Professional Documents
Culture Documents
Topic 1
Introduction
U-PRIMO E. RODRIGUEZ
Dept. of Economics
UPLB
WHAT IS ECONOMICS?
Oikonomia (Greek) household
management
Defn: A social science that deals with
the allocation of scarce resources to
satisfies unlimited human wants
Key words
Science
Social science
Scarcity
Economics as a science
Science
Systematic observation of natural events and
conditions in order to formulate laws and principles
Systematic body of knowledge
Hypothesis/questions
Procedure: experimentation or observation
Assumptions, models, statistical techniques
Formulate conclusions
Scarcity
Easier to understand scarcity by recognizing
the unlimited human wants
ContScarcity
and human wants evolve over time
Scarcity cont
Scarcity exists because our resources are
not enough to satisfy all human wants
Macroeconomics
-
Normative Economics
Answers the question: What should be?
The price of gasoline should be Php 20.0/liter
The population growth rate must only be at 2 %.
Filipinos ought to live on at least $5 a day
Economics 11
Topic 2
Economic Problem
U-PRIMO E. RODRIGUEZ
Dept of Economics
UPLB
Examples
Time: How much time should be spent between
studying, watching TV, friends?
Land: What do we plant? Do we even want to plant?
Budget of the national govt: Should it go to education
and health or to national defense?
etc
How to produce?
What inputs are used to produce
goods?
What techniques?
ContHow to produce?
Example: In agriculture
or
or
Trade-off: To produce
more food, need to
produce less clothing
Option A: Economy
specializing in clothing
Option F: Economy
specializing in food
PPF
B
C
D
Specializing
in clothing
A
Specializing
in food
B
C
D
Negative slope
captures the trade-off
Infeasible
point
A
B
C
D
E
Inefficient use
of resources
and/or
unemployed
resources
Preliminary calculations:
Interpretation
Between points A
and B, the O.C. of
producing an
extra unit of food
is half a unit (0.5)
of clothing
OC of producing
food increases as
more food is
produced. Explains
the concave shape
of the PPF
How to produce?
Use technology that will enable
economy to produce goods represented
by points along PPF
Shifts in PPF
C
resources and/or
techno improvements
in the production of F and C
Aside: balanced
Question: Can the PPF shift
inward?
Shifts in PPF
Improvements confined
to clothing only
Improvements
confined to food
only
10
WAKAS
11
Economics 11
Topic 3
U-PRIMO E. RODRIGUEZ
Dept. of Economics
UPLB
WHAT IS A MARKET?
Market = an institution that facilitates
transactions between buyers and sellers
Markets as we know it:
But..
DEMAND SIDE
Demand - refers to the various quantities of
a good or service that users/consumers are
willing to purchase at alternative prices,
ceteris paribus.
Captures the desire for the commodity and
capacity to pay. Willing and able!
Emphasizes the relationship between quantities
of a good that people want to buy and prices of
that good
Law of demand
Asserts that the quantity demanded
of a good (Qd) is inversely related
to its own price (P)
Income effect
Quantity Demanded
(No. of pairs)
50
100
150
200
250
300
350
400
Demand curve
400
300
200
100
D
0
Quantity
Equation
Qd is expressed as a mathematical
function of the price
Qd = a b P
Qd = 8 0.02 P
P1
P2
D
0
Q1
Q2
Quantity
Change in demand
P1
D2
D1
0
Q1
Q2
Change in demand
P1
D1
D2
0
Q2
Q1
OFAD: Income
Normal goods: higher income leads to
higher demand (rightward shift in the
demand curve)
Eg. Left and right shoe, coffee and sugar, beer and
sisig, paper and pencil
An increase in the price of a complement reduces the
demand for a good
10
11
SUPPLY SIDE
Supply refers to the various quantities of a
good or service that producers/firms are
willing to sell at alternative prices, cet. Par
Law of Supply states that quantity sold of
a good or services is positively related to its
own price
Higher price more good/service will be sold
Lower price less good/services will be sold
12
Quantity Supplied
(No. of pairs)
0
1
2
3
4
5
6
7
8
400
300
200
100
0
13
Equation
Quantity supplied (Qs) is expressed as a
mathematical function of price (P). The supply
function may thus be written as:
Qs = c + d P
14
P
P2
P1
Q1
Q2
Change in supply
S1
S2
P1
Q1
Q2
15
Change in supply
S2
S1
P1
Q
Q2
Q1
16
17
OFAS: Technology
Improved production techniques tend to shift the supply
curve the right
MARKET EQUILIBRIUM
Market equilibrium is a state in which the
quantities that firms want sell is equal to the
quantities that users want to buy.
Equilibrium = state of rest
Equilibrium condition: Qs = Qd
Defines equilibrium price (P*) and equilibrium
quantity (Q*)
18
Quantity
Demanded
(Qd)
Quantity
Supplied
(Qs)
50
100
150
200
250
300
350
400
Equilibrium
P* = 200
Q* = 4
Price above P*
Qs > Qd
Surplus or excess supply
Not equilibrium: There is pressure for the price
to fall.
