Lesson 1 ECON 102

ECON 102
Macroeconomics
Jedan A. Cavero
Faculty, Department of Economics
Is it beneficial for a country to be in debt or
borrow money? Why, or why not?
₱14,508,723,000,000.00
as of November 2023, Bureau of Treasury
More than 2,000 Mall of Asia

Yes 29 47.54%
No 12 19.67%
Both 15 24.59%
Unsure 5 8.20%
Total 61 100.00%
Beneficial
Not Beneficial
Philippine Debt and GDP
30,000
25,000
20,000
15,000
10,000
5,000
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
in billion peso General Government Debt GDP

DEBT-TO-GDP RATIO
70%
60%
Acceptable level is 60%
50%
Euro Convergence Criteria
40%
Growth slows down at 77% 30%
World Bank 20%
10%
0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Highest (2024) Lowest (2024)
Countries Ratio Countries Ratio
Japan 264% Brunei 2.1%
Venezuela 241% Kuwait 2.9%
Sudan 186% Cayman Islands 4.5%
Greece 173% Afghanistan 7.4%
Singapore 168% Turkmenistan 8%
At 60% Philippines is 71st out of 166 countries

World Population Review (2024)
“ Ideally, it is better for a country

to be able to thrive without the
need to borrow money.
However, in real world with
factors no one has the ability
to control, at some point one
country will thrive better if they
indeed borrow money. Debt is
beneficial if the country truly
needs it and it is still in a state
that the specific country can
”
still pay it off comfortably.
Lesson 1
INTRODUCTION TO
MACROECONOMICS
OUTLINE
01 The economy defined
02 Economic activity, resources & scarcity
03 Mixed economic system & economic fluctuations
04 Economics & its branches
05 Economic goals & policies
06 Economic models and math tools

01
THE ECONOMY DEFINED
▪ an area or setting where production, exchange,
distribution and consumption takes place
▪ usually place-based
▪ can also be characterized by medium and
feature of work
▪ affected by varying factors including geography,
norms and culture, politics and legal institutions,
natural environment and level of technological
advancement
02
ECONOMIC ACTIVITY
▪ most economic activities involve the exchange of
commodities for monetary payment
▪ activities that foster an exchange of resources
but do not involve the exchange of money can be
considered as a part of the economy
a. caring for the sick
b. housework
c. gifts
02
RESOURCES & SCARCITY
▪ Resources are inputs that are used with the goal of
providing material benefit or utility.
▪ Physical and intellectual labor, land and natural
resources, physical and financial capital and
entrepreneurial skills.
▪ Economic activity revolves around the exchange of
these resources through beneficial trade.
▪ How then can we know how a specific resource is
worth in value?
02
▪ What if you’re stuck on a desert? Which will you
value more? A glass of water or a piece of diamond?
▪ A diamond is valued way more than a glass of water
mainly because the modern economy provides more
than enough water for most while the number of
diamonds are a few.
▪ In a market economy, commodities or resources are
valued with respect to their scarcity relative to other
items.
02
Scarcity theory of value - when
a resource is scarce in supply, it is
relatively valued higher.
▪ Agri commodities are expensive
when they are in short supply.
▪ Relatively low number of skilled
labor in an area may result to
migration of skilled labor from
other areas because of high
wage in industries requiring
skilled labor.
03
MIXED ECONOMIC SYSTEM
▪ Works with both aspects of capitalism and central-
planning.
▪ Capitalism is an ideology that envisions that an
economy works well when people are left to their own, in
pursuit of their self-interest, without government control
and intervention.
▪ Leads to systems of private ownership of resources and
the means of production.
▪ The consequential free-market system allocates goods
and services in the most efficient way possible; that is,
resources are used to their highest value.
03
MIXED ECONOMIC SYSTEM
▪ Exhibits aspects of government control and
regulation as markets may fail to allocate resources
efficiently due to institutional constraints.
▪ Taxation, business laws, environmental regulation,
minimum wages and cash subsidies are forms of
government planning and control.
▪ Failure of free markets can be seen through issues
like poverty, pollution, crime and inequality.
03
ECONOMIC FLUCTUATIONS
In the last 3 centuries, human well-being has been
drastically improved by the 3 episodes of
industrialization in the global economy.
03
Modern economies are affected by (1) changes in supply
and demand, (2) availability of capital, (3) and future
expectations. These factors result to having natural cycles
of growth and down-turns.
03
Great calamities
adversely affect the
economy’s output.
The effects of
COVID-19 is a great
testament to how
natural events can
seep into the
economy producing
disastrous effects.
03
▪ Recurrent ups and
downs of economic
activity are called
business cycles.
▪ Trough are when
employment and
output are at the
lowest for a period,
peaks are the
opposite.
03
▪ A period leading
towards a trough is
called a recession; a
prolonged recession is
called as depression.
▪ The government’s
economic aim is to
minimize fluctuations
in the business cycle
and achieve stability.
Why?
03
▪ Trend growth represents
potential output, or the level
of output when all labor
resources are utilized.
▪ Short run output < potential
output: some resources are
unemployed
▪ Short run output > potential
output: people work
overtime; machinery used
over several shifts
04
ECONOMICS & ITS BRANCHES
▪ Lionel Robbins: economics is
the study of human behavior
as it pertains to meeting one’s
needs through scarce means.
▪ Economics sees this social
behavior through the lens of
rationality, where people are
taught to be calculating with
perfect information whose
end goal is to maximize net
benefits for every transaction.
04
ECONOMICS & ITS BRANCHES
▪ Microeconomics deals with individual behavior given
alternative choices.
▪ Firms maximize profits or minimize costs
▪ Consumers maximize utility or minimize budgets
▪ Macroeconomics is the study of the larger economy.
It studies aggregate behavior of several
macroeconomic variables.
▪ Understanding them helps in the formulation of
appropriate responses, if necessary, to key events in
the economy.
05
ECONOMIC GOALS & POLICIES
▪ Economic growth
▪ Full employment
▪ Stable prices
▪ Economic efficiency in distribution of resources
▪ Freedom to do business activities with little regulation
▪ Income equality
▪ Poverty alleviation
▪ Greater access to social goods like education and
healthcare
▪ Robust local economy
05
ECONOMIC GOALS & POLICIES
Rudimentary steps:
1. Defining specific and measurable goals
2. Identifying options of achieving the goal and
outlining the associated costs and benefits, choose
one, and
3. Evaluate its effectiveness by gathering and
analyzing data. Reexamine previous options if
policy was ineffective.
06
ECONOMIC MODELS & MATH TOOLS
Nature of economic models
▪ Economic models are mathematical constructs that
elucidate patterns in economic behavior.
▪ The goal of economic modelling is to simplify reality to
shed some light in complex economic phenomena.
▪ The simplicity of some of the more important
economic models bring in constant criticism.
▪ Useful economic models are judged by its predicting
power as its assumptions can still be considered
practical or effective in real situations.
06
Most common assumption is ceteris paribus where
we assume that the effect of one variable to another
variable can be isolated from the effects of other
variables.
Amount of remittance
▪ nature of job
▪ size of immediate family ▪ years of working abroad
▪ health of the economy
in the country he/she is
working
06
variables.
▪ size of immediate family

