LESSON 5: PRODUCTION AND GROWTH SAVINGS, INVESTMENTS, AND FINANCIAL INVESTMENTS

THE CONCEPT OF PRODUCTION

 Production is the process of converting inputs into outputs.
 Production is the process by which different inputs, including capital, labor, and land, are used to create outputs
in the form of products or services.
 Any human initiative that creates a good for use can be called production.
Inputs - any resources used to create goods and services
Outputs - quantity of goods or services produced in a specific time period.

Production can result in output in the form of goods and services.

Goods - are products we can view and touch with our hands.
Services - are what we cannot see but we can feel their use or presence.

Three Types of Production Processes

Primary Production - Primary production processes tap or harness natural resources. It is related to obtaining natural
resources in the form of raw materials.
Secondary Production - This type of production converts primary resources, such as raw materials, into finished goods.
Tertiary Production - This type of production concept is related to the services.

How is demand and supply related to the concept of production?

 In the Philippines, production is influenced by the interplay of demand and supply. Producers consider consumer
preferences and market trends to determine what to produce, while supply depends on factors like resource
availability and production capacity. The relationship between demand and supply is central to shaping the
production landscape and economic well-being in the country.
The Basic Problems in Economics
 The basic problem in economics is to determine the most efficient and effective way to allocate resources. This
means that a decision must be made on how the resources will be used to produce the goods and services which
people in society need and want. Identifying and setting a priority among the country's economic goals gives a
nation a sense of direction. However, because of scarcity, any society faces the basic economic problem of what,
how and for whom to produce.
1. What to produce?
 This is a decision as to the types of goods and services society desires.
 Are the goods to be produced for consumption or investment? Are they private goods or public goods?
2. How to produce?
 This is a question on the technique of production and the manner of combining resources to come up with the
desired output.
 How are goods and services produced? Is it made of wood or bronze? Is it with the use of a machine or bare
hands?
3. For whom to produce?
 This is the problem of distribution. It is the determination of how output is to be divided or allocated.
 Are we to produce for the children or adults, for girls or boys, for the rich or for the poor?
ROLE OF PRODUCTION IN ECONOMIC GROWTH
Economic growth is the increase in the production of goods and services from one period to the next . It is a result of
an increase in the quality and quantity of resources used in creating or manufacturing a good or service (factors of
production). A country’s standard of living depends on the ability to produce goods and services (productivity); thus,
economic growth improves the living standards of the people.
"Factors of production are resources that are the building blocks of the economy; they are what people use to produce
goods and services." - Federal Reserve Bank of St. Louis
Factors of Production:
Land - physical lands, such as the acres used for a farm or the city block on which a building is constructed.
Capital - cash, equipment, and other assets needed to start or grow a business.
Labor - all wage-earning activities, such as the work of professionals, retail workers, and so on.
Entrepreneurship - the initiatives taken by entrepreneurs, who typically begin as the first workers in their firms and then
gradually employ other factors of production to grow their businesses.

Growth in Potential Output

An aggregate production function relates the total output of an economy to the total amount of labor employed in the
economy, all other determinants of production (that is, capital, natural resources, and technology) being unchanged.

Actual real GDP is the output produced at any time based on the actual inputs of capital and labor.

Potential output is the real GDP produced when labor and capital are employed at equilibrium rates using the best
available technology.
Any growth in the potential output of goods and services then comes from growth in labor inputs to production,
growth in capital inputs to production, and changes in factor productivity because of new and improved technology.
Growth in Potential Output = Growth in Labor Input + Growth in Capital Input + Changes in TFP

Growth accounting measures the sources of growth in real GDP. From the production function, it follows that:
Growth in Real GDP = Effect of Growth in TFP + Effect of Growth in Labor Inputs + Effect of Growth in Capital Inputs

Solow Residual is the growth in real GDP or per capita real GDP not caused by growth in factor inputs, but attributed to
improved technology. The general formula often the takes form of the following:

Y = total output or GDP.

K = capital input.
L = labor input.
H = human capital input.
α (alpha) = output elasticity of capital, which measures the share of output attributed to capital.

Endogenous Growth Theory implies that the steady-state growth rate is affected by economic behavior and economic
policy. It provides an outlook of what engineer's economic growth; arguing that a persistent rate of prosperity is
influenced by internal processes such as human capital, innovation, and investment capital, rather than external,
uncontrollable forces, challenging the view of neoclassical economics.