Price below P*
Qs < Qd
Shortage or excess demand
Not equilibrium: There is pressure for the price
to rise.
19
Quantity
Demanded
(Qd)
Quantity
Supplied
(Qs)
50
100
150
200
250
300
350
400
Shortage (Qd>Qs)
=4
Surplus
(Qd<Qs) = 6
Graphical treatment
400
300
P*
200
Equilibrium
100
D
0
Q*
20
Surplus
surplus
400
300
P*
200
100
D
0
Q*
Shortage
400
300
P*
200
shortage
100
0
Q*
21
Caption : WHAT SHORTAGE? People line up to buy NFAs subsidized rice on Friday
at its central office warehouse along Visayas Avenue in Quezon City. Each person
is allowed Only 3 kilos. A kilo costs P18.85. JOAN BONDOC
Algebraic derivation
Equations
Solution
22
Our example
Equations
Solution
23
More consumers
24
P*1
P*0
D1
D0
0
Q*0
Q*1
Do on your own:
Decrease in demand
Increase/decrease in supply
Simultaneous change in the supply and demand curves
WAKAS
25
Economics 11
Topic 4
Supply and Demand: Elasticities and Policy
U-PRIMO E. RODRIGUEZ
Department of
Economics
UPLB
Welfare measures
Consumer surplus
Producer surplus
MEANING OF ELASTICITY
If Y = f(X), the elasticity measures the
responsiveness of Y to changes in X
Percentage change in Y in response to a
one percent change in X
Formula:
Point elasticity
P
P1
D
0
Q1
Arc elasticity
P
P1
A
B
P2
D
0
Q1
Q2
With numbers
P
30
A
B
20
D
0
100
200
Elastic
Unit Elastic
P1
P2
Inelastic
D
0
Q1
Q2
Quantity
Slope
Elasticity
10
-2
-2
-9.00
-2
-4.00
-2
-2.33
-2
-1.50
10
-2
-1.00
12
-2
-0.67
14
-2
-0.43
16
-2
-0.25
18
-2
-0.11
20
-2
0.00
Uses formula
for the point
elasticity of
demand
Elastic:
Q=
TR
Inelastic:
Q=
TR
Unit Elastic:
Q=
no TR
- inferior
FLOOR PRICE
Aka minimum price policy
This is a lower limit on a price.
E.g. Floor price = 10 pesos. Means that the price
at which the good/service is sold cannot go below
10 pesos.
Examples: minimum wages
To be effective, this must be set above the
equilibrium price.
Consequence: surplus
10
Floor Price
P
S
surplus
Price floor
P*
D
0
Q*
PRICE CEILING
Aka maximum price policy
This is an upper limit on a price.
E.g. Price ceiling = 10 pesos. Means that the price
at which the good/service is sold cannot exceed 10
pesos.
Examples: jeepney fares
To be effective, this must be set below the
equilibrium price.
Consequence: shortage
11
Price Ceiling
P
P*
Price
ceiling
shortage
0
Q*
TAX INCIDENCE
Concerned with the effects of government
taxes on consumption and production.
Specific/excise tax vs ad valorem tax
Specific/excise tax = tax per unit of the product
Ad valorem = tax as a percentage of the selling
price
12
P0+t
P0
Q0
D0
Q1
Q0
13
S1
P0+t
P1
P0
D0
Q0
Q1
Numerical example:
Tax = 15 pesos/unit
S1
25
S0
14
10
D0
Q1
Q0
14
P0
Q0
S1
S0
D0
P1 = P0
Q1
Q0
15
CONSUMER SURPLUS
P
S
Consumer surplus:
difference between
what a consumer is
willing to pay and
what he actually pays
for the good.