▪ nature of the job ▪ years of working abroad
▪ health of the economy in
the country he/she is
working
06
variables.
▪ nature of job
▪ size of immediate family ▪ years of working abroad
▪ health of the economy in
the country he/she is
working
06
▪ Most basic example of an economic model in
macroeconomics is the consumption function.
▪ The model says that consumption increases when
disposable income increases.
▪ In general mathematical notation:
𝑪 = 𝒇 𝒀𝒅
▪ Where 𝐶 is consumption expenditure and 𝒀𝒅 is
disposable income. The notation above tells us that
the value of aggregate consumption expenditure
depends on the value of aggregate disposable
income.
06
Mathematical tools in economics
Suppose we have a Yd Consumption (C)

linear consumption 400 360
function: 500 440
600 520
𝐶 = 40 + 0.8𝑌𝑑 700 600
800 680
900 760
06
Yd Consumption (C)
400 360
500 440
600 520
700 600
800 680
900 760
06
▪ Economists often use the
notion of equilibrium, a
borrowed notion from
physics, in modelling
economic phenomena.
▪ It is a situation where
forces are balanced (or
equal), and in the absence
of the influence of other
variables will not change.
06
In macro, the most basic

is the Keynesian cross, a
model of determining
income in the economy
that represents equality
of aggregate expenditure,
national income and
45°
aggregate production.
ECON 102
Macroeconomics
Jedan A. Cavero
Faculty, Department of Economics

Lesson 1 ECON 102

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Lesson 1 ECON 102

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ECON 102

More than 2,000 Mall of Asia

in billion peso General Government Debt GDP

Growth slows down at 77% 30%

World Bank 20%

At 60% Philippines is 71st out of 166 countries

“ Ideally, it is better for a country

02 Economic activity, resources & scarcity

03 Mixed economic system & economic fluctuations

04 Economics & its branches

05 Economic goals & policies

06 Economic models and math tools

▪ size of immediate family

Suppose we have a Yd Consumption (C)

In macro, the most basic

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