Growth in Real GDP per Capita

 Gross domestic product per capita measures a country’s economic output per person and is calculated by
dividing the GDP of a country by its population.
 Growth accounting can be used to uncover the sources of past growth in per capita GDP.
Technology (A) is constant, real GDP (Y) will grow of the growth in labor input and the growth in capital input. If labor
force growth increases employment, with fixed capital stock (K), and technology (A), GDP will increase. A similar
calculation shows the effects of growth in the capital stock. The elasticities of output with respect to the inputs of labor
and capital based on factor income shares in national accounts.
Factors Contribution
Marginal product: the change in total output caused by a change of one unit in the input of that factor to production.
Constant returns to scale: equal percentage increases in inputs of labor and capital increase output by the same
percentage.
Sustained growth in per capita real GDP: improvements in technology overcome the diminishing returns to increases in
the capital to labor ratio.

ECONOMIC GROWTH
 An increase in the amount of economic goods and services produced during one time period compared with the
previous period
 An increase in the capacity of an economy to produce goods and services
 It occurs when a society acquires new resources or when it learns to produce more by using existing resources.
ECONOMIC GROWTH RATE
 A measure of economic growth from one period to another
 It is expressed in percentage

GDP (Gross Domestic Product)

 The total or monetary measure of all the final or finished goods and services produced in a specific time period
by a country.
 Real GDP expansion is frequently used as an indicator of the condition of the economy as a whole. In general, an
increase in real GDP is seen as a positive indicator of the health of the economy.
 According to the Philippine Statistics Authority, the Philippines' gross domestic product (GDP) expanded by 4.3
percent in the second quarter of 2023, a slower rate than the first quarter's 6.4 percent growth and the same
period last year's 7.5% growth.
Three things that contribute to economic growth:
1. The labor supply grows as the population expands.
2. The stock of capital grows as spending by business and government on buildings, machinery, information
technology, and so forth increases.
3. Labor force productivity grows as a result of experience, the development of scientific knowledge combined
with product and process innovations, and advances in the technology of production.
Productivity of labor – the output of goods and services per worker
BENEFITS OF ECONOMIC GROWTH
Lower unemployment - Positive economic growth and increased productivity tend to lead to businesses employing
more people, which increases the employment rate. Jobs are generated by economic growth, which increases the
demand for labor, the primary and frequently only possession of the poor.
Improved public service - Higher economic growth generates more tax revenue, which allows the government to spend
more on essential services like health care and education, among other things. This can raise living standards by
resulting in longer life expectancies, higher rates of literacy, and a better understanding of social and political issues.
Money can be spent on protecting the environment - A society can allocate more resources to promoting recycling and
the use of renewable resources with higher economic growth. Some articles state that economic growth has a negative
impact on the environment such as higher levels of pollution, global warming, and the potential loss of environmental
habitats. However, not all kinds of economic growth cause damage to the environment. People are more equipped to
invest in environmental protection and reduce the negative effects of pollution as real incomes get higher. Additionally,
the economic growth brought on by advanced technology can lead to higher results with reduced environmental impact.
Investment - Investment by companies is encouraged by economic growth in order to meet future demand. A positive
feedback cycle that involves financial growth/investment is produced by higher investment, which expands the potential
for future economic growth.

COSTS OF ECONOMIC GROWTH

 Higher Inflation. Growing GDP (with a small amount of associated inflation) is important to a healthy economy
and nation. It means that companies are producing goods and services. They're making profits, which support
employment, wages, and consumer spending and demand. However, too much GDP growth can cause a rate of
inflation that's too high, which can then impact consumers and businesses negatively.
As the GDP grows, inflation may rise as a result of rising demand or falling supply. Businesses and consumers spend
more money on goods and services as the economy expands. Demand typically far exceeds supply during the growth
phase of an economic cycle, allowing producers and manufacturers to increase their prices. The rate of inflation,
therefore, gets higher.
 Damaging effects on the environment Increased output and consumption will result from increased economic
growth. Environmental pollution increases as a result. Asthma and other health issues brought on by increased
pollution from economic growth will lower the standard of living. Growth in the economy also increases the use
of raw materials, which may accelerate the eradication of non-renewable resources. Congestion issues can also
result from economic growth, as more people can afford to buy motor vehicles, but it is challenging to expand
the number of roads available to meet demand. Air pollution may also be brought on by an increase in traffic
congestion.

