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models. These are theoretical frameworks for existing firms and industries in the real world. Such market models describe the characteristics of the various market structures. However, some enterprises do not exactly fit the characteristics of any of the market models. In other words, the market models are not the complete replica of realities. But such market models are imported because they help us understand the real world where the market system is the principal element of the economy. Firms and industries play a vital role in our economy. They always seek ways of reducing costs of production and of improving the quality of their goods and services, especially in a competitive market. However, in the process of interplay between the forces of supply and demand, the happy balance between business profit and consumer satisfaction has always remained a big problem. In most cases, the satisfaction or interest of the consumers has been ignored due to self-interest of producers or sellers, and because of inherent market imperfections. For instance, in case of monopoly the position of the consumers is very weak. The monopolist usually dictates his price. And even in a market situation where there are many producers or sellers, the latter can agree together to forge a common price. Thus eliminating price competition among themselves in order to attain their self-interests -more profits per unit of their output. In view of the scarcity of resources, firms and industries should strive to maximize their employment and production. It is their responsibility to pursue economic efficiency as their objective. Economic efficiency is the relationship between input (factors of production) and output (goods and services produced by the factors of production). However, within the social contest of the economy of the poor countries, economic efficiency is not the main issue. The first and most important goal of the economic system should not be economic efficiency but social equity. This refers to the fair allocation of the productive resources like land, capital and management among the members of society. The market system allocates goods and services through the mechanism of demand and supply. The members of society obtain their goods and services. in the market on the basis of their ability and willingness to buy. Some say that the market system or price system is more efficient than the government in allocating goods and services. But in countries where productive resources are not fairly distributed, only the very few rich get most of the goods and services in the market. Hence, there is a need for the government to participate in allocation function of the market system to protect the interest of the poor. Basic Market Models 1. Perfect/ pure type a. perfect or pure competition b. pure monopoly
2. Imperfect/non-pure type a. monopolistic competition b. oligopoly Market Models Defined Pure competition - is a market situation where there is a large number of independent sellers offering identical products. Pure monopoly - refers to a market situation where there is only one seller or producer supplying unique goods and services. A one-buyer market situation is known as monopsony. Monopolistic competition - pertains to a market situation where there is a relatively large number of a small producer or suppliers selling similar but not identical products. Oligopoly - is associated with a market situation where there are few firms offering standardized or differentiated goods and services. Such definition is not precise because oligopoly includes a wider range of market structures than the other three market models. On the other hand, a few buyer market situation is called oligopsony. Characteristics of Market Models Pure Competition 1. There is a large number of independent sellers. 2. Products are identical or homogeneous. Examples are farm products like rice, corn, fruits, vegetables, etc. 3. No single seller and no single buyer can influence the change in market price of a product. There are thousands of sellers selling millions of identical products. In case a firm or one seller millions of identical products. In case a firm or one seller decides to reduce its supply even up to 99 percent, the total supply in the market is not affected. The supply of one seller is negligible. Therefore, he cannot change the market price. Likewise, if he sells his goods at a lower price than the prevailing market price, his goods are bought in just a few minutes. But the market price remains. On the other hand, if he offers his goods at a higher price than the market price, he cannot sell his goods. The rise or fall of market price is due to changes in total demand or supply. 4. It is easy for new firms or sellers to enter the market and for existing firms or sellers to leave the market. There are no significant barriers like legal, financial, or technical requirements. For example, a vegetable vendor is free to sell in the market. She only pays the market fee. In case, she is no longer interested in her small business, she is also free to leave the market. 5. There is no non-price competition like advertising, sales promotion, or packaging. There is no need for such non-price competition because the products are identical which means they have the same features. For instance, even if the advertise rice, egg plant, pr tomatoes, it has no effect
production and consumption are considered to be altogether contrary and different activities.Anatol Murad (2) "Production is the process that creates utility in goods. two aspects of the same activity are production and consumption. There would be many electric wires and posts and diggings. we come to know about the qualities of Samsung LED. electric and telephone service are monopolists. Products are unique in the sense that there are no good or close substitute available.on buyers. Rebisco or Jacinto Steel Company or factories changing the raw materials into goods create the form utility. the term "production" means raising of crops or making of a physical goods in factories. Pure Monopoly 1. Even the scientist also agree that " Matter can neither be created nor destroyed. he performs an act of production by increasing the utility of log of wood. lawyer or a tailor is also the producers. it is called service utility. and its use for the indirect satisfactions of want is called production. A transporter. a tailor’s stitching a shirt. their difference is not so fundamental. who make the stock of a commodity. sugar. The utility of the machine increases by this change of