Methods Used in

Economic

For Mira Karlsson

Hosted by Ana Bowman
Qualitative Approach
• Qualitative economics is the representation and analysis of
METHODS
information about the direction of change (+, -, or 0) in
USED IN
some economic variable(s) as related to change of some
ECONOMI
other economic variable(s). For the non-zero case, what
makes the change qualitative is that its direction but not
Cits magnitude is specified.
ANALYSIS
• For the non-zero case, what makes the change qualitative
is that its direction but not its magnitude is specified.

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Quantitative Approach
• Involves mathematical and statistical analysis of economic data.

• It complements qualitative analysis by providing the figures that

support the descriptive findings.

• For instance, what is corresponding increase in national income

account if the government increases spending by a certain amount?

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• Money supply is positively correlated to price.
• Is this Qualitative or Quantitative?

• Consumption drives economic growth.

• Is this Qualitative or Quantitative?

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The mathematical and statistical analysis of economic data is sometimes
referred to as – ECONOMETRICS.

Other quantitative and qualitative tools used extensively in the study of

economics are variables, equations, and functions and graphs.

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 Economic Variables
• Economic variables are measurements that describe economic
units, like the GDP, Inflation or Interest Rates.

A variable is defined as a set of attributes of an object.

Attributes are characteristics that describe an object.

Variable cost changes depending on the quantity or volume of

output while fixed cost is constant regardless of the increase or
decrease in quantity.
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 Variable or
Fixed

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Identify

RENT FOR OFFICE SPACE OR STOREFRONT

DELIVERY OR SHIPPING CHARGES
WEEKLY PAYROLL
SALES COMMISIONS
EQUIPMENT DEPRECIATION
ADVERTISING and PUBLICITY

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 TOP FIVE FIXED COST
Depreciation - the gradual deduction of an asset's decline in value. A physical asset is gradually
expensed over time down to a value of $0.

Amortization - the allocation of the cost of an intangible asset over a period of time. It is usually
used to expense a mortgage loan down to $0.

Insurance - the liability insurance you hold on your business.

Rent - the rent you pay on your office, factory, and storage space.

Utilities - electricity, water, and other utilities

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 VARIABLE COST

Direct Materials - the raw materials that go into the production of your product

Production Supplies - the supplies that are necessary for the machinery that help
produce your product, such as supplies that help maintain your equipment

Sales Commissions - the part of a worker's salary that is based purely on the sales
they make

Credit Card Fees - the fees that the merchant has to pay in order to offer credit
card services to their customers

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Functions
• FUNCTION (f) explain the relationship between two or more
economic variables.

Functions illustrate which of the variables are dependent and which

ones are independent. Take for example, the expression where D stands
for Demand and P stands for Price.
Then this expression reads, “Demand is a function of price”, which
means that the price of commodities determines the quantity demanded.
In this case, P is the independent variable.

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Economic Equation
An economic equation is a mathematical expression of an economic
thought or concept.

Economic equations are often used to further explain economic thought

or concept. Economic equations are often used to further explain
economic theories and models.

Consider the expressions below, which pertain to the national income

formula, where Y stands for national income, C for consumption, I for
investments, G for government expenditures, X for exports, M for
imports and Xn for net exports.
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Graph
A graph provides a visual representation of the relationship between two
or more economic variables. It helps break down abstract ideas or theories
through diagrams.

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Economic Theories and Models
Economics Theories – simplify economic phenomena.

- these are statements or observations on the relationship of variables.

Example is Marginal Utility.

Economic Models – are generally representation of reality.

-make the study of economics easier by serving as guides and by

simplifying concepts and ideas.

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The most popular being assumption is the CETERIS PARIBUS
ASSUMPTION.

Ceteris Paribus is a Latin term that literally translates to

“ all else being the same”.

This is a form of acknowledgement of the limitation of the model.

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Time Series versus Cross-Sectional Data
Time Series means that data are collected for element(s) for several time
periods.