FINANCIAL SYSTEMS
A financial system is a network of organizations, markets, tools, and services that makes it easier for investors,
borrowers, and lenders to transfer money. It can be set up according to market principles, centralized planning, or a
combination of the two.
Understanding Financial Systems
The financial system can be structured utilizing markets, central planning, or a combination of the two, much like any
other sector of the economy.
Financial markets involve loan negotiations between borrowers, lenders, and investors. In these markets, money in one
of its forms—current money (cash), claims on future money (credit), or claims on the future earning potential or market
value of real assets (equity)—is typically the economic good that is exchanged on both sides.
Components of Financial Systems
Market-based principles, centralized planning, or a combination of the two can be used to organize financial institutions.
The essential elements of a financial system are as follows:
1. Financial Institutions: Institutions that offer financial services to clients are known as financial institutions. (e.g.
Banks and credit unions as well as firms that provide insurance, investments, and other financial services.)
2. Financial Markets: These are marketplaces where traders can transact in financial instruments like stocks,
bonds, currencies, and commodities. (e.g., Stock exchanges, bond markets, currency exchange markets, and
commodities markets)
3. Financial Instruments: These are contracts, agreements, or records that stand in for a financial asset. (e.g.,
Stocks, bonds, options, futures contracts, and other derivatives)
 4. Financial Services: These are the services that financial institutions offer to their clients. (e.g., Loans, credit
cards, insurance plans, investment counsel, and other financial items)
5. Currency (Money): This is a medium of exchange that is widely accepted in transactions. (e.g. real money like
coins and banknotes or as digital money like cryptocurrencies)
Functions of Financial Systems
A financial system enables its users to grow and get advantages. Additionally, it aids in lending and borrowing when
necessary. In other words, it will distribute and circulate money among various economic sectors. Here are a few ways in
which the financial system works:
1. Payment System - Businesses and merchants can collect money in exchange for their goods or services thanks
to an effective payment system.
2. Savings - Public savings enable people and companies to make a variety of investments and watch them
increase over time. They can be used by borrowers to finance new initiatives and boost future cash flow, and
investors receive a return on their investment.
3. Liquidity - By providing liquidity, the financial markets enable investors to lower systemic risk. As a result, it
makes it simple to buy and sell assets when necessary.
4. Risk Management - Through insurance and other sorts of contracts, it shields investors against a variety of
financial dangers
5. Government Policy - Governments undertake specialized policies to deal with inflation, unemployment, and
interest rates in an effort to stabilize or manage an economy.
Key Takeaways:
 A financial system is a collection of organizations and procedures that are used to facilitate the exchange of
funds on a global, regional, or firm-specific level.
 Market-based principles, centralized planning, or a combination of the two can be used to organize financial
institutions.
 A financial system includes a variety of institutions, such as banks, stock exchanges, and government treasuries.

SAVINGS AND INVESTMENTS

SAVINGS
 A part of personal finance involves setting aside a part of your income for future use.
 It is used for both purchases and in case of emergencies
Ways to save money include:
 Savings Account - Designed to hold money you don’t plan to spend immediately - Set money aside for future
needs and goals and to deposit money safekeeping and earn interest.
 Pension Account - On retirement, pensioners can convert their salary account or savings account to a pension
account in which they can receive their monthly pension.
INVESTMENTS
 Act of investing the saved money by buying assets that might increase in value.
 Means of exchanging present income to produce earnings at some future date.
 It is essential to choose investments that align with your goals, risk tolerance, and time horizon.
Investments can be made through:
 Stocks - Represents the share in the ownership of a company.
 Bonds - An asset that makes one or more fixed money payment to its holder each year until its maturity rate.
 Real Estate - A form of real property that includes land and anything permanently attached to it or build on it,
natural or man-made.
  Mutual Funds - Act as a basket of stocks, bonds, or other investment assets.
SAVINGS INVESTMENT
 Protecting the money  Growing the money
 Made to fulfill short-term goals  Made to fulfill long-term goals
 Low risk, low returns  High risk, high returns
 Highly liquid  Less liquid

