PPT MACRO.ppt

MACROECONOMICS
is concerned with performance of the economy as a
whole or with large sectors of it, such as
government, business firms, and households.
attempts to explain why the economy’s total output of
goods and services fluctuates overtime, giving the
time to the business cycle with its accompanying
upward and downward movements in the
unemployment and inflation rates

it is also concerned with issues such as the
governments ability to control inflation, the
effectiveness of government policies and the
size of the government deficit or surplus

NATIONAL INCOME ACCOUNTING
it provides us with aggregate measures of what is
happening in the economy.
IMPORTANCE OF NATIONAL INCOME ACCOUNTING :
1. It allows us to keep finger on the economic pulse of the nation
2. By comparing national income accounts over a number of
years, we can track the long-run course of the economy and
see whether it has grown, been steady, or stagnated.
3. Information supplied by national income accounts provides a
basis for formulating, and applying public policies to improve
the performance of the economy.

THINKING LIKE AN
ECONOMIST
5
FIGURE 1: The Circular-Flow Diagram
Markets for
Factors of
Production
Households
Firms
Income
Wages, rent,
profit
Factors of
production
Labor, land,
capital
Spending
G & S
bought
G & S
sold
Revenue
Markets for
Goods &
Services

A more comprehensive circular flow diagram
will incorporate the two other agents namely:
government and foreign agents.
Such diagram is also likely to include the following
transactions:
a.Government purchases of goods and services
 Government buy goods and services for its day-to-
day operations and projects. These represent
transactions for which government makes
payments to firms.

b. Government payments for factor services
Government hire workers, rents privately owned
buildings, etc.. These represent payments of
government to the owners of the factors of
production.
c. Transfer payments between different agents
Transfer payments are transactions wherein one
party is not obliged to deliver a good or service in
return for the payment.
Examples include the retirement benefits,
unemployment benefits, scholarships , and
donations. In case of unemployment benefits, the
transactions will be shown in the circular flow
diagram as payments from government to
households.

d. Firms and households pay taxes to government
In the circular flow diagram, these will be reflected
as payments from the households and firms to the
governments
e. Transactions with the foreign sector
transactions between foreign and domestic agents
include sales of goods and services, assets, and
transfers.
Exports are sales of domestically produced gods
to other countries. This will be reflected as a payment
from the rest of the world to the firms.
Imports are goods bought from other countries.
This will be reflected as payments by the purchasing
domestic agent to the rest of the world.

Two Indicators of Aggregate Output:
Gross National Product (of the Philippines)
Is the market value of all final goods and services produced
by all nationals in the economy during a given period of
time.
Gross Domestic Product (of the Philippines)
 Measures the market value of all final goods and services
produced within the boundaries of the Philippines, whether
by Filipinos or foreign-supplied resources.
GDP = GNP – Net factor income from the rest of the world (NFIRW)
Net factor income from the rest of the world (NFIRW)
is the difference between the earnings of Filipinos from
activities overseas and the earnings of foreigners in the
Philippines.

If earnings of Filipino abroad exceed those of the
foreigners in the Philippines, the NFIRW becomes
positive making GNP higher than GDP. The opposite
is true if NFIRW is negative, that is GDP would be
greater than GNP.
Table 1. GDP and GNP of the Philippines, 2010
Item Value (billion pesos)
Gross Domestic Product 5,701.54
NFRIW 1,859.85
Gross National Product 7,561.39
Source: National Statistical Coordination Board.

Characteristics of GNP/GDP:
1)It is a flow concept, measured as the quantity
of final goods and services produced by the
economy per period of time.
2)It is measured in monetary terms
3)It includes goods and services bought for final
use, not unfinished goods in their intermediate
stages of production that are purchased for
further processing and resale.
4)It includes only final goods and services
produced during the accounting year.
5)It is a measure of productive activities only.

Approaches to GNP/GDP Measurement
1. The Final Expenditure Approach
GNP/GDP = C + I + G + (X - M)
In this approach, the GNP/GDP is computed by
getting the sum of the final expenditures of the four
major sectors of the economy. These major sectors
include the following:
Household – personal consumption expenditure (C)
Businesses – private domestic investment (I)
Government – government expenditures (G)
Foreign Sector – net exports (X – M)

GNP/GDP by expenditure approach of the Philippines
National Accounts for the years 2008 to 2010 shows
that:
Household Final Consumption Expenditure constituted
58.7% in 2008, 56.2% in 2009, and 53.7% in 2010 of the
Gross National Product while Gross Capital Formation or
Investment Expenditures accounted only 15.2% in 2008,
12.5% in 2009, and 15.4% in 2010.
On the other hand, Government Final Consumption
Expenditure contributed the least with only 7% in 2008,
7.4% in 2009, and 7.3% in 2010.
It is also shown that Exports of goods and services have
been smaller than the Imports for the three (3) year period
under consideration.

