Module 2: Macroeconomic

Indicators
Module Overview
This module presents the framework adopted by the government in measuring the Philippine
economy's output. It will also present important concepts necessary for understanding the
validity of this framework.

Motivation Question
Have you already accounted for all of your desirable traits? What about your undesirable ones?
Will your strengths help you in achieving your goals?

Module Pretest

Instruction: Answer whether the following statements are true or false.

1. The approaches in measuring GDP do not equate with each other.
2. Goods and resources flow into the consumer without the exchange of payment.
3. Nominal and Real GDP are the same.
4. GDP is a perfect measurement of evaluating the country's welfare.
5. The sale of a used laptop contributes to GDP.
Lesson 2.1: The circular flow model of the economy

Lesson Summary
In this lesson you will learn about the theoretical assumptions of the adopted system of
national income accounting.

Learning Outcome
1. Explain the workings of an economy based on the circular-flow model
2. Distinguish between an injection and a leakage.

Motivation Question
What practices do you want to inject into your daily routine to be productive? Are their activities
that are needed to let go of?

Discussion
The economy is usually broken down into four economic agents: households, firms
(business), government, and foreigners (rest of the world). The circular model of the economy
depicts a simplification of how an economy works. It gives an idea of the types of payments
made in the economy, the agent who makes the payment, and the agent who receives it.

Figure 1. The circular flow model of a two-sector economy

The circular flow diagram summarizes transactions between different economic agents.
The lower loop represents transactions in the factor markets. In producing output, firms use
resources. Households deliver economic resources to the business firms for use in production.
In return for the resources delivered by the households to the business firms, they get payment
for the use of resources which becomes income to them.
The upper loop captures the transactions in the goods and services markets. Income
now becomes the source of funds of households needed by them to buy goods and services for
consumption. The households give money payment for the purchase of goods and services.
The model implies that goods, resources, and money payments will flow as long as
households continue to consume and as long as firms continue to produce. Since goods and
resources flow in exchange for payments, the rate of payments flow will, in the end, be the
same. The value of all goods and services produced in the economy during a year is equal to the
money which business firms spent and which households received. Within the circular flow, the
measure of output and the measure of income always result in the same value as for every peso
value of output produced, one peso income is created or generated.

A more comprehensive circular flow diagram will incorporate the above two other
agents and likely to include the following transactions:

a) Government purchases of goods and services. Government buys goods and services for
its day-to-day operations and projects. These represent transactions for which the
government makes payments to firms.
b) Government payments for factor services. Government hires workers, rents privately
owned buildings, etc. These represent payments of government to the owners of the
factors of production; e. g. salary of a public school teacher is a payment from the
government to the household.
c) Transfer payments between different agents. Transfer payments are transactions
wherein one party is not obliged to deliver a good or service in return for the payment.
Examples: retirement benefits, unemployment benefits, scholarships, and donations. For
unemployment benefits, transactions are shown as payments from government to
households.
d) Firms and households pay taxes to government. These include the taxes paid on income,
property, goods and services. In the diagram, reflected as payments fro the households
and firms to the government.
e) Transactions with the foreign sector. Transactions between domestic and foreign agents
include sales of goods and services, assets and transfers. Sales of domestically
produced goods to other countries are called exports. These are reflected as payment
form the rest of the world to the firms. Imports or goods bought from other countries will
be reflected as payments by the purchasing domestic agent to the rest of the world.
f) Transactions with the financial sector. Interests and dividends paid to investors and
investment capital to financial institutions.
g) The biosphere and physical environment – To capture the acquisition of raw materials
from the earth and the elimination of pollution and waste unto the environment .

Inflows and outflows

Consumption is the mainstream of the circular flow. If firms produce P50B goods and
services, income of households would total P50B and spending would be P50B. However, if
households do not usually spend all their income, a portion is saved. In some sense, any income
that is not spent will result in a lower level of output in the economy in the next production
period. Thus, we can consider savings as leakage, or outflow, putting money out of the
economy, where it intends to be used as payment to firms and households. The following are
considered as outflows, or leakages:
1. Savings – decreases the level of economic activity in the flow because it decreases the
amount for consumption. This is considered as an outflow from the stream.
2. Tax – with the presence of government, people have to pay taxes (payments of
households and firms). The effect is to lessen the disposable income and amount
available for consumption spending.
3. Imports – purchases from foreign countries. These decrease the level of economic
activity.

