MACROECONOMICS by BUc065

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									                          MACROECONOMICS
 Macroeconomics covers the overall aspect of the economy. It deals with the total
  performance of the economy rather than the performance of individual units.

 Scope:
  a. Economy’s Total Output or GNP Sector
  b. Money
  c. Problems on Employment and Inflation
  d. Public Finance


                                                                MONEY INCOME
                                                               (WAGES, RENTS,
             COST                                            INTEREST, PROFITS)

                                     RESOURCE
                                      MARKET

                  RESOURCES                    LAND, LABOR, CAPITAL,
                                              ENTREPRENEURAL ABILITY




       BUSINESS                                                  HOUSEHOLDS




                 GOODS AND                                  GOODS AND
                  SERVICES                                   SERVICES
                                       PRODUCT
                                       MARKET
                REVENUE
                                                             CONSUMPTION
                                                             EXPENDITURES




 Difference between GNP and GDP:

GNP: Gross National Product is the total final output produced with labor or capital owned
   by a country’s citizens, regardless of where the output is produced.

GDP: Gross Domestic Product is the output produced with labor and capital located within a
country.
    Principal Methods of Measuring GNP

The Expenditure Approach: is a way of computing national income by adding up the peso value at
current market prices of all final goods and services.
         Consider the following:
             a. Consumption Expenditures: refers to the final expenditure of all private households
                during the period being considered. These include expenditure for durable consumer
                goods (those that last for more than a year) nondurable consumption goods such as
                food, gasoline and services.
             b. Gross Domestic Investments: are the activities that use resources which allow for more
                production in the future and consequently more future consumption. This covers both
                government and private investment.
             c. Government Expenditures: such as expenses for infrastructure projects and salaries of
                government employees.
             d. Net Exports: are the total exports minus the value of total imports.
Summing up all these expenditures from each sector would give us the equation:

GNP= C + I + G + (X-M)

Where:
C= Consumption Expenditures
I= Investment Expenditures
G= Government Expenditures
X= Exports
M= Imports

The Income Approach: to break down GNP into three components: National Income, Indirect Taxes
minus Subsidies and Depreciation.
         a. National Income: The total income earned by factors of production owned by a country’s
             citizens. It includes the following:
                  1. Compensation of Employees
                  2. Proprietor’s Income
                  3. Private Corporate income
                  4. Rental Income
                  5. Proprietary and Corporate Income of Government
         b. Depreciation: is the decrease in the value of an asset due to wear and tear.
         c. Indirect Taxes minus Subsidies: is the difference between sales taxes, customs duties, and
             license fees, etc. on one side and payments made by the government for which it receives
             no goods or services in return, on the other.

Some Weakness of GNP Accounting:

   1. Per Capita GNP which is a country’s GNP divided by its total population is a better measure of the
      average person’s well-being than GNP.
   2. Underground Economy is almost impossible to estimate the income because it is often unreported
      and unrecorded. Most of the economic activities are illegal or off the hook to avoid taxes.
   3. Unincluded items such as do-it-yourself articles, household chores, etc.
   4. “ECONOMIC BADS” such as increased pollution and crimes would have to be subtracted from
      GNP figures for a more accurate measure.
Unemployment
    one who is on temporary layoff
    looking for a job
    waiting to start a new job

Unemployment Rate:
    the percentage of the measured labor force that is not employed
    Computed by dividing the total number of unemployed individuals by the number of those in the
     labor force.
    (National Statistical Coordination Board) all persons 15 years old and over and are reported as:

                         without work
                         currently available for work, and/or would be available and willing to take
                          up work in paid employment or self-employment
                      seeking work, or not seeking work due to the following reasons:
                                a.      tired/believe no work available
                                b.      awaiting results of previous job application
                                c.      temporary illness/ disability
                                d.      bad weather
                                e.      waiting for rehire/job recall
    If the economy fails to generate enough jobs for its ever-growing labor force, the unemployment
     rate rises.

   Major Types of Unemployment
   1. Frictional Unemployment
   > This results from the continuous movement of individuals from job to job or from one stage of the life
   cycle to another
   > Those who have resigned from their jobs and are looking for new ones
   > New graduates who are looking for jobs

   2. Cyclical Unemployment
   >This arises when aggregate demand for labor is low

   3. Seasonal Unemployment
   > This results from the seasonal pattern of work in specific industries like construction, agriculture and
   the like

   4. Structural Unemployment
   > This is caused by a mismatch between the available jobs and the unemployed
   > The structure of the unemployed labor does not fit the characteristics needed for the available jobs

   5. Technological Unemployment
   > This results from the displacement of workers by machines

   Unemployment Affects All Sectors of the Economy

   1. The jobless and their families are directly affected by unemployment
   2. Unemployment affects real output. This means a decline in production output
   3. Social and Economic effects
INFLATION is a situation wherein there is a sustained rise in the weighted average of all prices and not just a one-
                      time increase.
Theories:

   1.     DEMAND-PULL INFLATION: This occurs when total demand in the economy is rising while the available
          output of goods is limited. Supply may be limited either because there are not enough firms producing
          the goods or because the economy is not giving solutions fast enough to meet the needs. This condition
          causes the increase in the general level of prices.

                            Aggregate Demand > Aggregate Supply = Demand pull Inflation

   2.     COST-PUSH INFLATION or WAGE PRICE SPIRAL: When the supply of production outputs decreases or when
          the total demand increases, inflation results. When inflation comes from the supply side, it is called cost-
          push inflation.
              a. Union Monopoly Power or Wage-Price Spiral: When strong unions demands a wage hike without
                  a corresponding increase in productivity, producers increase their prices to give in to the
                  demand and still maintain their profit margin.
              b. Big Business Monopoly Power or Price-wage Spiral: When powerful tycoons want bigger profits
                  to finance new or other ventures, wage-price increases and cost of living goes up. The vicious
                  cycle goes on if both sectors increase wage or profits.
              c. Raw Materials-Push Inflation: When all prices of basic input went up, all prices will automatically
                  increase and vice versa.

   3.     MONETARY INFLATION: Monetarists believe that change in money supply is the main cause of inflation.
                  This is explained by the Fisher Equation of Exchange which states that the total amount spent
                  during a period of time must be the same as the total value of goods and services
                  transacted. If the value of transactions remains the same as it would at full employment, and
                  the velocity or rate of the turn over of money is constant, an increase in money supply
                  necessarily results in a rise in the price level.

                   This relationship between and money supply and the price level is summarized this way:
               MxV=PxQ              Where: M = Money Supply
                                           V = Velocity of Money
                                           P = Price Level
                                           Q = Real Output

How is Inflation Measured?
           When prices of almost everything increase, there is inflation; consequently the cost of living also
increases. But how exactly is the inflation rate determined?
                                          Price Level        Price Level
                                          (Year t)            (Year t -1)
             Inflation Rate (year t) =                                         X 100
                                              Price Level (Year t -1)
Where:
Price Level = weighted average of the prices of the different goods and services in the economy
Year t = year under consideration
Reasons:

                                             Inflation

           Government
            expenses                                                                   Debts outside
                                                                                        the country
                           Import
                         Dependent                                Monopoly



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