Module 3

ECONOMIC
DEVELOPMENT
(BBE4303)
Presented By:
ANNIE LEE G. DE BELEN, MBA
DEVELOPMENT: Meaning and Concept Of Development

Development  means “improvement in country's economic

and social conditions”. More specially, it refers to improvements
in way of managing an area's natural and human resources. In
order to create wealth and improve people's lives.

OVERVIEW: Economic Development

What is ECONOMIC DEVELOPMENT?

It is often defined by others based on what it is trying to

accomplish. Many times these OBJECTIVES include building or
improving infrastructure (i.e.-Roads, Bridges etc).; improving
our education system (i.e.- through New Schools); enhancing
our public safety (i.e.- through Fire and Police service); and or
incentivizing new businesses to open (i.e.- a Location in a
community). Literally, economic development can be defined as
“passage from lower to higher stage which implies change”.
Economic Development often is categorized into
the following 3 MAJOR AREAS:
1.) Governments working on big economic objectives
i.e.- Creating JOBS or Growing an economy.

( These initiatives can be accomplished through written laws, industries'

regulations, and tax incentives or collections)
 
2.) Programs that provide infrastructure and services
i.e.- Bigger Highways, Community Parks, New School Programs and
Facilities, Public Libraries or Swimming Pools, New Hospitals, and Crime
prevention initiatives

3.) Job Creation and Business Retention through workforce development

programs to help people get the needed skills and education they need.
This also includes small business development programs that are geared
to help entrepreneurs get financing or network with other small businesses.
What are the MEASURES of Economic Development?

The more commonly used criteria to

measure  Economic Development  are:
 Increase in National Income
 Per Capita Real Income
 Comparative Concept
 Standard of Living
 Economic welfare of the community

(i.e.-Housing/Education/Leisure Time/Job
Satisfaction/Real Income etc. )
NATIONAL INCOME ACCOUNTING
Every time we read a newspaper, we would encounter terms like INFLATION
RATE, GDP, GNP, GDP growth rate, UNEMPLOYMENT RATE, INTEREST RATE,
FOREIGN DEBT, BUDGET DEFICIET, EXCHANGE RATE BALANCE OF
PAYMENTS(BOP), etc. Quite often, writers describe the trends in these
VARIABLES and attempt to EXPLAIN HOW OBSERVATIONS of these variables
came about.
What if the executive of a firm wants to know HOW WELL his firm is
performing. What measures should he undertake to improve the financing
standing of the firm? Accounting data provide him with the information he
needs to assess the operation of the firm. What accounting does to the
firm is what it does for the economy as a whole.
The NATIONAL INCOME ACCOUNTS provides the framework of the
economy’s performance and the economy’s stage of economic
development. Hence, policies can be formulated to improve the
performance of the economy.
NATIONAL INCOME ACCOUNTING
This type of ANALYSIS falls within that branch of ECONOMICS known
as MACROECONOMICS—the study of the economy in the aggregate. It
examines how economic agents AS A WHOLE respond to CHANGES in the
economic environment. It also studies how their actions feedback on the
economy.

MACROECONOMICS is concerned with 3 BROAD QUESTIONS. These are:

1. How de we explain changes in the inflation rate ?
2. How do we explain changes in the aggregate output ?
3. How de we explain unemployment ?

With the 3 BROAD QUESTIONS mentioned, we are therefore concerned

with IDENTIFYING THE DETERMINANTS of these important VARIABLES. We
are also interested in EXPLAINING how these variables are LINKED TO
EACH OTHER. While the said question mentioned also seems to be simple
enough, the ANSWERS ARE NOT. In fact, there are quite a NUMBER OF,
SOMETIMES CONFLICTING ANSWERS to these questions.
NATIONAL INCOME ACCOUNTING
Researchers, businessmen, politicians and others
examine a number of INDICATORS in order to gauge the
overall health of an economy. They sometimes compare the
past and present values indicators in order to see the
direction in which the economy is going.