possession. PLDT and MWSS. water. But at the same time. (4) Service Utility: If the service of a man satisfies our want. A professor's teaching in a class. and yet we are greatly inconveniences by its endless diggings. you have changed the form of milk. 3. (3) Time Utility: If by an act of storage for a good for some time its utility increases. Definition (1) "Production may be defined as the creation of utiities " . Collecting of the sand from the river-bank and transporting it to the construction site or.H. he can reduce his output in order to increase his price. their activity is also called production. MERALCO. Cream Silk conditioner or Colgate toothpaste through advertisements. There are also natural monopolies which refer to existing goods or services in which competition is not practical or profitable. Changing of wheat in the form of biscuit. In Metro Manila. a professor. Example.M. can also be called production. in fact. and airways create place utility. They just purchase such products even from one who has not advertised. apples and other fruits in the cold storages until their crop season is over and their prices increase.Nicholson (6) "Production is any actitvity which adds to the value of a nation's supply of goods and services. the word "production" is used to imply creation or increasing the utility of a good so that its value is increased. It is also called place utility. changing of wood into furniture are the examples of the form utility. . and thus have created the utility. It will be called possession utility.J Ulmer (7) "Prodcution may be defined as the process by which inputs may be transformed into output.Thomas (4) "Production is the creation of economic utility". For example. you have not produced any new thing in the form of ice-cream. Smith (3) "Production is the creation of value in commodity. capacity to satisfy wants is created in it. Or he can increase his supply if this means an increase in his total profit. if you make ice cream. For example. is the example of time utility." -Robert Awh.Ely (5) "Production means an increase in the value of a commodity". Thus. shipping companies.. 4. the function of transporting companies is called production. In fact. For example. Mehta. Therefore. There is only one producer or seller.". Thus the activities of traders. or telephone companies to operate at the same time in a community. For example. PRODUCTION What is Production? In the ordinary language. These are granted exclusive franchises by the government. Methods of Creation of Utility Production or creation of utility can be made by the following methods: (1) Form Utility : If by changing the form of a good. rather. cream. it is not practical and convenient for several electric. (2) Place Utility: Utility is also created by changing the place of goods. So. it is called knowledge utility. Since he is the only supplier. It is extremely difficult for new firms to enter the market. Storing oranges. it is called time utility. The existing monopolist is an established giant in the industry. 2. Both these are two different aspects of the same activity. Thus. when a carpenter makes a chair. "Man does not produce physical (material) goods. (5) Possession Utility: If the change of possession of a good increases its utility. he only creates the utility. Difference between Consumption and Production Generally. "When the utility of a good is used for the direct satisfaction of want. Most public utilities enjoy natural monopolies." Thus in Economics. There are several formidable barriers like very big capital and very keen competition. But from the point of view of Economincs. The utility of a sewing machine is not so great for a dealer in sewing machines as it is for a tailor. transporting the coal to different parts of the country from the coal-mines are the examples of place utility. we have only one water supply company.. it is called the possession utility. is the examples of the creation of service utility. advertisers also help production by creating knowledge utility. a lwayer’s pleading a case. Most public utilities supplying water. it is called consumption. but when it is said that he produces material goods. etc. According to Prof. it is called the form utility. railways. The monopolist makes the price. (6) Knowledge Utility : When the utility of a good increases by increasing people's knowledge about that goods. We make greater demand for these goods. Consumption is the use of utility whereas production is creation of utility. Since traders or retailers are the creators of this utility."."-A. According to Marshall. you will say that you have produced ice-cream (a goods). he has also consumed the log of wood by using its utility.
Thus. His income is called Interest. Agents of production and their Income In economic. Excise Duty. His income is called rent. lakes. The factors of production are classified as fixed factors (fixed input) and variable factor (variable . investing his own capital.M. Land.is an original gift of nature. In other words. 2. The factors are broadly classified as land. It is essential that the work-done by anyone must create or increase utility. etc. organizer and entrepreneur-. will lead to more production of the consumer goods. Entrepreneur. capitalist. the agents of production are those persons who are owners of these factors or resources. will be called landlord. the major basis of the consumption of the people of a country is the production of various goods and services in that country. tube well. e.. His income is called wages or salary or profit. etc. create income and remove unemployment in the process of economic development. machines. Basis of Economic Welfare : Increase in the economic welfare of a country takes place when people's standard of living improves. If the production is high. labor. rivers.g: Philippines. (ii) Labourer: he is the owner of labour. shirt. The quantity. almost all the people of the country get more necessaries of a superior quality than before and at a fair price. He is the owner of organization. capital and entrepreneur. In finance and to laymen. raw material.is an exertion of physical and mental effort of individuals. forests. If the production is high. With the help of these. favorable climatic conditions and fertilizers. Thus.is a finished product which is used to produced other goods. Capital . mountains. These taxes are in the form of Sales Tax. money is a medium of exchange. such as. organizer. greater increase in the volume of trade will take place. is the taxation on production.. pesticides. etc. laborer. mineral resources. Labor . the income received through these taxes will also be high. television. etc. such as the Five Year Plans of India is the fixation of the targets of production of different goods. or laborers but also to professionals like accountants. and the goods and services that have been created by the inputs are called outputs of production. for example. America or Japan are from among the richest countries of the world and are known as Big producers of a good number of items in the world. 