P*
D
0
Q*
P
S0
P0
P1
D
0
Q0
Q1
S1
Increase in
consumer
surplus
16
PRODUCER SURPLUS
P
S
Producer surplus:
difference between
what a producer
receives and the
amount that will
motivate him to sell
the product
P*
D
0
Q*
P
S
P1
Increase in
producer
surplus
P0
D1
D0
0
WAKAS
17
ECONOMICS 11
TOPIC 5
CONSUMER BEHAVIOR
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
UTILITY CONCEPTS
Approaches
cardinal utility - assumes that we can
assign values for utility, (Jevons, Walras,
and Marshall). E.g., derive 100 utils from
drinking a bottle of beer
Example
Q
0
1
2
3
4
5
6
7
TU
0
20
27
32
35
35
34
30
MU
--20
7
5
3
0
-1
-4
TU
0
20
27
32
35
35
34
30
If TU is increasing,
MU > 0
Example
Q
0
1
2
3
4
5
6
7
MU
--20
7
5
3
0
-1
-4
TU
35
30
25
20
15
10
5
0
3 4 5
Quantity
MU
20
15
10
5
0
-5
Q
1
Consumer Equilibrium
So far, we have assumed that any amount of
goods and services are always available for
consumption
In reality, consumers face constraints :
Limited consumers income or budget
Goods can be obtained at a price
Simplifying assumptions
Consumers objective: to maximize
his/her utility subject to income
constraint
2 goods (X, Y)
Prices Px, Py are given
Consumers income (I) is given
Definition
Marginal utility per peso = additional utility
Example:
Note: PX = 2, PY = 10
Qx
TUX
MUX
QY
TUY
MUY
30
30
15
50
50
39
4.5
105
55
5.5
45
148
43
4.3
50
2.5
178
30
54
198
20
56
213
15
1.5
X = 3 and Y = 4
Combination B: X = 5 and Y = 5
Total expenditure = PX X + PY Y
Scenarios
ECONOMICS 11
TOPIC 6
PRODUCTION AND COST
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
Contents
Production function
Production analysis with one variable input
Costs of production and related concepts
Costs: Short run
Costs: Long run
paribus.
ContProduction function
Fixed and variable inputs
Total Product
(QL or TPL)
12
20
26
30
32
32
30
10
26
QL
Total Product
(QL or TPL)
12
20
26
30
32
32
30
-2
10
26
-4
Marginal Product
(MPL)
Some points
Observe that the marginal product initially
MPL
-2
10
-4
becomes negative.
The law of diminishing returns states
that "as the use of an input increases (with
to output decrease"
Graphical presentation
L
MPL
-2
10
-4
MP
L
MPL
Slope of this
line is MP at
L0
QL
L0
QL
Inflection point:
MP highest at this
point
L0
MP < 0
QL
Inflection point
MP>0 and rising
L0
Formula:
Total product of
labor (TPL)
Average product of
labor (APL)
0
1
2
3
4
5
6
7
8
9
10
0
2
6
12
20
26
30
32
32
30
26
2
3
4
5
5.2
5
4.5
4
3.3
2.6
L1
Total
Product
Q
c
d
QL
AP and MP curves
AP,MP
At Max AP,
AP = MP
Max
MPL
Max
APL
APL
L1
L2
L3
MPL
10
TP
TPL
L1
L2
MP>AP
AP increasing
Stage II
Stage I
AP,MP
L3
Stage III
MP<AP
AP decreasing
MP still positive
MP<0
AP decreasing
A
B
0
L1
L2
APL
L3
L
MPL
In Stage I
APL is increasing so MP>AP.
All the product curves are increasing
Stage I stops where APL reaches its maximum
(point A)
MP peaks and then declines at point C and
beyond, so the law of diminishing returns
begins to manifest at this stage
11
Stage II
starts where the APL of the input begins to
decline.
QL still continues to increase, although at a
decreasing rate, and in fact reaches a maximum
Marginal product is continuously declining and
reaches zero at point D, as additional labor
inputs are employed.
Stage III
Starts where MP < 0
All AP and MP product curves are falling
TP curve shows that hiring more inputs actually
reduces output
COSTS OF PRODUCTION
Opportunity Cost Principle - the economic
cost of an input used in a production process
is the value of output sacrificed elsewhere.
The opportunity cost of an input is the value
of foregone income in best alternative
employment.
Implicit vs. Explicit Costs
Explicit costs costs paid in cash
Implicit cost imputed cost of self-owned or self
employed resources based on their opportunity
costs.
12
13
TVC = 0 if Q = 0
14
Total
product
TP or Q
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost
TFC
TVC
TC
0
1
2
3
4
5
6
7
8
9
10
Total
product
TP or Q
0
1
2
3
4
5
6
7
8
9
10
10
10
10
10
10
10
10
10
10
10
10
0
30
50
60
65
75
95
125
165
215
275
Total
Fixed
Cost
Total
Variable
Cost
TFC
TVC
10
10
10
10
10
10
10
10
10
10
10
10
40
60
70
75
85
105
135
175
225
285
Total
Cost
TC
0
10
30
40
50
60
Highlights the point
60 incur costs 70
that firms
75
even if 65
nothing is
produced.
75
85
95
105
Value does not change
125 of the firms135
regardless
175
output165
215
225
275
285
15
Total
product
TP or Q
0
1
2
3
4
5
6
7
8
9
10
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost
TFC
TVC
TC
10
10
10
TVC = 0 if firms
produce10
nothing.