NATIONAL INCOME ACCOUNTING discusses the basic

ideas behind the calculation of indicators like GROSS
DOMESTIC PRODUCT (GDP) and GROSS NATIONAL
PRODUCT (GNP). It also describes HOW THESE INDICATORS
CAN BE USED TO EVALUATE ECONOMIC PERFORMANCE.
 Introducing GOVERNMENT and FOREIGN AGENTS are the TWO
AGENTS that includes the following TRANSACTIONS:

a.) Government purchases of goods/services

- government buys goods/services for its day-to-day operations and
projects, these represents transactions for which the government
makes payment to firms.

b.) Government payments for factor services

- government hires workers, rents privately owned buildings etc.
These represents payments of government to the owners of the factor
of production.

c.) Transfers payments between different agents

- transfer payments are transactions wherein one party is not
obliged to deliver a goods/service in return for the payment.
(i.e.- Retirement benefits/ Unemployment/Scholarships/Donations)

**Payments from government to households

Introducing GOVERNMENT and FOREIGN AGENTS are the
TWO AGENTS that includes the following TRANSACTIONS:
d.) Firms and households pay taxes to the government
- these includes taxes paid on income, property, goods/services.

** these is reflected as payment from the households and firms to

the government

e.) Transactions with the foreign sector

- these includes sales of goods/services, assets and transfers.

Sales of domestically produced goods to other countries are called

EXPORTS, while IMPORTS is or goods bought from other countries.
This is reflected as payments by purchasing domestic agent to the
rest of the world.
 The previous mentioned transactions (letter a-e) gives an idea
between the 4 agents of MODERN ECONOMY:

1. Types of payments made in the economy

2. The agent who makes the payment
3. The agent who receives it

4 Economic Agents:
1. Households
2. Firms(Business)
3. Government
4. Foreigners (rest of the world)
MEASURING THE ECONOMIC OUTPUT: Basic Concepts
What does GROSS DOMESTIC PRODUCT (GDP) measure?

 GDP measures the market value of all final goods/services

produced within an economy in a given period.
 Generally measured for a year or quarter, GDP is a summary

indicator of how much output was produced by the economy. It

is measured in monetary terms and is limited to final goods.
 GDP only measures the current production.

 Transfer of payments and transactions involving goods produced

in other periods are not included in the calculation of GDP.

 GDP is usually expressed in the currency of a particular country.

(i.e.- Peso/US Dollar/Japanese Yen etc. etc.)

 MEASURING THE ECONOMIC OUTPUT: Basic Concepts
Why USE the MARKET VALUE?

The use of market value is due to the fact that we can not
directly ADD DIFFERENT GOODS/SERVICES.

For instance, it does not make sense to ADD the QUANTITY OF

BUKO PIE with the NUMBER OF HAIRCUTS b’coz these are MEASURED
IN DIFFERENT UNITS.

Hence, the USE OF MARKET VALUES allows us to ADD THE

QUANTITIES OF DIFFERENT GOODS IN A COMMON UNIT. Moreover, it
presents the sum in a number that people can easily understand.

 GDP only measures the value of FINAL GOODS. These are goods/services that are not
purchased for the purpose of producing other goods/services or resale.

For example, If an individual buys a coconut and decides to eat it, then the
coconut is considered FINAL GOOD(s). Such purchase is included in the calculation of
GDP.

In contrast, if the coconut is used to produce buko pie and sold in the
market, then the coconut is considered an INTERMEDIATE GOODS. In this case, the
purchase of the coconut is not included in the calculation of GDP.
MEASURING THE ECONOMIC OUTPUT: Basic Concepts
APPROACHES TO GDP MEASUREMENT
There are THREE equivalent WAYS to CALCULATE the GDP. These are
the:
(1)- Expenditure Approach - ( GDP = C + G + I + NX) / (NX = X – M)
(2)- Income Approach - ( NI = W + R + i + PR)
(GDP = NI + Indirect Business Taxes + Depreciation)
(3)-Value Added Approach

Expenditure Approach – involves calculating the sum of all expenditures on final goods.

