FDNECON
MIDTERM REVIEWER
Topics:
☐ General Economic Principles
☐ How Economists Think
☐ Case Study - The Great Depression
☐ Key Macroeconomic Variables
☐ Role of the Government in the Economy
or The Economics of Public Sector
MODULE 1: GENERAL ECONOMIC
PRINCIPLES
Intro to the Study of Economics
1. Definition of Economics
2. Branches of and fields of study in
Economics
3. Ten Economic Principles
4. Four Fundamental Economic Questions
Economics
- a social science that studies the
optimal/efficient allocation and
distribution of scarce resources to
satisfy unlimited human wants and
needs
- Oikonomos (Greek): one who manages
a household
Key Terms
Scarcity
- The demand for a good or service is
greater than the availability of the good
or service
- The state of being scarce or in short
supply or shortage
- The gap between limited resources and
theoretically limitless wants
Trade-offs
- Exchange something of value,
especially as part of a compromise
- Involves a sacrifice that must be made
to get a certain product or experience
- Often expressed as an opportunity cost
- A situation in which gaining one benefit
requires sacrificing another
made by scarlett :p
- Sacrificing one good or service to
purchase another
Opportunity Costs
- The value of the next best alternative
given up for the alternative that was
chosen
- The loss of potential gain from other
alternatives when one alternative is
chosen
- The value of the best alternative
forgone where, given limited resources,
a choice needs to be made between
several mutually exclusive alternatives
- The value of the next-highest-valued
alternative use of that resource
- The potential benefits that an
individual, investor, or business misses
out on when choosing one alternative
over another
- “The one that got away”
Branches of Economics
Microeconomics
- The field of economics that looks at the
economic behaviors of individuals,
households, and
companies/businesses
- Examples: individual demand,
individual supply, the theory of the firm,
opportunity cost, and consumer theory
Macroeconomics
- The economies on a much larger
scale—regional, national, continental,
or even global
- Examples: aggregate demand,
aggregate supply, efficiency,
investment, unemployment and
inflation
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Fields of Study in Economics
10 Economic Principles
How People Make Decisions
1. People Face Trade-offs.
2. The Cost of Something is What You
Give Up to Get It.
3. Rational People Think at the Margin.
4. People Respond to Incentives
How People Interact
5. Trade Can Make Everyone Better Off.
6. Markets are Usually a Good Way to
Optimize Economic Activity.
7. Governments Can Sometimes Improve
Market Outcomes
How the Economy Works as a Whole
8. A Country’s Standard of Living
Depends on Its Ability to Produce
Goods and Services.
9. Prices Rise When the Government
Prints Too Much Money
10. Society Faces a Short- Run Trade-off
between Inflation and Unemployment.
4 Fundamental Economic Questions
1. What to produce?
2. How much to produce?
3. How to produce?
4. For whom to produce?
1. Economist as a Scientist
- Economists try to address their
subject with a scientist’s objectivity.
They approach the study of the
economy by devising theories,
collecting data, then analyzing these
data to verify or refute their theories.
“social scientists” economy is a
social science
a. Scientific Method: Observation,
Theory, and More Observation -
Although economists use theory and
observation like other scientists, they
face an obstacle that makes their
task especially challenging: In
economics, conducting experiments
is often impractical. By contrast,
economists studying inflation are not
allowed to manipulate a nation’s
monetary policy simply to generate
useful data. Economists usually
have to make do with whatever data
the world gives them and they pay
close attention to the natural
experiments offered by history.
b. Role of Assumptions: Economists
make assumptions for the same
reason: Assumptions can simplify
the complex world and make it
easier to understand. Economists
use different assumptions to answer
different questions and to study the
short-run and long-run effects of a
change in the quantity of money.
c. Economic Models: Economists also
use models to learn about the world
mostly consisting of diagrams and
equations. Economic models omit
many details to allow us to see what
is truly important. An economist’s
model does not include every
feature of the economy.

MODULE 2: HOW ECONOMISTS THINK

made by scarlett :p
 FDNECON
MIDTERM REVIEWER
The Circular Flow Diagram Consumption Function
- a visual model of the economy that - illustrates the positive relationship
shows how dollars flow through between income and consumption
markets among households and firms.

2. Economist as Policy Adviser

a. Positive vs. Normative Analysis:
Production Possibilities Frontier
Positive statements - descriptive;
- a graph that shows the combinations of
claims that attempt to describe the
output that the economy can possibly
world as it is
produce given the available factors of
Normative statements - prescriptive;
production and the available production
claims that attempt to prescribe how
technology that firms use to turn these
the world should be
factors into output.
b. For Malacañang Palace, Batasang
Pambansa
c. Economic Policy is a Messy Affair

