Econ Dev Notes

The Circular Flow Diagram

'Leakage' means withdrawal from the flow. They may be in form of savings, tax payments,
and imports. Leakages reduce the flow of income. ‘Injection' means the introduction of income
into the flow. Injections increase the flow of income. Injections can take the forms of investment,
government spending and exports.
Financial institutions or capital market play the role of intermediaries. This means that income
individuals receive from businesses and the goods and services that are sold to them do not count
as injections or leakages, as no new money is being introduced to the flow and no money is being
taken out of the flow.
In terms of the five-sector circular flow of income model, the state of equilibrium occurs when the
total leakages are equal to the total injections that occur in the economy. This can be shown as:
Savings + Taxes + Imports = Investment + Government Spending + Exports
If S + T + M > I + G + X the levels of income, output, expenditure and employment will fall causing
a recession or contraction in the overall economic activity. But if S + T + M < I + G + X the levels
of income, output, expenditure and employment will rise causing a boom or expansion in
economic activity.
The circular flow of income is significant in four areas:
1. Measurement of national income
2. Knowledge of Interdependence - Circular flow of income signifies the interdependence of
each of activity upon one another. If there is no consumption, there will be no demand and
expenditure which in fact restricts the amount of production and income.
3. Unending Nature of Economic Activities - It signifies that production, income and
expenditure are of unending nature, therefore, economic activities in an economy can
never come to a halt. National income is also bound to rise in future.
4. Injections and Leakages
5. BSP Non bank quasied bank

Commercial bank – universal, ordinary commercial, savings, government bank

Government bank – landbank, development bank of the phil., Philippine Islamic bank
Savings Bank – private development bank, savings mortgage stock savings and loans, like
metrobank, china bank, (universal banks)
Discount rate/rediscounting rate – a tool; nagbibigay si bsp ng loan para umikot ang pera,; an
interest is charged
In march 2020, bsp cut the reserve requirement to 12%.
Felipe Medalla – current governor of BSP
Monetary Policy – It is a macroeconomic policy used by central banks to manage money supply,
interest rate and achieve macroeconomic objectives. It helps determine the amount of capital
available to invest from or lend, and help control the supply of money available to banks,
businesses and consumers.
Tools for monetary policy
 1. Required reserve – A high reserve requirement results to bank lending less money, while
a low reserve requirement results to bank lending more and creating credit.
2. Open market – It refers to central banks buying or selling securities, which are then bought
from or sold to private banks. When they bought securities, cash increases in bank
reserves. When they sell securities, their cash holdings decrease.
3. Rediscounting – exchanging (rediscounting) securities against a price that had already
been exchanged (discounted) before. It helps banks meet temporary liquidity needs by
refinancing the loans they extend to their clients.
4. Moral suasion – under monetary policy; banks cannot decide agad agad na isara ang
bangko pag may threat of closure; a power given to head/governor of bank to evaluate
reality of existing problem; some small banks cannot loan others big amounts which is
evaluated/approved first.
Tool for fiscal policy
1. Taxation – only tool of fiscal; an inherent character of state; came from individual, business
transactions and property
Income tax – higher salary, higher tax; proportional
20% for individual
25% for resident alien not engaged in business
Tax uses money for gov funds like infrastructures, pay salaries for govt employees; reduces
purchasing power of individual; a way of govt to regulate and prevent illegal doings; lifeblood of
the government
Money levied from Individual income, person, property, business transactions – objects of tax (?)
Inheritance tax, donor’s tax, estate tax, vat, community tax certificate – examples of tax
2 taxing authorities
1. BIR (property, land, building, income)
2. Bureau of customs (mga kargamento papunta sa ibang bansa or locally)
There are accredited banks that you can pay taxes (commercial banks cannot accept tax, BDO
can accept)
Income avoidance – may sanction involved for not paying taxes
Biden – released trade policy agenda (presidents may release this)
Production subsidy – subsidies are granted who are into import and export; granted to poorer
countries to produce product and export the same
Embargo vs import quota
Embargo – ban
Import quota – limit only
Factors affecting currency to depreciate – nagiging weak ang ating pera, monetary and fiscal
affect the exchange rate
Basic Economic Concepts
1. Scarcity – the demand for a good or service is greater than the availability of the good or
service.
2. Opportunity Cost – the potential forgone profit from a missed opportunity; the result of
choosing one alternative and forgoing another.
3. Factors of Production – resources that are the building blocks of the economy; they are
what people use to produce goods and services.
Four Categories:
(1) Land – any natural resource used to produce goods and services; anything that comes
from the land. Ex. water, oil, copper, natural gas, coal, and forests; raw materials in
the production process; can be renewable or nonrenewable.
(2) Labor – the effort that people contribute to the production of goods and services.
(3) Capital – the machinery, tools and buildings humans use to produce goods and
services. It differs based on the worker and the type of work being done. Ex. hammers,
forklifts, conveyer belts, computers, and delivery vans.
(4) Entrepreneurship – person who combines the other factors of production (land, labor,
and capital) to earn a profit. They find new ways or develop new goods and services
to bring to market.
4. Production Possibilities Curve – a curve on a graph that illustrates the possible quantities
that can be produced of two products if both depend upon the same finite resource for
their manufacture. The PPF demonstrates that the production of one commodity may
increase only if the production of the other commodity decreases. a model used to show
the tradeoffs associated with allocating resources between the production of two goods.
5. Absolute and Comparative Advantage – Absolute Advantage: looks at the efficiency of
producing a single product. It also looks at how to produce goods and services at a lower
cost by using fewer inputs during the production process when compared to the
competition; Comparative Advantage: the perspective lies in the fact that a country or
business has the resources to produce a variety of goods and services rather than focus
on just one product.
6. Economic Systems – a means by which societies or governments organize and distribute
available resources, services, and goods across a geographic region or country.
Four Main Types:
(1) Traditional Economic System – a system that relies on customs, history, and time-
honored believes. Tradition guides economic decisions such as production and
distribution. Societies with traditional economies depend on agriculture, fishing,
hunting, gathering, or some combination of them.
(2) Command Economic System – the central government plans, organizes, and controls
all economic activities to maximize social welfare; do not allow market forces.
(3) Mixed Economic System – a system that combines characteristics of market,
command, and traditional economies.
(4) Market Economic System – an economic system in which individuals, rather than the
state, own most of the resources. The concept of private property is central to the
market economy, as it gives owners the right to sell their goods. Competition is also
an important factor affecting supply and demand; not controlled by a central authority.
7. Circular Flow Model – demonstrates how money moves from producers to households
and back again in an endless loop.
 8. Demand and Supply – Demand: The law of demand holds that the demand level for a
product or a resource will decline as its price rises, and rise as the price drops. Supply:
the law of supply says higher prices boost supply of an economic good while lower ones
tend to diminish it.
10 Principles of
The National Bureau of Economic Research (NBER) identifies a recession as "a significant
decline in economic activity spread across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial production. " This is significantly different
from the commonly cited definition of a recession being signaled by two consecutive quarters of
decline in real GDP. If the economy does not begin to expand again then the economy may be
considered to be in a state of depression.
Four Phases of Economic Cycle/Fluctuations:
1. Prosperity Phase: Expansion or Boom or Upswing of economy.
2. Recession Phase: from prosperity to recession (upper turning point).
3. Depression Phase: Contraction or Downswing of economy.
4. Recovery Phase: from depression to prosperity (lower turning Point).
Examples of Endogenous and Exogenous Factors

