total spending). Demand – pull inflation is often expressed as ‘too much money
chasing too few goods.’ We already know that when sellers are unable to supply all the
goods and services that buyers demand, this results to shortage in supply so that the
tendency is for sellers to raise prices.
 Demand-pull inflation usually occurs at or near full employment, when economy
is operating at or near full capacity. Remember that at full employment all the available
resources in the economy are fully utilized. Therefore, the capacity of the economy to
produce more goods has already been reached so that it cannot produce more goods and
services given its limited resources.

Cost-Push Inflation. An excess of total spending is not the only possible

explanation for rising prices. As we have experienced, rising prices of crude oil in the E – Self-Check/Assessment
world and domestic markets result to rising prices of goods and services. This is because
Instructions: Fill the blank the letter of your best answer before the number. Erasure is also
increase in the prices of oil products results in an increase in the cost of production of
not allowed.
goods and services. The result cost-push inflation. Cost – push inflation is the rise in the
general level of prices resulting from an increase in the cost of production.
________1. Gross National Product includes:
a. Services of farmers coursed through the markets.
We should remember that the source of cost-push inflation is not always due to b. Gains from illegal transactions arising from rice importation.
the increase in prices of oil products. Any sharp increase in costs of production of c. Government transfer payments.
businesses can be a potential source of cost-push inflation. This means that upward d. Receipts from sales of second and tractors.
pressure in prices can be caused by increase in the minimum wage, prices of raw
materials, construction, equipment, rise in the cost of borrowing (interest rate), increase ________2. An example of transfer payments is:
in the price of electricity, and so on. Businesses can also contribute to cost-push inflation a. Pension of retired government agriculturists.
by raising prices to increase profits. b. Expenditures on rice.
c. Wages and salaries of technicians working on government farms.
A variant of the cost-push inflation is the profit – push inflation. Because just a d. Salaries of agribusiness executives.
handful of huge firms dominate many industries (for instance, computer, software,
cigarettes, detergents, cars, oil), these firms have the power to set prices in those ________3. Economists prefer to use real GNP than current GNP as a measure of aggregate
industries rather than accept the prices dictated by market forces of supply and demand. output because
As such, they are able to protect their profit margins by raising prices, these firms will a. Current GNP always understates actual output changes
respond to any rise in costs by passing them on to their customers. b. Real GNP adjusts current GNP for inflation.
c. Real GNP adjusts for the unequal distribution of income.
d. All of the choices are correct.

________4. Nominal GDP in 2020 was estimated at P500B. If the consumer price index in
2020 using 2000 prices is equal to 125, then real GDP for 2020 must be:
a. P400B
b. P300B

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 c. P250B
d. P125B ________9. Inflation rate shows…
e. None of the choices from A-D are correct a. the average price level during a particular period of time
b. the price level in a given year expressed in terms of a base year
c. the percentage rate per period that prices are increasing
________5.Which of the following is a normative statement? d. a measure of the change in real output from one year to the next
a. A guaranteed annual income will have a distinctive effect on work
b. If price controls are removed the energy shortage will be somewhat alleviated ________10. The CPI is designed to measure the degree to which:a. free resource
c. Price controls on oil and gasoline are only fair
d. The minimum wage law causes unemployment among teenagers a. income are distributed among the poor and rich over time
b. the cost of purchasing a bundle of consumer goods has changed with time
________6. Suppose that the consumer price index for 2018, 2019, and 2020 are 100, 110 and c. consumption patterns have changed with time because of prices
125, respectively. This implies that the general price level in 2020 is higher than that of 2018 d. consumer prices have risen, relative to wages.
by:
a. 25 pesos
F – Self-Reflect
b. 15 percent
c. 25 percent 1. How inflation rate affects your budgeting in your family basic need montly? Explain
d. 10 pesos or illustrate using an example. (20 points)

________7. Jerry is a high school graduate and employed at PNS Supermart at a ___________________________________________________________________________
merchandiser. Because of his dedication to his work and diligently done his tasked. He was
___________________________________________________________________________
promoted by the manager as sales associate. However, a new management took-over the
company and requiring all employees to undergo screening but his qualification is a mismatch ___________________________________________________________________________
to the position he was hired before and do not have the skills for, and no jobs for him to fill
___________________________________________________________________________
based on his qualification. What type of unemployment the situation belongs?
a. cyclical ___________________________________________________________________________
b. structural
c. seasonal ___________________________________________________________________________
d. frictional
___________________________________________________________________________

________8. Which of the following is considered an investment? ___________________________________________________________________________

a. Mang Kadong buys a second hand tractor from Mang Lucio.
b. Mang Pedro deposits P50,000.00in his savings account. __________________________________________________________________________
c. Mrs. Santos constructs a new condominium worth P2billion. Rubrics for Essay Question
d. Mr. Gil buys P10 million of stocks from Mr . Reyes.

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 Criteria for Written Exercises (As Agreed by the whole class)

Content (Correctness and Appropriateness of Ideas Presented) – 10 points

Convention (Linguistic Appropriateness – Grammar, Phonology,
Semantics) – 5 points
Quality (Neatness, refinement and skillfulness) – 5 points
Total = 20 points

References

Andrew Barkley and Paul W. Barkley. 2013. Principles of Agricultural Economics.

Simultaneously published in the USA and Canada by Routledge ,Taylor & Francis
Group, an informa business. ISBN: 978-0-415-54069-8 (hbk); ISBN: 978-0-415-
54070-4 (pbk); ISBN: 978-0-203-37114-5 (ebk)
Asor, Winifreda T. Entrepreneurship. Publishing, Inc. 2007.

Dheeraj Vaidya, CFA, FRM. What is Macroeconomics? | Top Terms in Macroeconomics. An

Article at https://www.wallstreetmojo.com/macroeconomics/. Retrieved. May 2021.

Marcelino, et al. 2010. Principles of Economics. National Book Store. Mandaluyong City. Pp
145-169

Pagoso, C., et. al (2015). Principles of Economics. Rex Book Store, Manila, Philippines. pp.
231-285

Philippine Statistics Authority, May 2021. Reference Number: 2021-190

Prepared by:
MARY GRACE ARCENAL-APOLONA
Course Instructor

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