John Maynnard Keynes

- founder of Keynesian theory which
promotes government spending on
infrastructure, unemployment
benefits, and education to increase
consumer demand. It also argues
that government spending is
necessary to maintain full
employment
- The ideas of economists and
political philosophers, both when
they are right and when they are
wrong, are more powerful than is
commonly understood. Indeed, the
world is ruled by little else. Practical
men, who believe themselves to be
quite exempt from intellectual

made by scarlett :p
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MIDTERM REVIEWER
influences, are usually the slaves of
some defunct economist. Madmen in
authority, who hear voices in the air,
are distilling their frenzy from some
academic scribbler of a few years
back.
3. Why Economists Disagree
Economists may disagree about the validity
of alternative positive theories of how the
world works. Economists may also have
different values and therefore different
normative views about what government
policy should aim to accomplish.
a. Difference in Scientific Judgements:
Economists tend to disagree because
they have differing beliefs about the
validity of alternative theories. They can
disagree because they have differing
opinions on the magnitude of the
parameters that measure how
economic factors are related.
b. Difference in Values: Policies cannot be
judged on scientific grounds alone.
Sometimes, economists give conflicting
advice because they have different
values or political philosophies.
c. Perception vs. Reality: Because of
differences in scientific judgments and
differences in values, some
disagreement among economists is
inevitable. Yet one should not overstate
the amount of disagreement.
Economists agree with one another
more often than is sometimes
understood.
Economic Systems
made by scarlett :p
Government (Centrally-Planned​​)
- A government-run economy is one that
is centrally planned. The government
determines the economy's needs and
ensures that those demands are
satisfied. They select what and how
much to produce. They set pricing and
make rules to ensure that the economy
runs smoothly.
Government-Private (Mixed Economy)
- A mixed economic system is a system
that has elements of both capitalism
and socialism. A mixed economic
system protects private property and
allows a level of economic freedom in
the use of capital, but it also permits
governments to intervene in economic
activity to achieve social objectives.
Private (Laissez-Faire)
- In economics, the concept of
laissez-faire is a cornerstone of
free-market capitalism. According to
the argument, an economy is strongest
when the government remains
completely out of the economy,
allowing market forces to operate
spontaneously.
Adam Smith
- was one of the most influential
philosophers of his time to make the
argument that money is generated
through productive effort and that
self-interest encourages individuals to
maximize the use of their resources.
He said that profits derived from capital
investments, and that money is
directed to where it can make the most
profit.
- Adam Smith's economic theory holds
that markets operate best when the
government stays out of them. He
argued that rational people would
naturally choose the best way to make
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use of the country's resources — He
viewed government regulation as
possibly harmful to economic growth.
MODULE 3: CASE STUDY – THE GREAT
DEPRESSION
The Great Depression
- An economic calamity that happened in
the early 1930s. One of the two
fluctuations that stood out as especially
large over the course of the U.S.
economic history.
Key Terms:
Depression
- a significant and prolonged decline in
economic activity, characterized by a
steep drop in economic growth,
employment, and production.
- A drastic decline in GDP
(gross domestic product) that lasts for
several years
Recession
- decline of real GDP for at least two
Consecutive quarters
Timeline: The Great Depression
(1929-1939)
1920s: Roaring 20s
- Lower production
- Higher unemployment
- Lower wages
- Higher consumer debt
- Struggling agriculture sector due to
drought and falling food prices
- Excess large unliquidated loans by the
bank
1929:
- Black Thursday, Black Tuesday
- 10 million jobless
- Dust Bowl migration
- Herbert Hoover 1929-1933
made by scarlett :p
In 1932, Franklin D. Roosevelt, a
Democrat, assumed the presidency of the
United States. Faced with the daunting
task of addressing the nation's economic
turmoil, he wasted no time in taking
decisive action.
1933:
- GDP bounced back (9% per year)
- Franklin D. Roosevelt 1933-1945: the
transformative U.S. president during
the Great Depression and World War II
1937:
- Sharp Recession
1941:
- WWII begins: Pearl Harbor Attack
To summarize the Great Depression:
- Worst economic crisis in 20th century
1929-1933:
- Output in the US declined by ⅓
- Unemployment rate increased by
25%
- Inflation rate declined by 2%-5%
- Stock market lost 80%
- 7,000 banks failed
- Absence of regulatory institutions
Causes of Great Depression
- 1920s: Sum of Excesses
- 1929 stock market crash
- Misguided government policies
- Consumers’ pessimism
- Smoot-Hawley Tariff of 1930
- Collapse of banking system
- Contraction of money stock
Vicious Cycle during the Great Depression
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Response:
1. Four-day Nationwide Bank Holiday
- Shut down banking system
- Restored consumer confidence to
banks
- Emergency Banking Act of 1933
- Federal Reserve created de facto
100% deposit insurance
- Reestablished integrity of US banking
system
2. New Deal (1933-1939)
- Three Rs: Relief (for unemployed and
poor), Recovery (of the economy), and
Reform (of financial system)
- New Deal Coalition: labor unions, blue
collar workers, minorities
- Tennessee Valley Authority
- Works Progress Administration
3. Federal Deposit Insurance Corporation
- Created in response to the thousands
of bank failures that occurred in 1920s
and early 1930s
Mission:
- Insures deposits
- Examines and supervises financial
institutions
- Works to make large and complex
financial institutions resolvable
- Manage receiverships
4. Securities and Exchange Commission
- enforce laws against market
manipulation
- strive to promote a market environment
that is worthy of public’s trust
Mission
- protect investors
- maintain fair, orderly, and efficient
markets
- facilitate capital formation
5. Social Security Act of 1935
- created a social insurance program
designed to pay retired workers age 65
or older a continuing income after
retirement
made by scarlett :p
- unemployment insurance, old-age
assistance, aid to dependent children,
grants to the state to provide various
forms of medical care
Relevance to the Philippines
- 23 March 2020: Congress ratified
Republic Act 11469 otherwise known
as Bayanihan to Heal as One Act
(Bayanihan 1) that empowered
President Duterte to “reallocate,
realign, and reprogram” Php275 billion
to avert the COVID-19 crisis
- 11 September 2020: Congress
approved RA 11494 otherwise known
as Bayanihan to Recover as One Act
(Bayanihan 2) that allocated a total
budget of Php165.5 billion to facilitate
economic recovery amid the pandemic
and enable the economic growth to be
more sustainable and resilient
Social Security Act of 1954
Mission
- To manage a financially stable social
security system which shall promote
social justice through savings and
provide meaningful protection and
exemplary service to members and
their families
Vision
- A viable social security institution
providing universal and equitable social
protection through world-class service
MODULE 4: KEY MACROECONOMIC
VARIABLES
3 Key Macroeconomic Variables:
1. Economic Output: GDP Growth Rate
2. Overall Prices: Inflation Rate
3. Labor: Unemployment Rate
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Gross Domestic Product
- Product: total market value of all final
goods and services produced within an
economy in a given period of time
- Expenditure: total expenditure on
domestically-produced final goods and
services
- Income: total income earned by
domestically-located factors of
production
- Philippine Statistics Authority: GDP is
the aggregate of gross value added
(GVA) of all resident producer units in
the country
Value-added
- a firm’s value added is the value of its
output minus the value of the
intermediate goods the firm used to
produce that output
Example:
1. A farmer grows a bushel of wheat and
sells it to a miller for $1.00.
2. The miller turns the wheat into flour and
sells it to a baker for $3.00.
3. The baker uses the flour to make a
loaf of bread and sells it to an engineer
for $6.00.
4. The engineer eats the bread.
Gross National Income
- Formerly, Gross National Product
(GNP)
Base Year
- “The choice of a base year as shown in
many literatures is that the base year
should represent a "normal year" for
the economy - with no influences due
to economic and financial crisis,
disaster, typhoons, calamities and/or
other related events that brings
negative impact to the economy.” (PSA,
2022)
Nominal GDP
- Measures these values using current
prices
Real GDP
- Measure these values using the
prices of a base year
Calculating GDP: Expenditure Approach