The opposite of the leakages is called injections or inflows into the economy. These activities
bring in money to the economy, which could then be used to increase the economy’s output.
The following are considered as inflows or injections into the economy:
1. Investment – when a household saves, money is brought to bank as deposits. Banks use
the funds by investing them: a) making payments to business sector and b) lending to
people who likewise invest the money. If investment is equal to saving, it offsets the
outflow caused by the saving of households.
2. Government's collection of taxes – used by government to defray expenses like
infrastructure, social services, education, economic development, etc. The amount is
spent back in the form of government spending or expenditures into the flow and offsets
the outflow of taxes.
3. Exports – purchases by foreign countries of locally produced goods. Exports are inflows
that offset outflows of imports.

Equilibrium Condition
Leakages = Injections
S+T+M=I+G+X
where:
S = saving I = investment
T = taxes G = government expenditures
M = imports X = exports

Learning Tasks/Activities
If the circular flow diagram described perfectly how the economy works, will saving be
considered a bad thing?

Assessment
Answer the question from the learning task above.
Instructions on how to submit student output
There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.
1. You may email your outputs using my VSU email address:
kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module2,
Lesson1.
2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A

Lesson 2.2: Measurement of the economy's output

Lesson Summary
In this lesson you will learn the theoretical underpinnings of the different approaches in
measuring GNP.

Learning Outcome
1. Solve for the value of GDP using different approaches.
2. Discuss the different concepts regarding the components of the different approaches.

Motivation Question
Can you measure the amount of effort you have given to reach your goals?

Discussion
The primary statistic that measures an economy's output is called as Gross Domestic
Product (GDP). It is a measure of the market value of all final goods and services within an
economy in a given period. It is measured for a year or quarter. It is a summary indicator of how
much output was produced by the economy. It is measured in monetary terms and is limited to
final goods and measures only current production. Transfer payments and transactions
involving goods produced in other periods are not included. Transfer payments are excluded
because no current production takes place in return for the payments. Example: unemployment
benefits – recipient does not render a service; retirement benefits – service was provided in the
period prior to that for which GDP is being calculated. Current production takes into account
values of goods and services during the current period. Some goods bought in 1999 could have
been produced in 1998. Sale will not be included in GDP for 1999 and would have been included
in 1998, the year in which the goods were produced. Purchases of secondhand goods are not
included in the calculation of GDP. Example: buy a 1990 model car in 1999 – value of the car not
included in the 1999 GDP because the good was not produced in that year. In national income
accounting, such transaction is treated only as transfer of ownership.

Other examples:
❖ Construction of new house – yes to GDP
❖ Sale of existing house – no to GDP
❖ Value of realtor's fees in the sale of existing house – yes to GDP (realtor provides a
current service in bringing buyer and seller together)

GDP is expressed in the currency of a particular country, indicating the market value of
the goods and services that are produced in the economy. The market value of a commodity is
the product of the price per unit and the number of quantities produced. We use market values
because of the fact that we cannot directly add different goods and services. For example,
qantity of buko pie and number of haircuts are not sensible to add. The use of market values
allows us to add the quantities of different goods in a common unit (easily understood). The
market values present the sum in a number that people can easily understand.

GDP only measures the value of final goods and services which are goods and services
that are not purchased for the purposes of producing other goods and services or resale. For
example, buying a coconut to eat it as it is; the coconut here is considered a final good and its
value should be included in GDP.

If the coconut is used to produce buko pie and sold in the market, coconut is considered
an intermediate good. Hence, the value of coconut is not included in the calculation of GDP.
Values of intermediate goods are excluded in order not to double-count (avoid double counting).
Fopr example, a baker buys P10 flour to produce buko pie. The consumer buys the buko pie at
P50. Buko pie is the final good (not purchased to produce another good) while flour is the
intermediate good. If the sales of flour and buko pie represent the only transactions in the
economy, then GDP will be equal to P50 (value of buko pie). The baker's flour is not included
because its value is already embodied in the price of buko pie. If we add value of flour to GDP,
will include the value of the same quantity of flour twice (results to double counting). To avoid
double counting, GDP measurement is limited to final goods only.