4. Factors of Production You want to produce wheat.all in one. Customs Duty. So. Basis of Economic Development We will be able to make the economic development of our country at a faster rate when the production of producer-goods.J. This applies not only to workers. is made on a large scale. tractor. and at the same time. Production Function Production is the creation of goods and services to satisfy human wants. 3.Thus. Basis for Economic Planning: The main basis of the formation of economic plans. like cloth. ocean. the economic progress of a country and the economic welfare of the people depend upon the volume composition and price of production and its distribution. electricity. However. (iv) Organizer or Entrepreneur. seeds. The Mangoes and Bananas are from among the rich people of Philippines because they make a lot of production. The success of failure of a plan is assessed on the basis of the achievement compared to its production targets. scooter. Examples of capital goods are machines as far as economics is concerned. all of us wish to consumer goods like ice cream. there is an increase in per capita income. Agents of production also be different persons. It can only buy goods.. the quantity and quality of production and their availability to all are the major basis of economic welfare. 1. Basis of Government's Income: A major basis of the income of the government of every country. Increase in the quantity of production will provide employment to more people. and other services. " The sources of services which enter into the process of production are called factors of production. All these are called the means of production or inputs.".is the organizer and coordinator of the land. The government should use this income for the economic and social progress of the public. For the production of wheat. chemicals. famers. etc. This is just an exchange between money and the corresponding units of goods. you require land. and climate.. Importance of Production Production has great importance for every man or country. it is to ensure whether an increase in utility or value is made by the work done by that man or not. scooter. or scientists. It includes the soil. a carpenter who makes furniture himself as his own shop. workers. Agents of production are also four (i) Landlord : He is the owner of land. etc. His income is also wages. (iii) Capitalist: he is the owner of capital. It cannot produce goods. in order to know whether a man is a producer or not. More production of machines and raw material. The importance of production can be judged by the following facts: Basis of Consumption: For the satisfaction of our wants. economist. one man can also be the master of several resources. labor and capital. capital refers to money. sugar. these are the persons by whom the supply of factors is made. Ulmer. The factors of production are called the inputs of production. we get the output or production. Basis of Trade: The volume of the internal and external trade of every country depends only on the volume of its production. quality and variety of consumption goods is made possible only when their production is made available and at moderate prices.
total output and additional output (or marginal product) increase up to a certain point.let us say hollow block machine . the production is profitable.input). one gets the average costs: how much a unit of production costs ("unit cost"). it is one machine. it is difficult to ascertain which are the alternatives considered. Cost Categories The burden sustained in order to perform a certain activity. Example is labor and entrepreneur. Law of Diminishing Returns The law of diminishing returns is also known as the law of diminishing marginal productivity. improving the firm's image through an advertising institutional campaign). at zero production the total costs will be zero. One hectare of land is still one hectare whether only 20 cavans or 40 cavans of palay are harvested. It is equivalent to total cost divided by quantity. This means whether you produce or not. naturally additional products do not decrease. If there are only variable costs. For example. it also diminishes beyond a certain point until it reaches negative returns as more variable inputs are added. modern techniques of production are more efficient than primitive technology. and later on total product decreases as more units of a variable factor are employed. Average costs can be directly compared with price to compute profitability: if the price is higher than average cost. It is noted that in the work combination of variable input and fixed input. From an external point of view. For example. That is.This is also called expenditure cost.it can produce 10 units or 50 units of hollow blocks a day. the superpowers are spending more than $1 trillion dollars a year for the arms race. The process of transforming both fixed and variable inputs into finished goods and services is called theory of production. they can harvest about 300 cavans of palay per hectare. In the same manner. If the first 5 farmers applied primitive technology while the remaining ones used modern technology. Production costs Given a specific product version. If there are only fixed costs. The relationship between total revenue and total costs depending on the production level is analyzed by the so-called "break-even analysis". In the case of marginal product. and so forth. if the first 5 farmers are lazy while the remaining ones are very industrious. 