LESSON 6: UNEMPLOYMENT AND MONETARY SYSTEM

Employment is defined as the number of adults (15 years of age and older) employed full-time and part-time and self-
employed.
Unemployment is a term referring to individuals who are employable and actively seeking a job but are unable to find a
job. It is a key economic indicator because it signals the ability (or inability) of workers to obtain gainful work and
contribute to the productive output of the economy. More unemployed workers mean less total economic production.
Labour force – those adults who are employed plus those not employed but actively looking for jobs.
Unemployment Rate in the Philippines
The unemployment rate in the Philippines fell to 4.4% in August 2023 from 5.3% in the same month the prior year. It
was the lowest jobless rate since May, as the number of unemployed persons came in at 2.21 million, down from 2.68
million in August of 2022. Meanwhile, the number of employments was posted at 48.07 million, up from 47.87 million
the year before. The services sector (57.3%) accounted for the largest share of employment, followed by agriculture
(24.5%) and industry (18.2%) sectors. The labor force participation rate dropped to 64.7%, from 66.1% a year earlier.
The problem of unemployment is usefully divided into two categories: the long-run problem and the short-run
problem.
1. Natural rate of unemployment refers to the amount of unemployment that the economy normally experiences.
(long-run rate of unemployment)
2. Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate, and it is
closely associated with the short-run ups and downs of economic activity. (shorter run fluctuations around the
natural rate.)
Types of Unemployment:
Frictional Unemployment. When workers move from one job to another job.
Structural Unemployment. It occurs when the qualification of a person is not enough to meet his job responsibilities.
Cyclical Unemployment. Occurs when the economy needs a lower workforce that is caused by a decline in total
spending.
Causes of Unemployment
 High population growth.
 Absence of employment opportunities.
 Seasonal employment.
 Joint family system.
 Increasing turnout of students from universities.
 Slow developing industries.
 Insufficient rate of economic growth.
Common Impacts of Unemployment
  Loss of Income
 Negative Multiplier Effects
 Loss of National Output
 Fiscal Costs
 Social Costs
Measurement of Employment
Measuring unemployment is the job of the Bureau of Labor Statistics (BLS), which is part of the Department of Labor.
The BLS produces data on unemployment and on other aspects of the labor market, including types of employment,
length of the average workweek, and the duration of unemployment.
Based on the data from the BLS measuring unemployment is divided into one of three categories:
1. Employed: This category includes those who worked as paid employees, worked in their own business, or
worked as unpaid workers in a family member’s business.
2. Unemployed: This category includes those who were not employed, were available for work, and had tried to
find employment during the previous four weeks. It also includes those waiting to be recalled to a job from
which they had been laid off.
3. Not in the labor force: This category includes those who fit either of the first two categories, such as a full-time
student, homemaker, or retiree.
Labor Force is the total number of workers, including both the employed and the unemployed. The BLS defines the labor
force as the sum of the employed and the unemployed.
Labor force = Number of employed + Number of unemployed.
Unemployment rate: is calculated as the percentage of the labor force that is unemployed.
Unemployment rate = Number of Employed/Labor Force X 100
Labor-force participation rate measures the percentage of the total adult population that is in the labor force.
Labor Force participation = Labor Force/Adult population X 100
Possible solutions to Unemployment in the Philippines
 Reducing Occupational Immobility
 Employment Subsidies
 Sustained Economic Growth

MONETARY SYSTEM
A monetary system is a set of institutions, laws, and procedures that establish how money is created, distributed, used,
and regulated in an economy. It is the foundation for all economic activity and a crucial factor in determining a country's
economic health.
Types of Monetary system
Commodity Money - Type of money that is made of precious metals or commodities that have intrinsic value.
Commodity-based Money - This type of monetary system can also be addressed as representative money; mostly like
physical banknotes with no financial value but can be exchanged with precious metals like gold and silver.
Fiat Money - This type of money is also termed as legal tender as notified by the Central Government and Central Bank.

Philippine Peso Currency | PHP

Description
The Philippine peso (PHP), or ‘piso’ in Filipino, is the official currency of the Philippines. It's subdivided into 100 centavos,
or ‘sentimos’ in Filipino. The symbol of the Philippine peso is ₱.
Economy
 The Philippines has the third largest economy in Southeast Asia.
 In 2020, the Philippines ranked as the 33rd largest national economy by nominal GDP, with the country’s GDP
being estimated at over USD360 billion.
 The Philippines’ economy has transitioned from being agricultural based to relying on services and industry
sectors. The agriculture sector now only accounts for over 7 percent of GDP.
 Major exports include semiconductors and other electrical components, transport equipment, clothing, copper
and petroleum products and fruits.
History
 In 1898, the country issued its currency backed by the Philippines’ natural resources.
 In 1902, the US captured the Philippines and established a new currency pegged to gold, about half the price of
a US dollar then.
 In 1993, the Philippine peso became a floating currency