10 the
Rises with
firms 10
output
0
30
50
60
65
75
10
95
10
125
TC= TFC10+ TVC
165
TC = TFC if Q=0
10
215
Rises as Q increases
10
275
10
40
60
70
75
85
105
135
175
225
285
Cost curves
Pesos Doyo: relate this to the table
TC
(Total Cost)
TVC
(Total Variable Cos
TFC
(Total Fixed Cost)
16
AFC
17
AVC falling
as
Q increases
AVC rising
as
Q increases
AVC
18
Average cost
AC = TC / Q
AC = AFC + AVC
AC falling as
Q increases
AC rising as
Q increases
recit class
AC
19
Reason: AC = AFC +
AVC
AC
AVC
AFC
20
Marginal cost
Shows the change in
total cost for a unit
change in output
MC falling as
Q increases
MC rising as
Q increases
derivation provided in
recit class
MC
21
MC, AVC, AC
All 3 curves are U
shaped
MC intersects the AVC
and AC curves at their
lowest points
MC intersects the AVC
curve first (will become
clearer later)
MC
AC
AVC
22
On closer inspection..
Minimum
point of
AC curve
MC
AC
AVC
Minimum
point of AVC
curve
Q
LTC
Long
run
total
cost
cuve
23
PhP
LAC
SAC1
SAC2
24
LAC
C0
Q0
Php
SAC1
SAC2
LAC
C0
Q0
25
Php
LAC
Minimum point
of LAC curve
Q1
LAC
Q1
26
LAC
SMC10
SAC10
Another point on
LMC curve
0
Q1
Q10
Php
SMC1 SAC
SMC100
SAC100
SMC10
LAC
SAC10
Q1
Q10
Q100
27
SMC100
LMC
SMC1
Php
SAC100
SAC1 SMC10
LAC
SAC10
Q1
Q10
Q100
Cleaning-up
LMC
Php
LAC
Q1
Q10
Q100
28
WAKAS
29
ECONOMICS 11
TOPIC 7
PERFECTLY COMPETITIVE
MARKETS
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
MARKETS
the market is a system where buyers and
sellers exchange goods or services
allocates goods and services with the help of
prices
Price
D
Price
Firm
P*
0
Equilibrium price is determined
in the market
P*
Firm
Price
D2
D1
P2
P2
P1
P1
NUMERICAL EXAMPLE
Q
TR
MR
AR
200
200
200
200
200
200
400
200
200
200
600
200
200
200
800
200
200
200
1000
200
200
TR
MR
AR
200
200
200
200
200
200
400
200
200
200
600
200
200
200
800
200
200
200
1000
200
200
PxQ
TR/ Q
TR/ Q
Graphical representation
TR
600
400
MR =
AR
P = 200
NUMERICAL EXAMPLE
Output
Price
Total
Revenue
Total
Cost
Profit
(Q)
(P)
(TR)
(TC)
()
200
500
-500
200
200
591
-391
200
400
668
-268
200
600
737
-137
200
800
804
-4
200
1000
875
125
200
1,200
956
244
200
1,400
1,053
347
200
1,600
1,172
428
200
1,800
1,319
481
10
200
2,000
1,519
481
11
200
2,200
1,784
416
12
200
2,400
2,119
281
13
200
2,600
2,529
71
14
200
2,800
3,019
-291
Maximum profits
The firm produces
10 units of output
TC
TR
Maximum
profits
Maximum
profits
Profit
Q0
Q*
Q1
Profit curve
Output
TR,TC
TC
TR
Highest
profits
0
Q0
Q*
Q1
Profit
Output
TR,TC
TC
TR
Highest
profits
Q
Q0
Q*
Q1
Profit
Price
Total
Revenue
Marginal
Revenue
Total Cost
Marginal
Cost
(Q)
(P)
(TR)
(MR)
(TC)
(MC)
()
200
500
-500
200
200
200
591
91
-391
200
400
200
668
77
-268
200
600
200
737
69
-137
200
800
200
804
67
-4
200
1000
200
875
71
125
200
1,200
200
956
81
244
200
1,400
200
1,053
97
347
200
1,600
200
1,172
119
428
Profit
200
1,800
200
1,319
147
481
10
200
2,000
200
1,519
200
481
11
200
2,200
200
1,784
265
416
12
200
2,400
200
2,119
335
281
13
200
2,600
200
2,529
410
71
14
200
2,800
200
3,019
490
-291
MC
200
AC
P =MR = AR
AVC
150
100
Q*
Optimizing condition: MC = MR = P
Optimizing position: point A
Profits maximizing level of output: Q*
MC
P = MR = AR
200
AC
AVC
150
100
Q*
AC
AVC
200
P0= MR0
150
P1 = MR1
100
Q1 Q0
10
Break-even point:
P = MR = MC at the minimum of AC
Zero profits
MC
AC
AVC
P2 = MR
100
Q*
AC
AVC
P3 = MR
Q*
11
AC
AVC
G
F
P4 = MR
E
Q
Q*
MC
AC
AVC
G
F
P4 = MR
Q*
12
AC
AVC
P5 = MR
Q*
Lessons:
The firm maximizes profits at the point
where P = MR = MC.
The firm will continue production even if it
is experiencing losses.