Approaches to GDP measurement

GDP can be tracked using three equivalent approaches. The following paragraphs
outline them.
 1. Expenditure approach
The expenditure approach involves calculating the sum of all expenditures on final
goods (total sales for final use) in the economy. For example, given that there are only 2 final
goods in the economy, GDP can be computed as such:

Table 1. GDP computation of the hypothetical economy using the expenditure approach

Good Price/unit (P) Quantity Sold Expenditure (P)

Ice cream 100 10 1 000
Buko pie 50 5 250
GDP 1 250

where expenditure is the product of pruice per unit ad quantity sold. Total expenditure or
spending on ice cream and buko pie from the example are P1 000 and P250, respectively. Since
GDP is equal to the sum of the expenditures on final goods, the hypothetical economy's GDP is
P1 250.

2. Income approach
The income approach calculates GDP by taking the sum of the payments for the
different factors of production. It is the total of all incomes from wages, interest, profits and
rent.

GDP = wages + interest + profits + rent

If there are 5 million workers in the economy who receive P30 000 each for the year, then
wages is equal to P150 M. We add in to this, the interest payments on investments, profits of
businesses and rent on leased property.
3. Value-added approach
The value-added approach measures the contribution of the different factors of
production to the value of a good. The value-added is equal to the sales of a firm minus
purchases from other firms.

Table 2. Income statement of a hypothetical firm

Item Amount (P)

Sales 1 000
Costs of production
Wages 100
Interest 100
Rent 100
Purchases from other firms 300
 Profits 400

The firm's value added is equal to P700. This is sales – purchases = P1 000 – P300 =
P700. This came from the sales (1,000) minus the purchases from other firms (300). This value
is the total value of the payments to the factors of production.

Value-added is actually equal to the firm's factor payments. Value-added is sum of

payments for wages, rent, interest and profits. With the value-added approach, GDP is equal to
the sum of the value-added of each firm in the economy. For example if there are 2 firms in the
economy, with firm 1 having a value added of P200, and firm 2 having a value added of P100;
GDP will be equal to P300.

Are the approaches equivalent?

Each approach gives the same value for GDP because each approach just represents a
different view of the same transaction. In any sale of a final good or service, one party makes a
payment (expenditure) and another party receives the payment (income). In the expenditure
approach, GDP is calculated from the side of the agents making the payments. This must equal
the total income of the groups that received payments. In the income approach, simply identify
how this income is divided: wages, interest, rent and profits. The value-added of a firm is the
sum of its payments to wages, interest, rent and profits. Each payment represents the income
of a group of households. Taking the sum of the value-added of firms is just like taking the sum
of the incomes of households. Income and value-added approaches must yield the same total.
Since income and expenditure approaches are equivalent, then value-added and expenditure
approaches must also be equivalent.

Example:
Table 3. Sales, costs and profits of firms A and B

Item Firm A Firm B Total

Sales
For final use P 1 000 P 2 000 P 3 000
Other firm1 500 300 800
Costs
Wages 400 500 900
Interest 300 300 600
Rent 300 500 800
Purchases from the other firm 300 500 800
Profits 200 500 700
1
Sales to the other firm for Firm A must equal the purchases from other firm of Firm B and vice-
versa.
Expenditure Approach:
GDP = sum of the sales of firms A and B for final use
= P 1 000 + P 2 000 = P 3 000
Income Approach:
GDP = total payments for wages, interest, rent and profits
= P 900 + P 600 + P 800 + P 700 = P 3 000
Value-added Approach:
GDP = total sales (sales to households + sales to other firms) less
purchases from other firms (A+B)
= P 1 200 + P 1 800 = P 3 000
Since the results are the same, then we prove that the three approaches are equal.

Learning Tasks/Activities
Fill in the empty cells
Item Firm A Firm B Total
Sales
For final use P 1 000 P 5 000
Other firm1 300 800
Costs
Wages 400 600
Interest 300 300 600
Rent 200 500
Purchases from the other firm 300 500 800
Profits

Assessment
Submit the filled-in cells fromn the table above. Compute also the GDP figure.

Instructions on how to submit student output

There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.
1. You may email your outputs using my VSU email address:
 kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module2,
Lesson2.
2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A

Lesson 2.3: The National Accounts of the

Philippines

Lesson Summary
In this lesson, you will learn about the National Income accounts as adopted by the Philippine
government.

Learning Outcome
1. Solve for the value of GDP using different approaches.
2. Discuss the different concepts regarding the components of the different approaches.

Motivation Question
If your family, friends, and schoolmates calculate a rating for your personality, will their ratings
be the same?