Functions of Money
Medium of Exchange
 Common measure of value
 Standard for deferred payments
 Store of wealth
Barter System – A commodity is exchanged for other commodities.
Problems of barter System are:
 Double coincidence of what is required
 Valuation of commodities exchanged is a problem
 There won’t be a standard to serve as future monetary obligation
Gresham’s Law – Bad money drives out good money
Legal Tender Money – This money cannot be denied in the settlement of the monetary obligation
 Limited Legal Tender Money: It is compulsory to accept up to a certain limit. Example – A sum of 10 can be paid
in denominations of 50 paisa coins and the recipient must legally accept it.
 Unlimited Legal Tender Money: This money can be used to make any amount of payment
Non-Legal Tender Money – There is no legal compulsion to accept this money. It is also called optional money or
Fiduciary Money (on the basis of trust).
 E.g. – Nepalese currency at India – Nepal border may be used as but the recipient is not legally bound to accept
it.
Near Money – Highly liquid financial assets like shares and bonds

The Role of Government in Financial Systems

The government is the party that is most suited to this maintenance of financial systems. However, too much
government intervention is not desirable since it interferes with the laissez-faire policy, which is important for financial
markets.
1. Interest Rates and Loanable Funds: The central bank, which is a quasi-government body, decides the level of
interest rates in an economy. The interest rate is a very important number for the economy. This is because the
interest rate decides the time preference of people. If the interest rate is high enough, people will postpone
their consumption to a future date. However, if the interest rate is low, people will consume immediately, and
the savings rate will reduce. Hence, interest rates have a direct impact on the amount of loanable funds in the
economy. These loanable funds, on the other hand, have a direct impact on capital formation and the entire
economic process
2. Reserve Requirements: Apart from interest rates, the central bank of any country can also alter the supply of
loanable funds by altering the reserve requirements. The modern banking system is based on the concept of
fractional reserve banking. This means that modern banks need to keep a fraction of their reserve with the
central bank before they lend out the rest of the money. Hence, if the proportion of funds which they need to
keep with the central bank increases, the amount of loanable funds decreases correspondingly, the government
can increase or decrease the reserve requirement to regulate the money supply.
3. Minting of Money: The government is the only agency which is authorized to create money supply in a country.
Therefore, it is the responsibility of the government to ensure that excess money is not printed and flooded into
the market. Financial systems tend to fail if there is excessive inflation in the economy.
4. Fiscal Policy: The government can also regulate the functioning of the financial system with its fiscal policy.
Normally, countries where governments spend most of the money do not have well developed financial
systems. This is because there is already infrastructure in place to sell government-backed securities. However, if
capital does not flow into private hands via the equity market and bank loans, other channels of financing
remain underdeveloped. Also, if the government starts undertaking the bulk of viable projects, then the
financing channels for the private sector do not grow as fast as they should. The government must ensure that a
balance is struck between the public sector and private sector funding.
5. Transaction Costs and Taxes: Governments can severely impact the functioning of credit markets if they start
levying excessively high transaction costs. A transaction cost creates friction in the financial market. They deter
investors from trading more often. Hence, it is the job of the government not to treat financial markets as a
source of revenue. The taxes and charges imposed on the financial markets should be minimal as a turnaround
in the financial markets means that there is more liquidity in the financial system. Liquidity is a desirable quality
since it promotes investments and increases economic growth as well as prosperity.
6. Deposit Insurance: The government also has the responsibility to stabilize the banking system. Usually, this is
done by providing deposit insurance. Governments all over the world guarantee the safety of depositor funds up
to a certain amount. This is a very important function since, without this function, the funds which are deposited
with banks would be reduced drastically. As a result, the flow of funds from the idle to the industrious would be
impacted.
7. Regulatory Role: Finally, it is the job of the government to ensure that each type of financial institution has its
own regulator. This regulator must prevent malpractices. Malpractices can be practices that jeopardize the
safety of investor funds. Alternatively, there can be practices that suppress competition in the sector.
Fortunately, frameworks that define the role of regulators are already well developed in most nations. The
present task of governments is just to keep pace with the technology, which is quite challenging