13
AC
AVC
P1
P2
P3
P4
P5
Q*
14
Cleaning-up
When P = MR = MC at minimum of AVC
MC
AVC
Supply curve
Q*
15
SAC
MC
S0
LAC
P0
MR
P0
Q0
16
MC
D
S0
LMC
S1
LAC
P0
P0
P1
P1
Q1
Q0
COST
LAC
SMC1
SAC1
0
Long Run Equilibrium of the Industry: P = LMC = SMC,
LAC = SAC
MR,
AR
Q
P=
17
18
P
P0
D1
P0
D0
Q0
P0
P0
D0
Q0
D1
19
S0
S1
P0
Long
run
supply
curve
P0
D0
D1
Q0
P1
P0
D0
Q0
D1
20
S0
S1
Long
run
supply
curve
P1
P0
D0
Q0
D1
COST
LAC1
LAC0
P1
P0
0
MR,
AR
Q
21
S0
S1
P0
P1
D0
D1
Q0
S0
S1
P0
P1
D0
D1
Long
run
supply
curve
22
COST
LAC1
P0
P1
0
WAKAS
23
ECONOMICS 11
TOPIC 8
IMPERFECT COMPETITION
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
Important points
While a firm may have some control over
the price, but this power is not absolute!
Why?
MC
AC
Market demand
MONOPOLY
Note: Other forms of imperfect competition will
not be covered in the course
Some points about monopolies
being a monopolist does not ensure the firm instant
profit;
it is not true that the firm can impose any price it
wants; maximum price is dictated by market demand;
and
a monopolist cannot maximize profit at the inelastic
portion of the market demand curve.
MR
TR
MR
200
198
198
198
196
392
194
194
582
190
192
768
186
190
950
182
188
128
178
186
1302
174
184
1472
170
182
1638
166
10
180
1800
162
11
178
1958
158
12
176
2112
154
Note:
MR =
TR/ Q
Also, P>MR
for Q>1
Important points:
Note that P MR, unlike perfect competition.
P is also the AR curve, hence as price drops,
MR is less than price
On a linear demand curve, MR decreases
twice as fast as the demand curve.
Profit max at MR = MC
Q
TR
MR
TC
MC
200
500
-500
198
198
198
589
89
-391
196
392
194
660
71
-268
182
1638
166
1168
114
470
10
180
1800
162
1330
162
470
11
178
1958
158
1550
220
408
12
176
2112
154
1850
300
262
13
174
2262
150
2262
412
TR
MR
TC
MC
200
500
-500
198
198
198
589
89
-391
196
392
194
660
71
-268
182
1638
166
1168
114
470
10
180
1800
162
1330
162
470
11
178
1958
158
1550
220
408
12
176
2112
154
1850
300
262
13
174
2262
150
2262
412
AC
P*
A
0
D=AR
Q*
MR
Profits = EP*CB
P
MC
AC
P*
B
E
A
D=AR
Q*
MR
Loss
MC
P*
AC
No!
D=AR
Q*
MR
Inefficiency of a monopolist
The price set by monopolist is greater
compared to that under competition.
Hence some consumers are unable to
purchase the commodity, implying some
welfare loss.
The level of output under monopoly is
lower compared to that under perfect
competition.
10
D=AR
QM
Q0
MR
Regulation of a monopoly
Lump sum tax is a fixed amount of tax levied on a
producer
The tax increases the firms fixed cost but not the variable cost
The firms marginal cost is not affected (does not change)
The change in fixed cost however affects total cost and average
cost
11
MC
AC w/ LST
P*
AC
A
0
D=AR
Q*
MR
P
MC
P*
F
G
AC
C
B
A
D=AR
Q*
MR
12
MC w/ ST
MC
P1
P0
AC w/ ST
AC
A
D=AR
Q1 Q0
MR
PM
P0
D=AR
QM
Q0
MR
13
WAKAS
14
ECONOMICS 11
TOPIC 9
NATIONAL INCOME ACCOUNTING
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
INTRODUCTION
National income accounting (NIA) refers to the
measurement of indicators of national output or
income; e.g. GDP, GNP
The road ahead
Circular flow diagram
Gross Domestic Product
Measuring GDP
National accounts of the Philippines
Refinements to GDP
Important considerations
Digression: price indices and the inflation rate
HOUSEHOLDS
Factor services (labor,
capital, land
factor payments
(wages, interest, rent, profit)
HOUSEHOLDS
Factor services (labor,
capital,
land
upper loop
represents
The
the
transactions in the market for
goods and services
HOUSEHOLDS
Factor services (labor,
capital, land
factor payments
(wages, interest, rent, profit)
b.
c.
d.
e.
f.
Transfer payments
Transaction for which the receiving party is not
obliged to deliver a good/service in return for a
payment
E.g., donations, unemployment benefits, gifts
Example: coconut
cont.