4. Total profits will be given by multiplying the average profit with the quantity produced and sold. Actual costs refer to real transactions. For example. By dividing the total costs by the quantity produces. In a balance sheet. Implicit cost . Marginal cost . Average cost . Discretionary costs are not strictly necessary for current production but correspond to strategic goals (e. 8. Opportunity cost . Such amount is more than enough to erase global poverty from the face of the earth. a laborer is not needed. you can employ 24. Beyond this point. total profits can be obtained as total revenues less total costs. the factor of production is unchanged. beyond a certain point the additional product (output) produced by each additional unit of a variable. The quantity and quality of goods and services being produced depend on the state of technology.Is a foregone opportunity or alternative benefit. In the case of a machine . there would be an increase. the rate of increase of total product declines. whereas opportunity costs refer to the alternative taken into consideration by decision makers who might want to choose the line of activity which minimize the costs.This is also called unit cost. even if there is no production. Also. it changes in accordance with the volume of production. The law states that when successive units of a variable input (like farmers) work with a fixed input (like one hectare of land). You do not pay rent to your own land. AC = TC/Q 5. production costs are usually classified according to their responsiveness to different levels of production attained. They should not be confused with money outflows. 7. in a one hectare rice field. Such technical relationship between the application of inputs (factors of production) and the resulting maximum obtainable output is known as production function. most formal models ignore this distinction between costs and payments. the machine is still there. For instance. Obviously. The factors of production belong to the users. By contrast. the case of 10 farmers who work in a 1 hectare rice field. It is obtained by dividing change in total cost by change in quantity MC = TC/Q 6. Total costs are the sum of all costs. The validity of the law of diminishing returns is based on two assumptions. costs raise commercial liabilities to be settled. Examples are land capital.g. 1. the United States and Japan apply modern technology in rice farming. Total costs will follow for instance this rule: 3. Explicit cost . the total costs follow this rule: Variable costs grow with higher levels of production (proportionally or not). and the same technology is applied . in economics. they should have the same efficiency.Another term for this cost in non-expenditure cost. These are payments to the owners of the factors of production like wages. to achieve certain goals. they are all industrious and strong. input decreases. It is a basic law of economics and technology. 2. In fact.A fixed factor remains constant regardless of the volume of production. Still. to carry out a certain production. Identically. . As a result. In fact. then additional products produced by the latter do not decline. or 6 farmers to cultivate it. So. Fixed costs are simply not responsive to production levels. No production means no variable factor. they do not pay. The underdeveloped countries can only harvest an average of 40 cavans. If there is no job to perform. In the case of a variable factor. More laborers are needed when there are more works to do. interests.is the additional or extra cost brought about by producing one additional unit. electric bills. they use the same type of technology. The successive units of a variable input should be identical. More production means more variable factors.
They also share their profits and losses. In not a few cases. and so forth. 3.2 Partnership It is a form of business organization in which two or more persons agree to own and operate a business. materials and management). Like the single proprietor. They must not be less than 5 but not more than 15. and other personal properties which are not part of his business. The larger corporation is treated differently in that some of its income is doubly taxed. having the right succession and the powers. and management. Better management because of the presence of more participants in the operations of the business. Benefits of specializations in business management are not present in small-scale proprietorship. market vendors. Possibilities of conflicts or quarrels are minimized. 3. by selling stocks and bonds. 2. Most of our business operations (including those which are not registered) belong to single proprietorship. the financial resources of a single proprietorship are not enough to transform the business into a large-scale enterprise. as each looks to its own self-interest in the workplace. In general. 4) Corporations are the most difficult type of business to form. Financial institutions may extend bigger loans to such business organization considering the combined resources of the partners. all of legal age. barber. 2. 3) It has a permanent existence. Each incorporator of a stock corporation must be an owner of at least one share of the capital stock. In case of loss. distinct and separate from the individuals (stockholders) who own it. but also his other personal assets like his piece of land. draft its articles of incorporation. There is also the "industrial" partner. 3) Specialized decision making is sometimes a time-consuming and complex process as proposals. The death or withdrawal of some officer’s and members does not affect the existence of the corporation. the partners are also subject to unlimited liability. The Corporation Code states "Corporation is an artificial being created by operation of the law. Conflicts or quarrels between or among the partners regarding the management or policies of the business are likely to crop up.3 Corporation. 2) There is a sharp division between those who own the corporation and those who are involved in its business operations. 3 . bank deposits. and properties expressed authorized by law or incident to its existence. The corporation can easily get officers or managers from inside or outside the organization. It is a legal entity. This means the owner of the business risks not only the assets of his small enterprise. It lacks stability." Only natural persons are qualified to be incorporators. 1. under Filipino style. some partners cheat their other partners in matters of profits or expenses. 2. He does not contribute money to the business organizations but he is responsible for the management. Such partners’ liabilities are only confined to their share of capital contribution in the form of cash or property. changes in policies. the disadvantages of a single proprietorship are: 1. 2.Major Forms of Business Organizations 1. They only provide the financial capital but they do not participate in the management. The owner has unlimited liability. Examples are retailers. In fact. The rules and regulations for forming . The single proprietor is the boss. The advantages of partnership are: 1. there are "silent" partners. There are financial institutions which specialize in helping a corporations sells its securities (stock and bonds). only the capital contributions of the members are affected. The advantages of single proprietorship are: 1. and so on. The other personal properties of the stockholders of a corporation are excluded from financial claims of creditors of the corporation. Considering its small asses and high mortality rate. adhere to strict guideline in the issuance of stock. tailors. 