Discussion

Expenditure Approach

The following are the components of GDP using the expenditure approach:
Table 4. Components of the expenditure approach

Personal consumption expenditures

(C)
 Add Gross domestic capital formation (I)
Fixed capital
Changes in stocks
Add Government consumption
expenditures (G)
Add Exports
Less Imports
Add Statistical Discrepancy
Gross Domestic Product (GDP)
Add Net Factor Income from Abroad
(NFIA)
Gross National Product (GNP)

Personal consumption expenditures (C) is the spending of households and private non-
profit institutions on goods and services. Example: food, clothing, entertainment, etc. Involve
durables and non-durables. Durables are those that last for a longer period of time; e.g.,
appliances, furniture, etc. Non-durables are goods and services that are consumed rapidly; e.g.,
food, beverages, services, etc.

Gross domestic capital formation (I) represents the investment spending of domestic
agents (fixed capital + changes in stocks). Fixed capital are expenditures on new construction
and purchases of durable equipment. Changes in stocks represent additions to or reductions in
firms' inventories; adjustment for the fact that not all goods are bought in the period in which
they are produced (ensure that GDP measures the economy's current output).
Government consumption expenditures (G) represent the government's payments for the
salaries of the workforce as well as expenditure of goods and services used for its day-to-day
operations and projects.

Exports (X) represent the spending of the rest of the world on goods and non-factor
services produced in the Philippines (not all goods are sold to domestic agents).

Imports (M) represent the country's purchases of goods and non-factor services for the
rest of the world (these don't represent domestic production).
Statistical discrepancy accounts for measurement error. It captures reporting and
recording errors that cause GDP estimates of the three approaches to differ from each other. It
is a theoretical account used to even out difference between figures obtained by approaches.

GDP can be distinguished from GNP. GNP is the value of all final goods and services
produced by residents of an economy within a given period. GDP is less than GNP if NFIA is
positive and vice-versa. Part of GNP is earned abroad.
Table 5. Gross Domestic Product by Expenditure Shares, 2018 current prices, in millions

Component Value % of GDP

Household Final Consumption Expenditure 12,864,928 73.83
Government Final Consumption Expenditure 2,078,437 11.93
Gross Domestic Capital Formation 4,694,352 26.94
Fixed Capital 4,663,858 26.76
Construction 2,326,341 13.35
Durable equipment 198,236 1.14
Breeding stock and orchard development 246,991 1.42
Intellectual property products 106,291 0.61
Changes in Inventories 30,493 0.17
Net Exports - 2,211,515 -12.69
Exports of Goods and Services 5,521,318 31.68
Exports of goods 3,169,266 18.19
Exports of services 2,352,053 13.50
Imports of Goods and Services 7,732,833 44.37
Imports of goods 6,322,435 36.28
Imports of services 1,410,399 8.09
GROSS DOMESTIC PRODUCT 17,426,202 100.00

Net factor income from abroad (NFIA) is the difference between earnings of Philippine
residents inother countries and foreign residents in the Philippines. It represents earnings from
labor services and ownership of assets (OCWs). If NFIA is positive, then Philippine residents
earn more from their transactions overseas (abroad) compared to what foreigners earn from
their transactions in the Philippines (residents of a given country are earning more abroad than
foreigners are earning in that country). With NFIA, GNP represents earnings of Philippine
residents, regardless of where the income is earned (part of GNP is earned abroad). While GDP
is limited to production in the Philippines.

Income Approach

The following are the components of GDP using the income approach:
Table 6. Components of the income approach

Compensation of employees
Add Net operating surplus
Add Indirect business taxes
Less Subsidies
Net National Product (NNP)
Add Depreciation
Gross Domestic Product (GDP)
 Compensation of employees represents simply the salaries and wages of workers in the
economy. Net operating surplus meanwhile lumps together all sources of income other than
labor. It includes property income of persons, government income from property, and corporate
income (corporate savings + corporate taxes). In a simple world, the sum of compensation of
employees and net operating surplus is equal to GDP. However, there is a need for adjustment
in equating income and expenditure sides of the national accounts.