Table 1
The Expenditure Approach in a Two-Good Economy
Good Price Per Unit Quantity Sold Expenditures
  (in PESOS) (in PESOS)
  (1) (2) (1 x 2- 3)
Ice Cream 100 10 1,000
Buko Pie 50 5 250
GDP     1,250
Notes: (1)Expenditure = Price Per unit X Quantity Sold
2- The numbers are hypothetical
Explanation: We can start by computing the SPENDING or EXPENDITURE for EACH
GOOD. Table 1 shows that the TOTAL EXPENDITURE on ICE CREAM and BUKO PIE are
php.1,000 and php.250 respectively. Since GDP is EQUAL TO THE SUM OF THE
EXPENDITURES ON FINAL GOODS, this hypothetical economy’s GDP is php.1,250.00
APPROACHES TO GDP MEASUREMENT
Income Approach – calculates GDP by taking the sum of the payments for
the different factors of production . In other words, it is the total of all
incomes from wages, interest, profits, and rent.

For example: If there are 5M workers in the economy and they each
received 30,000 pesos per year, then the wages will be equal to 150M
pesos (5M x 30,000). If we ADD this amount to the total incomes from the
other sources(i.e.-Interest/Profits/Rent), then we can arrive at an estimate
of GDP.

GDP = Wage + Interest + Profits + Rent

Value Added Approach – measures the contribution of the different factors

of production to the value of a good.

VALU ADDED = Sales – Purchases From Other Firms

 4 COMPONENTS OF GDP
Spending in the economy takes many forms. At any moment. The Smith
family may be having lunch at Burger King; General Motors may be
building a car factory; the Navy may be procuring a submarine; and
British Airways nay be buying an Airplane from Boeing, GDP includes
all of these various forms of spending on domestically produced goods
and services.
To understand how the economy is using its scarce resources,
Economists study the composition of GDP among various types of
spending. To do this GDP (which we denote as Y) is divided into 4
Components:
1. Consumption (C)
2. Investment (I)
3. Government Purchases ( G)
4. Net Exports (NX)

Equation/Formula:
Y = C + I + G + NX
4 COMPONENTS OF GROSS DOMESTIC PRODUCT (GDP)
Consumption (C) – all private consumer spending within a country's economy, including,
durable goods (items with a lifespan greater than three years), non-durable goods (food &
clothing), and services.
- it is spending by households on goods/services, with the exception of purchases of
new housing.

Goods include household spending on durable goods such as cars and appliances and
non durable goods such as food and clothing. SERVICES include such intangible items as
haircuts and medical care. Household spending on education is also included in
consumption of services (although one might argue that it would fit better in the next
component.

Investment (I) – sum of a country’s investments spent on capital equipment, inventories, and housing.
- it is the purchase of goods that will be used in the future to produce more
goods/services. It is the sum of purchases of capital equipment, inventories and structures.

Investment in structures includes expenditure on new housing .

Here the investment is different form what you hear in everyday conversation. The word
INVESTMENT means purchases of goods such as capital equipment, structures, and
inventories that used to produce other goods.
4 COMPONENTS OF GROSS DOMESTIC PRODUCT (GDP)
Government Purchases ( G) – total government expenditures, including salaries
of government employees, road construction/repair, public schools, and
military expenditure.
- include the spending on goods and services by local, state and federal
governments. It includes the salaries of government workers, as well as
expenditures on public works.

The meaning of government purchases requires a bit of clarification. When

the government pays the salary of an Army or Policemen or a school Teacher,
that salary is part of government purchases.
But when the government pays Social Security benefit to a person who is
elderly or an unemployment insurance benefit to a worker who was recently
laid off, the story is different: these are called TRANSFER OF PAYMENTS b’coz
they are not made in exchange for a currently produced goods/services.

Net Exports (NX) – country’s total export less total imports.

- spending on domestically produced goods by foreigners (EXPORTS)
minus spending on foreign goods by
domestic residents (IMPORTS).