2) It has the most effective means of raising money capital for its operations. Possibility of bigger resources than the single proprietorship exists. and registrations requirements are not difficult do not even bother to apply for a license. The owner personally manages his business. There is only one manager. In case the corporation becomes bankrupt. and subject to renewal for another 50 years. It is a form of business organization which is owned by one person. any income after expenses is taxed as ordinary personal income. To continue its operation.1 Single or sole proprietorship. attributes. It is easy to organize. It is also easy to organize like the single proprietorship. He makes the decisions. 1.first as corporate profits and then as individual income on dividend. a complete reorganization is needed. and enjoys substantial freedom of action. except the limited partners. Financial capital is small. The disadvantages of partnership are: 1. On the other hand. Legal red tape is connection with its registration is not much. For an unincorporated business. the owner is the only employee. A corporation must form a board of directors. However. There is potential for conflict between owners. The death or withdrawal of one partners dissolves the partnership. which is concerned with using profits to maintain or upgrade production facilities. The disadvantage/s of a corporations are: 1) Corporations face one major disadvantage: The government levies an extra tax on corporate profits. The owner acquires all the profits from his business This gives him more incentives to make his business grow. 3. banks are reluctant to grant big loans to single proprietorship type of business organizations. The partners agree to combine their resources (money. The life-span of a corporation is 50 years. Stocks are certificates of ownership while bonds are certificates of indebtedness. The advantages of corporations are: 1) A member has a limited liability. Transfer of corporate ownership may take place anytime through the sale of stocks. There is a greater potential for conflict between workers and management. such assets are subject to financial claims by creditors. who want a fair return on their investment. and so on pass through layers of management. and a majority of whom are residents of the Philippines.
Its foreign operations were integrated into a single organizational structure. veterinary medicines. It is one man one vote and no proxy voting. This type of analysis falls within that branch of economics known as macroeconomics. beauty soaps. It has been noted that many of these Filipino corporations are conservative in their business operations. we encounter terms like the inflation rate. the management of international companies was restructured in response to the needs of international business operations. balance of payments." A small producer is an individual who provides (or together with his family) the primary labor requirements of his business enterprise. Macroeconomics is concerned with three broad questions. The warehouses. It is the rule of the minority (richer members). profits are distributed to the stockholders on the basis of number of their shares. service offices. Today. Factors of production are privately owned and managed. Canada. A cooperative is for service while a corporation is for profit. It also studies how their actions feedback on the economy. 1. marketing. Such situation exist in many other less developed countries like those in Africa and Latino America. a global corporation evolved. and personal functions within many other countries (mostly poor countries). Differences between a cooperative and a corporation are: 1. 4. finance. The most famous of these big corporations. However. or France. Brazil or Nigeria. Examples of their products are oil. Multinational Corporations Among Filipino corporations. and so forth. Shortly after the last global war. and the like. Such subsidiaries were treated as appendages to the parent company. Both depend on business efficiency to survive in a competitive market. 5) Corporations are subject to a double taxation of corporate profits. Israel and other progressive countries. Such business organizations have become famous in Europe. United States. budget deficit. drugs. Both enjoy a reasonable degree of economic freedoms. 3. International business was primarily an international trade at the start.000 members (including special depositors who are the minor children of the members). toothpastes. Corporate profits are first subject to the corporate income tax. Savings or nets profits are refunded to the members of a cooperative on the basis of their individual patronage while in a corporation. soft drinks. This is the multinational or transnational corporation. interest rate. and marketing of all essential goods all over the world. a progressive tax on corporate profits. some big companies emerged in international business. and more shares more votes. The rich countries granted financial loans to the poor countries.corporations vary from state to state.4 Cooperative. financing. and governments. Macroeconomics Every time we read a newspaper. Metro Manila. Their subsidiaries managed overseas operations. Japan. unemployment rate. During the 1960s . fertilizers. The government in its effort to promote the organization of more cooperative throughout the country has extended several power and privileges’ (like tax exemptions) to cooperatives. 175 defines a cooperative as "only organizations composed primarily of small producers and consumers who voluntarily join together to form business enterprise which they themselves own. Presidential Decree No. Such investments were strictly financial in nature. investment companies. and they are not risk-takers like the American. The other corporations are owned mostly by very close friends. European and Japanese corporations. That is. family corporations are still dominant. In the case of a corporation. Cooperative has been very effective in improving the social and economic conditions of the poor people are in said countries. and functioned chiefly as export agencies. Gross Domestics Product(GDP). GDP growth rate. 2. 