Indirect taxes less subsidies accounts for things like taxes on the use or purchase of
goods and services and grants from government to firms. Firms do not include indirect taxes in
computing for their profits because proceeds go to the government. Indirect taxes and
subsidies show up in the market prices of goods and services; e.g., VAT. Market prices used in
the expenditure side include taxes, hence the need to include in the income side to generate the
same value for GDP.
Table 7. Gross Domestic Product by Income Shares, 2018 current prices, in million pesos

Component Value % of GDP

Compensation of Employees 6,428,182 36.89
Operating Surplus, net 7,915,503 45.42
Consumption of Fixed Capital (Depreciation) 1,596,400 9.16
Taxes on Production and Imports (Indirect Taxes) 1,650,555 9.47
Subsidies 164,437 0.94
GROSS DOMESTIC PRODUCT 17,426,202 100.00

Depreciation (capital consumption allowance) represents the consumption of existing

capital stock. Example: computer worth P40T with life span of 5 years has depreciation of P8T
over a period of 1 year. It is treated as a business cost. In calculating profits, it is subtracted
from revenues. The sum of compensation of employees and net operating surplus do not
include this. Add to income side to ensure that income and expenditure accounts yield the
same.

Value-Added Approach

This is approach is disaggregated based on the nature of activities from which the value
added is generated. The sectors include agriculture, fishery and forestry, industry, and services.

Agriculture, Fishery and Forestry represent the value added of three sectors. Agriculture
captures value-added from production of agricultural crops, ornamental plants and livestock.
Fishery includes commercial and municipal fishing, aquaculture, and the harvesting of marine
products. Forestry represents activities such as logging and gathering of other forestry
products.

Industry represents the value-added of firms engaged in mining and quarrying,

manufacturing, construction and utilities.

Services is made up of transportation, communication and storage, trade, finance,

ownership of dwellings and real estate, private services, and government services.
Table 8. Gross Domestic Product by Industry Shares, 2018 current prices, in million pesos

Component Value % of GDP

Agri., Hunting, Forestry and Fishing 1,617,910 9.28
Agriculture, hunting and forestry 1,403,040 8.05
Fishing 214,869 1.23
Industry Sector 5,358,045 30.75
Mining & Quarrying 146,185 0.84
Manufacturing 3,320,346 19.05
Construction 1,347,556 7.73
Electricity, Gas & Water Supply 543,958 3.12
Service Sector 10,450,248 59.97
Transportation, Storage and
Communication 1,030,521 5.91
Trade and repair of motor vehicles
Motorcycles, personal and household goods 3,229,363 18.53
Financial Intermediation 1,461,025 8.38
Real Estate, Renting & Business Activities 2,227,075 12.78
Public Administration & Defense:
Compulsory Social Security 787,464 4.52
Other Services 1,714,800 9.84
GROSS DOMESTIC PRODUCT 17,426,202 100.00

Learning Tasks/Activities
Research on the size and components of the Philippines’ underground economy.

Assessment
Submit a report of your findings from the learning task above.

Instructions on how to submit student output

There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.
1. You may email your outputs using my VSU email address:
kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module2,
Lesson3.
2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
 KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A

Lesson 2.4: Related measures of output and

concerns

Lesson Summary
In this lesson, you will learn about how GDP lacks several important features in serving as a
perfect measure of an economy's health.

Learning Outcome
1. Discuss the concepts of Real, Nominal GDP and GDP per capita.
2. Discuss the limitations of GDP as a measure of an economy's output and welfare.

Motivation Question
If you fail in achieving your goals, what will be the consequence?

Discussion
GDP can be distinguished in two ways: Nominal and Real GDP. Nominal GDP is GDP at
current prices; it measures the value of output in a given period using prices of that period.

Example:
▪ 1990 nominal GDP measures the value of goods produced in 1990 at the market prices
prevailing in 1990 while 1995 nominal GDP measures the value of goods produced in 1995
at the market prices that prevailed in 1995.
Nominal GDP changes from year to year due to:
a) changes in physical output
b) changes in market price
 In making comparisons over time, nominal GDP can be a misleading indicator of changes
in output or income because it also embodies changes in the prices of goods and services. This
is the reason that in making comparisons, Real GDP is used.

Real GDP is GDP at constant prices; it measures the total value of output using the prices
of goods of a selected (base) year.
Table 9. An example comparing Nominal and Real GDP

1990 Nominal GDP 1995 Nominal GDP 1995 Real GDP *

Goods
Quantity Price Value Quantity Price Value Quantity Price Value

Shoes 150 200 30 000 200 250 50 000 200 200 40 000

Bags 100 150 15 000 130 170 22 100 130 150 19 500

Total 45 000 72 100 59 500

* Measured in 1990 prices

Nominal GDP in 1990 was P45 000 and nominal GDP in 1995 was P72 100. There's an
increase in GDP by more than 60%; much of this increase was due to the increase in prices. Real
GDP in 1995 was only P59 500 or an increase by 32% and not 60%. The 32% increase is a better
measure of the increase in physical output than 60%. In this sense, Real GDP eliminates the
effects of price changes. Adjusting GDP estimated for price changes determines the real change
in output or income produced or received in the economy over time.