Time-series data considers the same variables over a certain period of

time, whereas cross-sectional data uses different data for a given point
in time.

Cross sectional data include different variables for a single time period.

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 Table 1.1 Gross National Income and Gross Domestic Product by
Expenditure Shares (2005-2010, at current prices, in million pesos)
Type of Expenditure 2005 2006 2007 2008 2009 2010

1. Household Final Consumption 4259131 4677986 5064463 5739592 5993427 6442033

Expenditure

2. Government Consumption 513254 575717 639985 681893 791403 875291

3. Capital Formation 1223578 1129376 1195015 1489212 1331662 1849380

4. Exports 2619543 2920983 2981846 2981846 2587015 3133508

5; Less: Imports 2937757 3032905 2988588 3039737 2677363 3296732
Gross Domestic Product 5677749 6271157 6892721 7720903 8026144 9003480

Net Primary Income 1472565 1611931 1741410 2055282 2626323 2992597

Gross National Income 7150314 7883088 8634131 9776185 10652467 11996077

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Normative Vs. Positive Economics
Categories of Economics in terms of judgement:
1. Normative – evaluates economic decisions, policies or outcomes as
good or bad. It is based on opinion and is subjective.

2. Positive – evaluates economic scenarios and policies based on

qualitative and quantitative analysis.

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LET’s TRY
1. The Philippine economy is doing good or not.

2. Philippines economic growth based on data for the past three

quarters.

3. Employees should pay less in taxes.

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Main Branches of Economics
• Microeconomics – is the branch of economics that examines the
individual or company level. It deals with households and firms, such
as the buying behavior of consumers and profit-maximizing behavior
of consumers and profit-maximizing behaviour of sellers
• Macroeconomics – studies the aggregate or country level. The
frameworks focus on the effect on a larger scale, such as the national
economy. Major economic indicators include national income account,
GDP, inflation and interest rate.

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Analyze and categorize each of the following scenarios
into either microeconomics or macroeconomics
1. Household weekly budget
2. Government budget on public infrastructure.
3. Total Philippine export to the United States of America
4. A manufacturer’s operating expense for the past year
5. Current unemployment rate of the country

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MICROECONOMIC Concepts
• The concept of utility is the foundation of consumer buying behavior
and demand for goods.

• UTILITY – refers to the value or satisfaction derived from the

consumption of a good.

• MARGINAL UTILITY – is the additional utility or satisfaction from the

consumption of an additional unit of good, keeping other’s constant.

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Total and Marginal Utility
Quantity (Q) Marginal Utility (MU) Total Utility (TU)
1 220 220

2 200 420

3 160 580

4 100 680

5 0 680

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As you consume an additional unit of a good,
the marginal utility derived it declines.
Marginal Utility
Quantity (Q) Marginal Utility (MU)

250

200

150

100

50

0
1 2 3 4 5

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Law of Diminishing Marginal Utility
- As you consume more hamburgers, your total satisfaction increases.
However, for every additional consumption, your marginal utility or
your level of satisfaction is declining.

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As the Quantity consumed increases, a consumer’s
total utility also increases but at a decreasing rate

TOTAL UTILITY
800

700
680 680

600
580

500

420
400

300

220
200

100

0 1 2 3 4 5
1 2 3 4 5

Quantity (Q) Total Utility (TU)

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Indifference Curve
• An indifference curve is a chart showing various combinations of two
goods or commodities that consumers can choose.

• At any point on the curve, the combination of the two will leave the
consumer equally well off or equally satisfied—hence indifferent.

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Indifference Curve
• Example of choice of goods which give consumers the same utility

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Diminishing marginal utility

The indifference curve is convex because of

diminishing marginal utility.
When you have a certain number of bananas – that is all you want to eat
in a week.
Extra bananas give very little utility, so you would give up a lot of
bananas to get something else.

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Indifference Curve Map

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Find the slope of Indifference Curve.
• Certain change in Y when I have a change in X

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Marginal rate of substitution
• How much you are willing to give up of the vertical axis on every
increment of the horizontal axis. (slope)

What is the marginal rate of substitution?