Compute:
1. Value added at each stage of production
2. GDP

Stage 1: 1 Calculating GDP: Value-added Approach

Stage 2: 2
Stage 3: 3
GDP = $6

made by scarlett :p
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MIDTERM REVIEWER
MODULE 5: ROLE OF THE 2. Charities/foundations for a good cause
GOVERNMENT IN THE ECONOMY/ THE 3. Contract
ECONOMICS OF PUBLIC SECTOR
Negative Externalities: Pollution
Government and the Economy
- Promote inclusive, sustainable,
equitable economic growth
Provide goods Set standards Regulatory
and services framework

Maintain or Redistribute Address

enhance income externalities
competition

Principle #6: Markets are usually a good

way to optimize economic activity.
Principle #7: Government can sometimes Positive Externalities: Education
improve market outcomes.

Market Failure: not optimal distribution of

goods and services in the market
Externalities: the uncompensated impact of
one person’s actions on the well-being of a
bystander

Externalities and Government’s Response

Negative externalities lead markets to

Government’s Response to Externalities
1. Command-and-Control Policies:n
Regulation
2. Market-based Policy 1: Corrective
(Pigovian) Taxes and Subsidies
Private Solutions to Externalities
1. Do unto others as you would have them
do unto you.
produce a larger quantity than is socially
desirable.
Positive externalities lead markets to
produce a smaller quantity than is socially
desirable.
Government can internalize externalities by
imposing taxes on goods or services with
negative externalities or subsidizing goods
or services with positive externalities.
Coase Theorem: if private parties can
bargain over the allocation of resources at
no cost, then the private market will always
solve the problem of externalities and
allocate resources efficiently

made by scarlett :p
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Consumer Price Index (CPI)
- Measures the changes in the prices of
goods and services consumed by
households

GDP Deflator vs CPI

Basis GDP Deflator Consumer

Price Index

Scope of All goods Bought a

measurement produced typical
consumer

Sources of Domestic Only Domestic and

goods and Foreign
services

Weights Changing Fixed

Computations for:

Basket of Goods Consumer Inflation

Price Index

(Quantity*price) CoB CPI - OCPI

+ —------ x100 —----------- x100
(Quantity*price) ByCoB OCPI

= Inflation Rate
= Cost of Basket = CPI

ByCoB = Base year Cost of Basket

CoB = Cost of Basket
CPI = Consumer Price Index
OCPI = Old Consumer Price Index

made by scarlett :p