MEASURING GDP
Note: There are always two sides to every
transaction (purchase)
Eg. Pedro buy 50 pesos worth of rice from
Juan
1 transaction = 50 pesos
Pedros viewpoint: expenditure = 50 pesos
Juans viewpoint: income = 50 pesos
Expenditure approach
GDP = sum of expenditures on final goods
Example: 2 final goods ice cream and buko
pie
Numerical example in the next page
Good
Ice Cream
Buko pie
Q sold
Expenditure
100
50
10
5
GDP
1000
250
1250
Income approach
GDP = sum of payments for the different
factors of production
GDP = wages + rent + interest + profits
Item
Sales
Value
(Php)
1,000
Costs
Wages
100
Interest 100
Rent
100
POF
300
Profits
400
NATIONAL ACCOUNTS OF
THE PHILIPPINES
The actual accounts retain the principle
that the three approaches generate the
same value for GDP. However, some
adjustments are made to accommodate
the realities of modern economies.
Strategy:
Values presented are based on the textbook
Will present more recent data later
Expenditure approach
GDP = C + G + I + X M + SD
GDP of the RP, 1998, million pesos
Item
Personal Consumption Expenditure
Symbol
C
Value
1,980,088
354,981
541,233
1,478,016
1,577,727
Statistical Discrepancy
SD
-109,483
GDP
2,667,108
10
1,980,088
354,981
541,233
1,478,016
payments
for its
Less: Governments
Imports of Goods
and Services
workforce and purchases of
Statistical Discrepancy
goods and services
1,577,727
SD
-109,483
GDP
2,667,108
Changes in Stocks
Item
Personal Consumption Expenditure
Symbol
C
Value
1,980,088
354,981
541,233
1,478,016
1,577,727
SpendingDiscrepancy
of foreigners on goods and non-SD
Statistical
factor services produced in the Philippines.
Gross
Product because C+I+G
GDP
AddedDomestic
into the calculations
just represents the expenditures of domestic
residents only.
-109,483
2,667,108
11
541,233
1,478,016
1,577,727
Statistical Discrepancy
SD
-109,483
12
Income approach
GDP = COE + NOS + Depreciation + IBTS
Depreciation and IBTS are adjustment items
ITEMS
SYMBOLS
VALUE
Compensation of Employees
COE
725,261
NOS
1,468,612
Depreciation
236,845
IBTS
236,390
GDP
2,667,108
13
SYMBOLS
VALUE
Compensation of Employees
COE
725,261
NOS
1,468,612
Depreciation
This
captures
rent,
profits
Indirect
Business
Taxes less
Subsidies
and IBTS
interest
in the theoretical presentation
GDP
236,845
236,390
2,667,108
NOS
1,468,612
236,845
IBTS
236,390
GDP
2,667,108
14
Summary
Items
Expenditures
Primary
items
C
I
G
X
(less) M
Adjustments
Total
SD
GDP
COE
NOS
IBTS
Depn
GDP
GDP
15
16
REFINEMENTS TO GDP
(and GNP)
GDP estimates are usually refined (or
adjusted) to enhance their usefulness for
analysis.
Analysis over time
Analysis across economies
Refinements:
Price changes or differences
Population
17
Example
18
REAL GDP
19
20
Population projection
for 2006 (medium
assumption) of the
NSO
21
Brunei:
GDP = US$ 17 B, population = 0.4 M
persons, GDP per capita = US$ 41,703
Ethiopia:
GDP = US$ 42 B (2.5 times larger than
Brunei), population = 86.8 M persons
(217 times larger than Brunei), GDP per
capita = US$ 483 (1% of Brunei)
Country
Price relative to US
Ukraine
1.86
0.4
China
2.45
0.6
Philippines
2.80
0.6
United States
4.33
1.0
Norway
7.06
1.6
22
IMPORTANT CONSIDERATIONS
REGARDING GDP/GNP
Main point: High values of GDP do not always
correspond to high standards of living. At best
GDP is an imperfect measure of output
GDP does not capture
Income distribution, poverty
Costs of achieving high levels of output: pollution,
time for leisure, etc
Transactions to that do not go through
organized/formal markets: e.g. household chores,
helping friends.
Illegal activities
23
24
25
Inflation rate
measures the rate of change in the general
price level
indicates how fast prices are, on the
average, rising or falling over a given
period.
Formula:
Example:
26
Annex 1
GDP and population estimates for 2012
Rank
1
2
3
4
5
181
182
183
184
185
10
20
65
93
113
127
140
144
157
159
11
13
87
Country
GDPpercapita
(US$)
HighestpercapitaGDP
Luxembourg
107,206
Qatar
99,731
Norway
99,462
Switzerland
79,033
Australia
67,723
LowestpercapitaGDP
Liberia
436
Niger
408
Burundi
282
Malawi
253
DRCongo
237
SoutheastAsia
Singapore
51,162
BruneiDarussalam 41,703
Malaysia
10,304
Thailand
5,678
Indonesia
3,592
Philippines
2,614
Vietnam
1,528
LaoP.D.R.