• The marginal rate of substitution (MRS) is the amount of a good that a
consumer is willing to consume compared to another good, as long as
the new good is equally satisfying. MRS is used in indifference theory
to analyze consumer behavior.

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Budget Line
Budget line is a graphical representation of all possible combinations of
two goods which can be purchased with given income and prices, such
that the cost of each of these combinations is equal to the money income
of the consumer.

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Optimal choice of goods for consumer

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Equilibrium Position
- Is the tangency point (point B) of the budget line and the highest
indifference curve.

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Equimarginal Principle
The equimarginal principle states that consumers will choose a
combination of goods to maximize their total utility. This will occur
where:

• The consumer will consider both the marginal utility MU of goods

and the price.
• In effect, the consumer is evaluating the MU/price.
• This is known as the marginal utility of expenditure on each item
of good.
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Example of marginal utility for
Goods A and B
Units MU good A MU Good B
1 40 22
2 32 20
3 24 18
4 16 16
5 8 14
6 0 12

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Suppose the price of Good A is now Php4 and the price of good B is Php2.
We divide the MU by the price. This give us:

Units MU A/ Php4 MU B /Php2

1 10 11
2 8 10
3 6 9
4 4 8
5 2 7
6 0 6
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Assumptions of marginal utility theory

• Consumers are rational

• Utility can be described in cardinal terms (e.g. monetary
units)
• Constant prices and incomes.
• Goods can be split up into small units

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Disposable Income and Discretionary Income
Disposable Income = Gross Income – Income Taxes
Discretionary Income = Disposable Income – Nontax expense

Consider you have a monthly income of 100,000 with tax liability of

32%. Additionally you pay rent of 10,000 and spends 15,000 on food,
transport, gas and utilities. Given this expenses, what is your Disposable
Income and Discretionary Income.

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What Have I learned So Far
Analyze and calculate your average monthly disposable and
discretionary incomes. Suppose your salary is your only source of
income. You receive Php72,000 gross monthly income. You pay
personal income taxes of 32%. You are living with your parents so you
do not pay rent. However, you settle your family’s utilities such as
average monthly electricity bill of Php 2,300, water bill of Php 550., and
cable and Internet bill of Php 1,999.00 You spend an additional Php
5,000.00 for transportation expenses and allot Php 10,000.00 per month
for your savings.

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MACROECONOMIC THEORY
• GROSS DOMESTIC PRODUCT
• NATIONAL INCOME ACCOUNT

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Gross Domestic Product (GDP)
GDP is defined as the total value of final goods and services consumed
during a given period.

This is typically expressed in Philippine peso in contrast to GDP growth

or the rate of increase in GDP value from one period to another, which
is expressed as a percentage.

GDP is the more popular measure of the overall health of the economy.

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 Gross Domestic Product
FINAL is emphasized in the value of goods and services derivation of
GDP to avoid double counting. These goods and services are the products
bought or consumed by end consumers in contrast to intermediary goods
or those that are used for further processing or production.

All final goods that are produced within the country are included in the
GDP. This means that outputs or products by multinational companies in
the Philippines are factored in. For instance, the output of a Japanese car
manufacturer located in Laguna is included in the country’s GDP.

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• In contrast to GDP, GNP factors in outputs or products by Filipinos or
Filipino companies abroad. The income equivalent of GNP is the GNI.

• GNI = GDP + Net Primary Income

Net Primary Income is the income from nationals working abroad.

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There are two ways to measure the national income – either through
output or through expenditure.

The previous definition of GDP corresponds to the output approach. It

looks at output and evaluates what goods and services are factored in.
On the other hand, the second approach, called expenditure approach,
considers the value or expenditure associated with the purchase of
goods and services. It derives GDP by getting the sum expenditures of
the different segments of the economy.