2. In the Philippines. They performed liaison works with the various subsidiaries engaged in international manufacture and trade. foreign debt. Government in a cooperative is democratic. Quite often. or one who earns at least fifty percent of his gross income from his labor. it is one share one vote. insecticides. industrial countries imported raw materials from the agricultural countries. It started in 1961 with only 28 members and P380 capita. 4. Great Britain. but most follow the provisions outlined in the Model Business Corporation Act. Macroeconomics is the study of the economy in the aggregate. the whole Philippine economy has been dominated by giant corporations which do not belong to Filipino citizens. the most successful community credit union is found in San Dionisio. Vice -presidents for international operations were appointed. cars. Membership in a cooperative is open and voluntary while in a corporation membership is only for wealthy relatives and friends. These are: a) How do we explain changes in the inflation rate? b) How do we explain changes in the aggregate output? c) How do we explain unemployment? . control and patronize. They control production. It is the biggest of its kind on Asia. it has more than P60 million assets and about 15. Emergence of Big International Companies As the start of the 20th century (1900). Some year’s later. Similarities between a cooperative and a corporation are: 1. and then exported the finished products to the agricultural countries. writer describe the trends in these in theses variables and attempt to explain how observations of these variables came about. 3. processing. It is a corporation which maintains its headquarters in one country (rich country) but performs productions. exchange rate. Their activities and operations are both regulated and supervised by the government. This means they are not very responsive to innovations. The headquarters of these subsidiaries were located (and still at present) in the home country like the United States. It examines how economic agents as a whole respond to changes in the economic environment. and involved the flow of funds through banks. Paranaque. and sales agencies have been located in foreign countries like the Philippines. international finance and investment developed.
and these are not for further processing or manufacturing. However. the existence of competing explanations in macroeconomics lies in the fact that we still know very little about how an economy as a whole operates. Such earnings or market value of final goods and services are estimated on a yearly basis. While the questions above seem simple enough. All countries. GNP has greater value than national income because the latter is equivalent to total cost of production. or less developed. Example is bread.are those which are sold for the last time.With these questions.is the value of GNP in terms of the number of goods and services produced. if it is a reverse situation. the incomes of the citizens earned from abroad are included. Money GNP.is the total income of the factors of productions in one year or the total payments received by citizens in one year. Per capita income (PCI) .is the value of GNP at current price or market price. Ways of Calculating National Income Income approach Wages +Rents +Interest +Profits ____________ = National income + Indirect taxes less subsidies + Depreciation _____________ = GNP Product or Expenditure Approach Household consumption expenditures + Government purchases of goods and services + Gross domestic investment of business firms + Net exports (if value of imports is greater than exports .is the total market value of all final goods and services produced by citizens in one year. the GDP is bigger than GNP. or per capita(GNP) . PCI = National income _____________ Population Per capita GNP = Gross national product __________________ Population Gross domestic product . Disposable income . Furthermore. sometimes conflicting. fishery and forestry + Industry a. These indicate whether the national economy is progressing or regressing. We are also interested in explaining how these variables are linked to each other. it is in. This is the actual situation in many less developed countries. National Income The income of the nation is measured by the total earnings of the factors of production owned by its citizens of by the total market value of all final goods and services produced by its citizens.is income per head. Real GNP = Money GNP _________ Price Index x 100 Final goods and services . Perhaps. The reference point is the per capita (GNP) or per capita income (PCI) of the United States. are classified as highly developed countries. In a country whose economy is dominated by multinational corporations or foreigners. intermediate. Countries usually show their achievements by economic indicators like gross national product (GNP). mining . Those whose incomes are far below that of the United States are considered less developed countries. then the national income has been experienced by many poor countries.is personal income less personal taxes. Incomes derived from investments or wealth in foreign countries are excluded. it is minus) ________________________________ = Gross national product = Capital consumption allowances (depreciation) = Net national product = Indirect business taxes = National income Industrial Origin Approach Agriculture. National Income . In fact. whose national income or PCI are withing the range of the PCI of the United States. the answers are not. Such measurements reflect the performance of the economy. Perhaps. Definition of Terms Gross national product (GNP). In the case of GNP. Real GNP . Flour is not a final product. It is used for making bread. if the national income is bigger this year than in the previous year and that last year's national income was bigger in the previous years. answers to these questions. Their population growth rate is greater than their production rate. For instance. we are concerned with the identifying the determinants of these important variables.Such measurements also classify the economic class of countries whether these are highly developed. per capita income (PCI). macroeconomics that the old adage “asking ten economists yields eleven different answers" fits perfects. the numerous civil wars and droughts in Africa have brought a plunge to the national economies of not a few African countries. there are quite a number of. It is referred as intermediate product. then it can than be said that the economic performance of the country has been improving during the last few years.is the total market value of all final goods and services produced within the territories of a country in one year.