1,446
Cambodia
934
Myanmar
835
Others(selected)
UnitedStates
49,922
Japan
46,736
China
6,076
GDP Population
(BUS$) (mpersons)
57
183
501
632
1,542
0.5
1.8
5.0
8.0
22.8
2
7
2
4
18
4.0
16.1
8.8
16.6
74.7
277
17
304
366
878
250
138
9
14
53
5.4
0.4
29.5
64.4
244.5
95.8
90.4
6.4
15.3
63.7
15,685
5,964
8,227
314.2
127.6
1,354.0
Annex 2
Per capita GDP of selected countries, 2012
Country
US$
PPPadjusted US$/PPPadjusted
Lowestratios(GDPinUS$/PPPadjustedGDP)
The Gambia
503
1,864
0.3
Kiribati
1,646
5,973
0.3
Malawi
253
858
0.3
Timor-Leste
3,730
9,873
0.4
Tanzania
599
1,567
0.4
Highestratios(GDPinUS$/PPPadjustedGDP)
Zimbabwe
756
559
1.4
Denmark
56,202
37,657
1.5
Australia
67,723
42,640
1.6
Switzerland
79,033
45,418
1.7
Norway
99,462
55,009
1.8
Memo:
Philippines
United States
Global average
2,614
4,430
49,922 49,922
13,431 14,874
0.6
1.0
0.6
ECONOMICS 11
TOPIC 10
DETERMINATION OF NATIONAL INCOME
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
OBJECTIVE
Explain fluctuations in national income
Helps understand changes in national income
Helps in formulating policy and business
decisions
BASIC FRAMEWORK
Tasks
Define aggregate expenditure and
equilibrium income
Describe how the economy adjusts to
equilibrium
Explain how changes in aggregate
expenditure affect equilibrium income
Common formulation
AE = C + I + G + X M
C = consumption, I = investment, G = govt
spending, X = exports, M = imports
Note: AE is not the same as GDP.
AE = planned spending
GDP = actual spending/output
Equilibrium: Y = AE
Why? No longer an incentive to adjust
production
Illustration
Assume AE does not respond to changes in
income
Horizontal line in (Y,AE) space (AE schedule)
Highly unrealistic but sufficient for now
AE
Equilibrium
E0
AE
20
45
20
Y*
AE > Y
raise production
AE
E0
AE
20
45
20
Y*
AE
AE < Y
Reduce production
E0
AE
20
45
20
Y*
20
AE0
45
0
20
Y0
30
Y1
Low levels of Y
C>Y
Break-even level:
C=Y
High levels of Y
Y>C
Income Consumption
(Y)
0
200
400
600
800
1,000
1,200
1,400
1,600
(C)
200
350
500
650
800
950
1,100
1,250
1,400
Y
0
200
400
600
800
1,000
1,200
1,400
1,600
C
200
350
500
650
800
950
1,100
1,250
1,400
Autonomous
consumption
Marginal propensity
to consume (mpc) =
change in
consumption
spending for a one
peso increase in
income
mpc = C / Y
Example
C = 500 350 = 150
Y = 400 - 200 = 200
mpc = C / Y
= 150/200 = 0.75
a 1 peso increase in
Y leads to 75 centavo
increase in C
Note: 0 < mpc < 1
Y
0
200
400
600
800
1,000
1,200
1,400
1,600
Y
0
200
400
600
800
1,000
1,200
1,400
1,600
C
200
350
500
650
800
950
1,100
1,250
1,400
C
200
350
500
650
800
950
1,100
1,250
1,400
C
200
350
500
650
800
950
1,100
1,250
1,400
200
200
200
200
200
200
200
200
150
150
150
150
150
150
150
150
C/Y
_
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
1600
1400
Slope is the
mpc
1200
1000
800
600
Autonomous
consumption
400
200
0
400
800
1200
1600
Y<C
1200
1000
Y>C
800
600
Breakeven
400
200
0
400
800
1200
1600
Mathematical representation:
Consumption function
Autonomous
consumption
TWO-SECTOR MODEL
Two sectors: Households and firms
No govt and no foreign trade
Implication
AE = C + I
AE = C + I
investment
AE
400
500
100
600
600
650
100
750
800
800
100
900
1,000
950
100
1,050
1,200
1,100
100
1,200
1,400
1,250
100
1,350
10
Equilibrium: Y = AE
Example, equilibrium income (Y*) = 1,200
Y
AE
400
500
100
600
600
650
100
750
800
800
100
900
1,000
950
100
1,050
1,200
1,100
100
1,200
1,400
1,250
100
1,350
11
Experiment: What
if I investment
rises from 100 to
200? I.e. I =
100
Equilibrium
income rises from
1,200 (our original
value) to 1,600
AE
400
500
200
700
600
650
200
850
800
800
200 1000
1,000
950
200 1150
1,200
1,400
1600
1400
200 1600
1800
1550
200 1750
12
Graphical treatment
multiplier.