The GDP deflator is a kind of price index that measures the cost of purchasing a given
bundle of goods in one period relative to the cost of purchasing the same bundle in the base year.
It indicates how prices of goods and services, on the average, change over time. It is the ratio of
nominal GDP in a given year to real GDP. If price index is 125, then the cost of purchasing a given
bundle of goods is 25% higher in that year compared to the base year. From the previous example,
ratio of nominal to real GDP in 1995 is 1.21 derived by getting the quotient of P72 100/P59 500.

GDP Per Capita is a good indicator for evaluating economic performance over time. It
measures how much output or income was produced or received, on the average, by an individual
in an economy. This indicator adjusts for changes in the population of a country. Estimates of per
capita real GDP are important for time series analysis because these eliminate the effects of
changing prices and population. It gives idea of how much an individual's production or income,
on the average, has changed over time. Real GDP per capita is measured as the quotient of Real
GDP divided by the number of the population.

Some important considerations

GDP is not a perfect measure of an economy's output or its citizen's well-being. The
following outlines the reasons for such statement:
1. It fails to include non-marketed or non-traded goods and services; e. g., household
services like baby-sitting, cooking, cleaning, helping friends and relatives (tutoring,
repairing appliances, etc.); not included in GDP because no formal markets exist;
underestimates the actual production that takes place in the economy
2. Does not include transactions of the underground economy; some activities are not
included because these are illegal; not reported to evade payment of taxes; e. g., drug
 trafficking, prostitution, gambling, cigarette vending; underestimates an economy's
production
3. It only measures tangible income; it does not measure satisfaction
4. It excludes externalities (unintended result of an activity); doesn't include or reflect the
costs of achieving high levels of output; e. g., pollution
5. It fails to give idea on the distribution of income
6. Not useful in comparing GDP across countries because household production is not
included.

Learning Tasks/Activities
Critically evaluate the use of national Income accounts in measuring an economy’s welfare.
What other possible activities that can be considered as ouput have not been discussed here?

Assessment
Submit a report of your findings from the learning task above.

Instructions on how to submit student output

There are three options for you to submit your output for the assessment. Please choose the
one that is most convenient and safe for you.

1. You may email your outputs using my VSU email address:

kjgalvez @vsu.edu.ph and put in the subject line: Outputs for ECON102 Module2,
Lesson4.
2. You may hand in your output in the kiosk where you got this manual. Write your name,
course and address outside the envelope and label it as Outputs for ECON102, and
write my name and address.
3. You may also send your outputs through courier, to the following address:
KARL JOHN A. GALVEZ
Department of Economics, Visayas State University,
Visca, Baybay City,
Leyte 6521-A
Lesson 2.5: Indicators for the labor market and the
general price level

Lesson Summary
In this lesson you will learn about the indicators for the labor market and the price level

Learning Outcome
1. Explain the labor market, its components and issues.
2. Compute for the inflation rate using hypothetical market basket

Motivation Question
If you fail in achieving your goal, what will you do next?

Discussion

Unemployment

Unemployment characterizes people that are not gainfully employed but are willing and
able to work and are actively seeking employment. If a person satisfies the first two statements
but is not actively seeking employment, that person is classified as not a part of the labor force.
We can decompose a country’s population that can work into two: those that are a part of
the labor force and those that are not. If a person is employed or actively seeking employment,
he is a part of the labor force. In the Philippines, only 15 years and over can be a part of the labor
force. In October 2020, there were 74 million Filipinos that are 15 years and over. Out of this, 45
million are a part of the labor force. The number means that 45 million Filipinos are willing and
able to work and at the same time employed or actively seeking employment. This number gives
a labor force participation rate of 58.7%.
The labor force can be divided into those that are employed and those that are
unemployed. About 41 million Filipinos were gainfully employed in October 2020, giving us an
employment rate statistic of 91.3%. This number leads to an 8.7% unemployment rate or about 4
million people. 8.7% is an improvement to July 2020’s figure of 10%.
Table 10. Philippine labor market situation, October 2020