. its yearly depreciation value is computed: 10.000 is included in 1994 GNP. A machine depreciates not only because of the use through time but also as a result of obsolescence or calamities like fire and flood. labor..... The productive life of the machine maybe 5 or even 10 years but the expenditure in the purchase of the machine has been included in one year national income accounting....000. businessmen merely increase the prices of their products.. Otherwise... Here is a simple illustration of value-added method: Bread. In this case . transportation b. The value added to the total value of the product at every stage of production is totaled. the businessmen pass on to the consumers the tax imposed on them by the government.000 and its junk value is P200..10 centavos Baker.. if the useful life of the machine is 5 years.. there is double counting.... license fees..Depreciation __________________________ = National Income Depreciation and Indirect Business Taxes Depreciation is an allowance for capital goods like machines which have been "consumed" in the process of production... The value of the intermediate goods which constitute the value of the final products is excluded. welfare payments. electricity....20 centavos Framer. business property taxes........ there is double counting in the calculation of national income. and again included in the form of government services funded by taxes. gas and water + Service sector a. To avoid double counting... government subsidies. veterans’ payments... In other words..Net indirect taxes ..... For example. To restate briefly... their useful life is more than one year. service = Gross Domestic Product .. However.... An indirect tax is a tax imposed by the government on products sold by businessmen.. For example.. and so forth. then . The sum of P7..... The result is equal to the value of the final product. finance d.. the value of the products sold by businessmen contains an element of tax in the form of higher price (indirect tax).. trade c. To get national income.. Double Counting The value of goods and services must be counted only once..... ply wood...5 centavos Also nonproductive transactions are excluded like purely financial transactions (social security payments..Factor income from the rest of the world = Gross national product .. In most machines. For example.. profit. the beneficiaries do not contribute to current production..15 centavos Retailer. Since national income accounting covers a period of one year. excises. these include general sales taxes.. Another kind of transaction which is not included in the GNP is resale transaction. manufacturing c... and the buying and selling of stocks and bonds.000 is the total student's allowance for 1994.. and the others are just transfer of ownership.5 centavos (value added) Retailer. only the value of the final goods and services are included..Such transactions do not directly involved current production... nails. paint.... interest and profits. Clearly .....b... Thus.. and custom duties.20 centavos Farmer.. To include these in the present GNP accounting would be double counting because such incomes have been included in previous years and others are already counted in the current year..... To make up for the money that they have to pay to the government.... the services rendered by the government are included. to avoid understatement of total income during the year of purchase of the machine and overstatement of total income for succeeding years. It would be P20.. the tax element is included in the value of output under government services rendered. If this allowance is counted fir 1994 GNP.. then it is an overstatement because such amount came from the income of his father.. construction d. the actual expenditures for such machines and their useful life do not have the same length of time.. the market price of an executive table is P10.... its costs is P10...000 – 200 __________ 5 In the case of indirect taxes.. tax was included once in the price of goods sold in the market........ student's allowance from parents.. rents... In estimating national income. depreciation and indirect business taxes are deducted from GNP which is the market value of final goods.. the income of the student's father which is P40..10 centavos (initial value) Baker.. If the second hand sales are included. there is an alternative way of estimating value of the final product. Hence. Such machines loses its value and must be replaced in order to sustain production. This is called the value-added method...... Nevertheless... This is reflected in the GNP as P10..000... and other costs that are incurred in the production of the table are excluded....... the burden of the tax is shifted to the buyers of the products. a depreciation cost is allocated evenly over the useful life of the machine... lumber.000 which is not true.. it is much easier to count only the final products than the intermediate goods like the nails. Taxes are used to finance the programs and projects of the government... Likewise. and gain included in the form of government services funded by taxes.. Some of these incomes were earned some years ago.. National income is the factor value of goods which refers to the total cost of production or factor payments like wages. The cost of the paint. In this case in the market. Therefore.