13
Multiplier ()
Measures the change in income for a
unit change in an autonomous
component of aggregate expenditure
14
1
2
0
mpc[100]
100
0
100
mpc100
mpc [mpc100]
mpc2100
mpc[ mpcn-2100]
mpcn-1100
15
Mathematical derivation
16
Solving for Y:
17
Solving for Y:
WAKAS
18
ECONOMICS 11
TOPIC 11
GOVERNMENT AND THE
MACROECONOMY
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
GOVERNMENT BUDGET
Government budget: indicates the public sectors
expenditures and sources of income
Net budgetary position
Budget surplus: revenues > expenditures
Budget deficit: revenues < expenditures
Balanced budget: revenues = expenditures
2011 2012
Revenues
1,360
1,535
Expenditures
1,558
1,778
-198
-243
Surplus
(Deficit)
% share
91.5
43.0
0.2
44.1
4.2
8.5
100.0
Revised AE
AE = C + I + G
Numerical example
Y
1,100
1,300
1,500
1,700
1900
2,100
T
100
100
100
100
100
100
YD
1,000
1,200
1,400
1,600
1,800
2,000
C
950
1,100
1,250
1,400
1,550
1,700
I
100
100
100
100
100
100
G
200
200
200
200
200
200
AE
1,250
1,400
1,550
1,700
1,850
2,000
YD
AE
100
200 1,250
200 1,400
200 1,550
200 1,700
1900
200 1,850
200 2,000
Algebraic Treatment
Graphical treatment:
If
G = 200
then,
Y* = (4).(200) = 800
Graphical treatment
Graphical treatment
10
Shock
Impact (Y*)
G = 200
800
T = 200
-600
Total effect
200
Algebraic derivation:
11
Fiscal Policy
Fiscal policy - a collective term that refers
to the use of taxation and government
12
13
Deflationary gap
Exists when AE < Y at Yf
There is pressure for a decrease in
output.
Implies unemployment
14
WAKAS
15
ECONOMICS 11
TOPIC 12
OPEN ECONOMY MACROECONOMICS
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
Balance of Payments
Balance of Payments (BOP) - a summary
of the transactions between residents and
non-residents of a country over a given
period
It records transactions in goods, services,
assets and transfers.
Keeps track of the country's transactions with
the rest of the world.
The information helps in analyses that could
assist in the formulation of economic policies
and decisions.
Values
Sub-totals
7,177
69,721
Imports
-80,845
Income (net)
Transfers (net)
-871
19,172
181
5,520
341
3,523
Others (net)
1,656
-3,642
9,236
-9,236
Current Account
The Current Account
reflects the flow of the country's transactions in
goods and services, investments as well as
current transfer payments.
Inflows = earnings of residents from nonresidents
Outflows = payments of residents to nonresidents
Capital Account
Capital Account
the sum of the Capital Account and Financial
Account
represents capital transfers, changes in the
resident claims on non-residents (changes in
assets), and changes in non-resident claims on
residents (changes in liabilities).
Financial Account
The Financial Account captures transactions
in equity and other financial assets.
It is classified into
Direct Investment represents transactions in
ECONOMICS 11
TOPIC 13
MONEY
U-PRIMO E. RODRIGUEZ
Dept. of Econ., UPLB
Significance
Some of the more controversial economic
issues involve the conduct of monetary
policy as it is used to deal with inflation,
budget deficits, unemployment, incomes,
international economic relationships, etc.
Monetary policy has profound effects on our
jobs, incomes, livelihood, and career
choices.
This lesson, therefore, introduces the role
and functions of money in the economic
system
Definition of Money
Economists have not really agreed on a single
definition but they agree that money supply
refers to all things generally acceptable in
payment of debt (store of value) and as payment
for goods and services (medium of exchange)
whatever its legal status may be.
Functions of Money
Money serves a
medium of
exchange.
Evolution of Money
Autarky refers to a family or tribal
group, which, in the absence of
trade, produces that level of goods
and services equal to their
consumption. Money is not used.
coincidence of wants.
Evolution of Money
Coinage solved the
problem of
adulteration and short
weighing, with the
king's seal being
stamped on the metals
for authentication.
However, some more
problems came up like
storage, theft, costly
and risky transport,
and so on.
Evolution of Money
IOU's tend to minimize risk in transport since coins were left to a
reputable person with "vault or safekeeping" means. IOU's ("I owe
you") were simply written on paper/receipt instead of going to the
safekeeper to transact.
interest rate.
Other factors:
(a) credit availability and affordability;
(b) expectations on future income;
(c) expectations on prices;
(d) risk and expected returns on alternative assets;
and
(e) financial innovations that allow easy movement
of funds from less liquid to more liquid forms.
Supply of Money
M1 consists of items used as medium of exchange
such as currency or coins in circulation and demand
deposits.
M2 =M1+
Savings &
small
time
deposits
Adios!!!
WAKAS
10