ec102_week3_macroecnomics

8/14/2019 EC102_week3_Macroecnomics

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Introduction to Macroeconomics

Jason P. Alinsunurin/ Lecturer, EC102

The Circular Flow DiagramA world composed of only households and firms A world composed of only households and firms A world composed of only households and firms A world composed of only households and firms

FIRMSFIRMSFIRMSFIRMS HOUSEHOLDSHOUSEHOLDSHOUSEHOLDSHOUSEHOLDS

PAYMENTS FOR GOODS AND SERVICES

GOODS AND SERVICES

FACTOR SERVICES

FACTOR PAYMENTS:WAGES, INTEREST, RENT, PROFIT

Other economic activities/ agents not captured in CFD Government spending

Spending of the government; payment to firms Government payments for factors (inputs )

Payment of government to workers, rentals tobuildings, etc.

Transfer payments (payments wherein one partyis not obliged to deliver a good or service in returnfor a payment)

Taxes Taxes paid on income, property, goods and services,.

Transactions with the foreign sector Exports and imports

The Economic Output

Gross Domestic Product (total value of all finalgoods and services produced of an economy) Market Value: price per unit of the good multiplied

by the quantity produced Vi=Pi * QiGDP only measures final goods (vs. intermediate

goods) When it is divided by the total population, we

would be getting the average per capita income or GDP of each person in the economy

Thus the per capita GDP can be more comparablewith other countries

How do we measure GDP? Expenditure Approach- Calculating the sum of all

expenditures on final goods (Price per unit* quantity sold)

Income approach- Measures the contribution of different factors of production to the value of a good. GDP= wages + rent + profits + rent

Value Added- Calculated by taking the differencebetween the sales and the sales from other firms Value Added= sales purchases from other firms

The Approaches would be equivalent

The three approaches just represents different viewsof the transaction.

In any sale of a final good or service, one party makesa payment (expenditure) and another party receives apayment (income) Expenditure approach-GDP is calculated from the side

making the payment For the income approach, we simply identify how the

income is divided. For value added: firms pay factor payments to

households. The payment is the income of households. STATISTICAL DISCREPANCY- captures reporting and

recording errors that cause GDP estimates to differ.


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The Expenditure Approach GDP= C + I + G + NX

C is the personal consumption expenditure, I is for Gross Domestic Capital Formation or InvestmentSpending, G is for Government Spending and NX isfor Net Exports.

NX= X-M , where X is for Exports and M is for Imports.

GNP= GDP + Net factor incomefrom the rest of the world (eg:remittances)

Compensation of employees Salaries and wages

Net operating surplus- an item that lumps together sources of income other than labor

Depreciation Consumption of existing capital stock, and allowance

for wear and tear.

Indirect taxes less subsidies Taxes on the use or purchase of goods and services,

and also grants of the government to firms.

Items in Income approach

Items in the Value Added or Industrial Origin Approach

Aggregated into industries Agriculture, fishery and forestry

Production of agricultural crops, ornamental plantsand livestock. Aquaculture, municipal fishing, andharvest of marine products. Also logging andgathering of forest products

Industry Mining, quarrying, manufacturing, constructions and

utilities. Services

Transportation, trade, finance, real estate, privateservices, government services

Nominal and Real GDP

Prices change How are we going to take account of the effects of

changes in prices?

The Philippine GDP Accounts

Nominal and Real GDP GDP at current prices: Nominal GDP

GDP at constant prices: Real GDP

30000 15000 NominalGDP

20000 200 100 10000 100 100 Buko Pie

10000 100 100 5000 50 100 Icecream

ValuePriceQuantityValuePriceQuantityGood

Year 2Year 1

Price index Measures the cost of purchasing a given bundle of

goods in one period relative to the cost of purchasing a given bundle of goods in the baseyear.

Ex: price index is 125---prices are 25% higher inthat year compared to the base year.

GDP Deflator Real GDP= (Nominal GDP/ GDP Deflator)*100


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Selected Values and Indicators of the Philippines selected years

73.5371.9055.6854.3453.03Population ( inmillions)

12,14511,81010,62210,52411,634Per capita GDP atcontantprices

32,96130,20810,93510,5249,890Per capita GDP atcurrent pricespesos)

893,014849,137591,440571,883616,964GDP at constantprices

271.40255.78102.95100.0085.01GDP Deflator (baseyear=1985)

2,423,6402,171,922608,887571,883524,481GDP at currentprices (millionpesos)

1997 1996 1986 1985 1984Item

Per Capita GDP =GDP/ population Does nor necessarily translate to equal

distribution of wealth

GNP for cross-country comparisons

GNP in US dollars= GNP in pesos/

Per capita GNP in US dollars= per capita GNP in pesos/

Where is the prevailing exchange rates In order to compare with different countries

Economic Indicators for SelectedCountries

29340293407921.3270USA

20640214001263.859UK

58402200134.461Thailand

28620306095.013Singapore

3540105078.975Philippines

6990360079.822Malaysia

23180323804089.9126Japan

2790680138.5204Indonesia20810258502122.782Germany

22320244901466.254France

PPP adjustedper capitaGNP

Per capitaGNP

GNP inbillions

Population inmillions

Country

Purchasing power parity (PPP)

Exchange rate that adjusts for the costs of purchasing a given bundle of goods in onecountry relative to another.

We can derive the PPP adjusted GNP or PPP adjusted per capita GNP.

ec102_week3_macroecnomics

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