Economic expansions tend to decrease the number of unemployed people. Whenever an

economy is growing, more jobs are available for unemployed people to fill in. Because the current
output level is mostly dependent on its previous values, increased unemployment, as what we
experience now, may reduce income for some people in the foreseeable future.
Unemployment can be classified into four:
1. Frictional – consists of people searching for work or are waiting to take a job in the near
future.
2. Structural – consists of people that are permanently laid off in jobs that are no longer
needed due to advances in technology or changes in products demanded.
3. Cyclical – consists of people laid off temporarily due to recessions or downturns in the
economy.
4. Seasonal – consists of people that are temporarily not in active employment because
their seasonal job has just ended or not yet in effect.

The presence of frictional and structural unemployment is a characteristic of a dynamic

economy. People are coming in and out of the labor force. People that went sick or are taking
care of a sick relative will have to be not a part of the unemployment level. By the time they return
to actively seeking employment, they may not be able to find a job immediately and will fall into
the frictional unemployment category. The same goes for those that recently graduated from
college. Competition from other fresh graduates may make employment hard for some. New
graduates are often unemployed in the first few months after graduation. Some structural
unemployment is a sign of a healthy economy. This circumstance reflects the constant innovation
and production of new products that may result in old industries becoming obsolete. As time
moves on, this displacement comes faster.
This natural level of unemployment that an economy holds due to normal levels of
frictional and structural unemployment corresponds to what is called the full employment level
of output. As said, a healthy economy can never have zero unemployment; this is why the term
“full employment” only refers to when an economy employs all labor resources that can be
employed at a time. The full-employment level of output, or commonly referred as “potential
output,” is the output level associated with full utilization of our productive resources. In the
empirical literature, the potential output corresponds to the secular trend that the business cycle
associates with.
 Several issues can be said about counting those that are a part of the labor force. The
employment rate consists of those that are currently employed as a part of the total labor force.
However, it does not distinguish whether the employment characteristic of the worker is full-time
or part-time. In the Philippines, we call people “underemployed” when they are currently employed
but still express their need to have additional hours of work or an additional job or have a new job
with longer working hours. In October 2020, the Philippine underemployment rate stood at 14.4%
of the total labor force. As some economists note, a high underemployment rate may have several
economic and social repercussions requiring attention. Workers on a casual or contractual basis
have lower job satisfaction, higher job turnover, and persistently low income because of the lack
of job security. High underemployment rates mean that, on a macroeconomic level, there is a
high level of underutilization in the labor market. This instance means, given our resources, we
could still have created more goods and services for everyone to share if there were only adequate
jobs in the labor market.
We should also not put into the same category those that are unemployed and those that
are called “discouraged workers.” They are those persons who dropped out of the labor force
because they could not find a good job after a prolonged time of searching. The two problems of
underemployment and the discouraged workers may suggest that the unemployment rate as a
measure of labor resources' underutilization is understated.

Inflation

Inflation is generally defined as the increase in all prices. The Consumer Price Index (CPI)
measures the prices of a collection of consumer goods and services (called a market basket)
that the average Filipino usually avails. The Philippine Statistics Authority gathers the
commodities' prices in the basket and aggregates them to create a single indicator that will reflect
the market basket's overall value. The CPI reflects into a single figure the cost of living of the
citizens in an economy. When the CPI increases or decreases in value, it reflects the change in
the consumer goods' prices in the basket. Other price indices include the Producer Price Index
(PPI), which measures the composite of producer’s prices of representative commodities in the
manufacturing or the agriculture sector, and the Wholesale Price Index, which is an indicator that
measures the changes in the price levels of commodities that flow into the wholesale trade
intermediaries.
 15.00

10.00

5.00

0.00

(5.00)

(10.00)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Producer Price Index for Manufacturing
Producer Price Index for Agriculture
Wholesale Price Index
Consumer Price Index

Figure 2. Inflation rates from various price indeces

Several steps are done to compute for the inflation rate using the CPI.
1. Fix the basket – figure out what’s in the basket of goods that a typical consumer buys
in a specific period. This basket can change from time to time as spending patterns
change.
2. Find the prices paid by the typical consumer for the goods in the basket
3. Compute the basket’s cist and weight by commodity group.
4. Choose a base year and compute the CPI for all years.
5. Compute the inflation rates.
The following items make up the market basket that the PSA uses to create the CPI.
 Lets have an example. Suppose there are only two items in the consumer basket, buko pie
and biko. We find out their prices in three years for example as shown in the table below. The
prices and quantity results to the value of the market basket on the rightmost column.
Year Price of Price of Quantity of Quantity of Value of
Buko pie Biko Buko Pie Biko Basket
2018 10 pesoos 20 pesos 2 4 100
pesos
2019 12 pesos 25 pesos 2 4 124
pesos
2020 15 pesos 30 pesos 2 4 150
pesos