Exogenous Factors
1. Migration – a shifting flow of PEOPLE.
2. Technological change – a shifting flow of IDEAS - consider the changes that have taken
place in our places because of innovations in technology.
3. Economic changes – the shifting flows of money and investment. We have seen a
tremendous change in patterns of production across the globe.
4. Government rules and decisions – governments can make decisions that impact areas.
Gregory Mankiw’s Principles of Economics:
1. People face trade-offs.
2. The cost of something is what you give up getting it.
3. Rational people think at the marginal cost and marginal revenue.
4. People respond to incentives.
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.
8. A country's standard of living depends on its ability to produce goods and services.
9. Growth of money leads to inflation
10. Society faces a short-run tradeoff between Inflation and unemployment.
For Clark, development is a process of successive domination by primary (agriculture), secondary
(manufacturing), and tertiary (trade and service) production. For the American economist W.W.
Rostow, growth proceeds from a traditional society to a transitional one (in which the foundations
for growth are developed), to the “take-off” society (in which development accelerates), to the
mature society.
In Rostow’s phraseology economic growth begins somewhere between the stage of take-off and
the stage of maturity; or in Clark’s terms, between the stage dominated by primary and the stage
dominated by secondary production.
In earlier years public utility investment (including investment in transportation) was more
important than manufacturing investment, but in the course of growth this relationship was
reversed.
The most striking aspect in such development is generally the enormous decrease in the
proportion of the labour force employed in agriculture. There are other aspects of growth. The
decline in agriculture and the rise of industry and services has led to concentration of the
population in cities.
Comparative growth rates for a group of developed countries show how uneven the process of
growth can be.
The Great Depression of the 1930s persuaded many that a laissez-faire system did not
automatically provide the necessary incentives to the innovation and risk bearing essential for
economic growth. This led to a good deal of writing on the role that governments might play
in stimulating growth.
Some economists have stressed “economies of scale.” For example, if an increase in the use of
capital and labour leads to a greater than proportionate increase in output, this is said to result
from economies of scale. Economies of scale may arise because an expansion of
the market justifies a radical change in productive techniques. These new techniques may be so
much more efficient that the returns in the way of increased output are much greater
proportionately than the increase in inputs.
At the same time, the higher the rate of growth of capital, the higher will be the growth of incomes
and therefore the demand for education.