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National Income Account
Y = C + I + G + (X-M) = GDP

Y = National Income
C = Household Consumption Expenditure
I = Investment Expenditure
G = Government Expenditure
X = Exports of Goods and Services
M = Imports of Goods and Services

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NOMINAL GDP
- is derived when the value of goods is expressed in current prices while
real GDP is adjusted for inflation and is expressed at constant or base
year prices.

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INFLATION
- refers to the persistent rise in price levels of goods and services. It is
measured through the rise and fall of the purchasing power of the
domestic currency.

The increase in prices of goods and services means a fall in value or

money or conversely, a fall in the purchasing power.

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The Consumer Price Index (CPI) measure the purchasing power of the
peso through regular survey of the price level of consumer goods and
services that are included in a virtual “basket of goods”.

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THE PHILIPPINE ECONOMY and ITS 21st
Socioeconomic Challenges
• Identify the different economic systems
• Explain the 3 primary macroeconomic goals of a country
• Explain how applied economics can be used to solve the country’s
economic problems
• Understand the opportunities and challenges given the country’s
current economic state.

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Economic System
• Refers to the different ways of managing a nation’s available resources
to answer the 3 economic questions:
1. What to produce?
2. How to produce?
3. For whom to produce?

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Main Types
1. Free Market Economy
2. Centralized Economy
3. Mixed Economy
4. Traditional Economy

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Free Market Economy

A free market is one where voluntary

exchange and the laws of supply and demand
provide the sole basis for the economic
system, without government intervention.

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Free Market
Is a system characterized by competition and a high level of private
ownership.

Prices are set by market mechanism or by the interaction of buyers and

sellers in the market.

Resources are allocated freely based on the interaction of market forces.

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Centralized Economy
• Sometimes called the command economy.
• System is characterized by the heavy involvement of the government
in managing the economy.

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MIXED ECONOMY

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MIXED ECONOMY
• COMBINES THE FEATURES OF FREE MARKET AND
CENTRALIZED SYSTEMS.

• There is a balance between private and government accountability.

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TRADITIONAL ECONOMY
- characterized by customs and habits.
- BARTER is a mechanism where goods are exchanged for another
good.

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What I have learned.
Classify the economy of the following countries:

1. Afghanistan
2. China
3. Argentina
4. Philippines
5. New Zealand

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MACROECONOMIC GOALS

1. Economic Growth
2. Full Employment
3. Price Stability

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Activity:
1. The State of the Philippine Economy based on:
A. GDP
B. Consumer Price Index
C. Inflation rate
D. Gross National Income and Gross Domestic Product by
Sector:
Agriculture, Hunting, Forestry and Fishing
Industry Sector
Service Sector

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E. Employment
F. Exchange Rate

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Performance Task:
• Pathways to industrialization in the Twenty First Century, it is
substantial that economic challenges and issues emerge at its
crucial point that everyone of us gets greatly affected.
• As an economist, you need to propose a solution in addressing
these economic issues provided with the facts gathered by the
government or from the resource persons.
• The output is in the form of a position paper that will be
evaluated using the following criteria: content, relevance to the
topic, organization of the data and conventions.

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Choose 3 problems (3-5 solutions)
1. Poverty and Unequal Distribution of Income
2. Demographic Changes and Its Economic Implications
3. Low Investment in Human Resource Development
4. Weak Infrastructure
5. Pursuing Food Security
6. Slow Adoption of Modern Technology

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Double Spacing – 12 font – ARIAL
Short Bond Paper.
Sliding Folder – PINK
Minimum 5 pages

Introduction
Discussion
Recommendation

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Group 1
• Angel
• Madelyn

• Sophia
• Razzie
• Ashly
• Karen

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Group 2
• Ashley
• Cassandra

• Thea
• Brent
• Decylen

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Group 3
• Paul
• Colleen

• Christine
• Lenibel
• John Niel

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Group 4
• Mark
• Novea

• Harold
• Fel Ghem
• Zaira
• JP

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Group 5
• Allen
• Jenine

• Alex
• Samuel
• Estuche
• KIM

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