For instance. A nation can also do the same. then borrowers also exhaust their credit. in the long run. There are several factors which affect investment. Higher income results to more consumption. The formula is: C/Y. a hollow-block machine is produced this year. the loans have to be paid. it appears that C can not be higher than Y. The formula is: C/Y. If one individual saves a large part of his income for his future use. then it is more than 1. However. However. more investment means more national income or gross national product. More taxes reduce disposable income. 2. However. 8. This decreases consumption. when we buy food or pay the services of a doctor. then there is a big decline in consumption. Is it really possible for consumption to exceed income? Note that under the equation of Y = C+S. the answer is 1(based on the formula). That part of income which is not consumed is called savings. 4. if there is a very even distribution. street demonstrations and crony capitalism. Consumption Consumption is the amount of money spent on goods and services which yield direct satisfaction. all other things being constant. This group does not save much. Such behavior is generally assumed to cause economic fluctuations. Rate of interest. it is consumption. income is largely concentrated in the hands of a very small portion of the population. The other one is the marginal propensity to consume (MPC) This is the ration of the increase in the consumption to to the increase in income that caused it. We have been taught that thrift is always a good virtue. This is the fraction of all income spent on consumption. People tend to save more at a higher interest rate. On the other hand. Income = Consumption plus saving Y = C+S s = Y-C Factors Influencing Consumption 1. these factors influence consumption or savings. rebellion. but under the short run consumption function. production and consumption. it was first necessary for society to save for investment funds. social problems and other destabilizing elements. Such negative growth rate was caused by assassination of former Senator Benigno Aquino. Income. There are individuals who are thrifty or extravagant. Investment plays a very vital role in the economy because it creates more employment. 7. In order to accumulate capital. If not. But if consumption is greater than income. The desire to hold cash. Investment is the most fickle component of expenditure. if consumption is equal to income. 3. Any change in consumption is due to change in income in most cases. But if all individuals in a society save. savings increase at the expense of consumption. The answer is it it possible. then people are encourage to purchase such assets. Take note that GNP measures all produced in 1994 are measured in the 1994 GNP even if some of these are not sold in the same year. Clearly. Hence. 5. it is likely good for him. Investment Investment is expenditure on new capital goods. An individual can spend more than his income by using his past savings or by borrowing. such unsold products should not be included in the 1995 GNP. The value of this machine is included in this year's GNP. The aforementioned factors influencing consumption all contribute to the level of consumption of individual. Jr. people spend more amounts of money. Therefore. our 1984 GNP posted as negative 6 percent. GNP Record of the Philippines GNP statistics indicate the economic conditions of our country in a given year. This was the lowest economic growth rate in the whole Asian and Pacific region. As a result. the economic growth of society depended on capital formation. Thus. consumption tends to be greater than saving. like political instability. Paradox of Thrift The economy is in equilibrium when saving equals desired investment. This decreases saving. 6. Such economic conditions become bad due to several factors. This is the paradox of thrift. Thus savings decrease. if income-earning assets yield more incomes. Attitudes and values. However. John Mynard Keynes disagree with such economic theory. More people means more consumption. Such needs for cash for personal or business reasons reduce consumption and raise saving. consumption primarily depends on income. if consumption is less than income. However. Individuals with big incomes are proportionately big savers. When there is a very uneven distribution. Price level. Taxes. This greatly .it is double counting. However. it is no longer possible for a man or nation to consume more than its income because savings are already exhausted. These were not produced in the said year. According to the classical writers. If this is double counting. More people have to buy more goods and services. the answer is less than one. Evidently. One is the average propensity to consume (APC). the decision to invest is based largely on expected profits. Population. Such relationship between income and consumption is analyzed in two ways. Consumption Function Consumption function is the functional relationship between income and consumption. It is the biggest of the major components of expenditures on output. the concentration of the bulk of aggregate income is in the hands of individuals with moderate incomes. the classical economists believed that more saving was good because more funds would be available for investment. it is spending more than what it is getting from taxes and other sources of income. Like the Philippines. He said the attempt of consumers to save more will reduce saving. its purchase is not considered consumption. Distribution of national income. When prices are high (inflation). This had been made possible because of foreign loans. the purchase of a bond which generates an income in the future does not produce direct satisfaction. In short. natural calamities. Capital goods are produced goods which are used to produce other goods. For example. In both ways.
then total saving also falls . Summary 1. Being thrifty is likely to reduce the rate of inflation. The sum total of all factor payments is the national income. Consumption is the amount of money spent on goods and services which yield direct satisfaction. Non-productive transactions are excluded like students' allowance. There are three ways of estimating national income: income approach. less production. While those produced by citizens. GNP measures all current productions whether the products are sold or not. Since aggregate or total income falls. only the value of the final goods and services are counted. What is produced during the year is counted for that year.less investment.both from the position of the individual and that of society. 2. there is an expansion of economic activities. price. during full employment (when all productive resources are fully used. Under condition of unemployment. Its major determinants are ROI and IR. However. Conversely. and peace and order. This is the total costs in the production of goods and services by citizens of a country in one year. 5.reduces the demand for goods and services. The other determinants are population. To avoid double counting. NEDA is responsible for the national accounting. is the gross national product. production is cut down. As long as ROI is greater than IR. rate of interest. price. and industrial-origin approach. it is good to save . it is good to save during boom and inflation. 4. product or expenditure approach. among other things. When investment is greater than saving. Likewise. Evidently. Investment is expenditure on new capital goods. population. government policies. The total market value of all final goods and services produced within the territory of a country in one year is known as gross domestic product. what is good for the individuals is not good for all. there is contraction of economic activities. . Because if we consume all our resources. technology. there is investment. nothing is left for capital formation. less employment. 7. and income. more savings means less consumption.or even zero saving. 3. inside and outside the country. So. 6. It is determined by income distribution. pensions and those for resale to avoid double counting. This results to more unemployment and reduction of income. and less income. together with the number of workers. And this leads to the downfall of the economy .
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