We compute the CPI by comparing the value of the market basket with that of the value
of the market in the base year. For example if we set the base year as 2018, then the value of its
CPI is directly 100. The value of the CPI can be computed by using the formula:
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑎𝑡 𝑦𝑒𝑎𝑟 𝑖
𝐶𝑃𝐼 = × 100.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑎𝑡 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
Using this formula, we can get the CPI for 2019 as (124/100)*100 = 124. The CPI for 2020
is (150/100)*100 = 150.
To compute the inflation rate, take the percentage change in the movement of the CPI.
Use the formula:
𝐶𝑃𝐼𝑡 − 𝐶𝑃𝐼𝑡−1
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒𝑡 = × 100
𝐶𝑃𝐼𝑡−1
For example, given: 𝐶𝑃𝐼2019 = 124 and 𝐶𝑃𝐼2020 = 150, the inflation rate is equal to:
150 − 124
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒2020 = × 100 = 20.97
124
Several kinds of inflation exist; these stem from different theories of how increases in
price levels originate.
Demand-pull inflation arises because of an upward pressure on prices that follows a
shortage in supply. When consumer demand is larger than the available supply of consumer
goods, demand-pull inflation is the result. The aggregate supply and demand graph shows
demand-pull inflation.
 Figure 3. Demand-pull inflation

The sudden increase in the price level causes an overall increase in the cost of living of
consumers. Several reasons could cause this increase in the price level due to a rise in demand.
1. A growing economy where consumers feel confident in spending their income and taking
on more debt. A steady increase in aggregate demand causes the increase in prices.
2. Freer spending of the government.
3. Inflation expectations may also cause increases in the price today, when companies
expect inflation in the future.

Cost-push inflation results from particular changes in the real activity in the
macroeconomy. In the case of cost-push inflation, aggregate supply decreases.

Figure 4. Cost-push inflation

The causes of cosh-push inflation can be of varying reasons.

1. Supply shocks are unexpected events that suddenly change the supply of a commodity.
In the Philippines, we have typhoons, mostly in the latter months of the year. These cause
a decrease in the supply of agricultural products, causing their prices to go up. Whenever
crude oil in the global market increases, this results to higher transport costs in local
economies, which might result in firms increasing their prices.
 2. Higher wages lead to an increase in the cost of production of firms leading to the possible
rise in prices.
3. An increase in indirect taxes like the Value-Added Tax and other excise taxes will
commonly lead to increased prices.
Counter-acting demand-push and cost-push inflation is the job of monetary policy done
by the Bangko Sentral ng Pilipinas.

Learning Task 5.2

If you can access online, watch a short video the economic experience of the Philippines during
the pandemic.
https://www.youtube.com/watch?v=mAfCQSWssGk

Assessment 5.2
Write down your observations on the video on a bond-paper and submit.

Instructions on how to submit student output

To easily track submission and keeping outputs intact for easy checking and recording, students
are advised to send their output via Moodle (VSUEE) whether they are online or on modular form.
There is specific slot for each section where to send your output. This decision was made based
on experience during the first half of the semester. Please be guided accordingly.
Module Posttest

Instruction: Answer whether the following statements are true or false.

1. The approaches in measuring GDP do not equate with each other.
2. Goods and resources flow into the consumer without the exchange of payment.
3. Nominal and Real GDP are the same.
4. GDP is a perfect measurement of evaluating the country's welfare.
5. The sale of a used laptop contributes to GDP.

References and Additional Resources

Dornbusch, R., Fischer, S. and Startz, R., 2014. Macroeconomics. New York, N.Y.: McGraw-Hill Education.
Campbell R. McConnell and Stanley L. Bruce, Economics. 2018. New York: McGraw-Hill.
Gabunada, F.2006. Lecture Notes in ECON 102: Macroeconomics. Visayas State University.

Answers to the Pretest

1. False
2. False
3. False
4. False
5. False

Answer to the Posttest

Use Normal text here

1. False
2. False
3. False
4. False
5. False