2. The Factor Income Approach
GNP/GDP = NI + IBT + D
This consists of wages (w), interests (i), rents (r), or
profits (p). In addition, a portion is provided for capital
consumption allowance or depreciation and indirect
business taxes. In symbols:
where:
NI = w + i + r + p
IBT = indirect business taxes net of subsidies
D = depreciation or capital consumption allowance

Components of National Income (NI) as reflected in the
National Income Accounts of the Philippines:
Compensation of employees (salaries and
wages)
Net Operating Surplus
Depreciation
Indirect Taxes

3. Value-added Approach (Industrial Origin)
GNP/GDP = GVA1 + GVA2 + GVA3 + ...+ GVAn + IBT
this approach accounts the value added of the three
main or activities in the economy. The formula is as
follows:
where:
1….n = industry 1 up to n

GNP/GDP of the Philippines National Accounts by
Value-added approach shows that:
The Services Sector accounted for slightly
more than 40% of Gross National Product,
followed by the Industry Sector that ranged
from 23-26%.
While, Agriculture, Fishery, and Forestry had
the least contribution with only 9-10% in the
National Accounts.

Real and Nominal GNP (or GDP)
Nominal GNP/GDP
measures the value of output in a given period in
the prices of that period, or, as it is sometimes put,
in current pesos.
Real GNP/GDP or GNP/GDP at constant prices
measures changes in physical output in the
economy between different time periods by valuing
all goods produced in the two periods at the same
prices, or in constant pesos.
Real GNP =

Problems of GNP (or GDP) Measurement
1. Some outputs are poorly measured because they are not traded
in the market.
2. It is difficult to account correctly for improvements in the
quality of goods.
3. Some activities measured as adding to real GNP in fact
represent the use of resources to avoid or contain “bads” such
as crime or risks to national security.

Macroeconomic Equilibrium
when aggregate expenditures (AE) equals
aggregate income/aggregate output in the
economy.
AE = C + I + G + X – M
NATIONAL INCOME DETERMINATION
Aggregate Expenditures – represents the total amount
that all economic agents want or plan to spend on
domestic goods and services. It combines the planned
spending of households, firms, government and
foreigners.

Letting Aggregate Income = Y, then equilibrium requires
the equality between income and aggregate
expenditure. That is:
Y = AE
AE
E
Y
450
Output, Income (in pesos)
AE (in pesos)
0
100
100

AE
E0
Y
450
Output, Income (in pesos)
AE (in pesos)
0
100
100
200
200
E1

CONSUMPTION, SAVINGS AND INCOME
Consumption Function
The schedule that relates consumption to disposable
income. Drawn as a straight line with a slope of less than 1, the
slope is also called marginal propensity to consume (MPC)
indicates the percentage of each additional peso of disposable
income that will be consumed. It is given as:
C = a + bYd, where: a>0, b<1.
Given: a = 20
b = 4/5 or 0.8 then,
C = 20 + 0.8 Yd
Note that MPC = 0.8

Savings Function
Is the schedule that indicates the values of savings
associated with different levels of income. A fundamental
relationship in economics is that the sum of consumption
spending and savings (S) must equal income that is,
Y = C + S
Suggesting that households can either spend or save their
income. Subtracting C from both sides of the equation leads
to: S = Y - C
From C = a + bYd , the saving function can be derived as:
S = - a + (1– b)Yd
Given: a = 20
b = 4/5 or 0.8 then,
S = - 20 + 0.2 Yd
Note that MPS = 0.2

Note further that MPC + MPS = 1 or b + (1 – b) = 1.
0.8 + 0.2 = 1
While the MPC is the ratio of the change in
consumption to the change in income, ΔC/Δyd.
The slope (1 – b) is also called as the Marginal
propensity to save (MPS). The MPS is the ratio of the
change in savings to the change in income, ΔS/ΔYd

Determination of Equilibrium Income in a
Two-Sector Economy
This assumption suggests that aggregate expenditures
is equal to the sum of consumption and investment or
AE = C + I
It suggests further that to achieve macroeconomic
equilibrium, aggregate income must equal aggregate
expenditures or
Y = C + I

 Simple Income Determination
Y = C + I
C = 20 + 4/5 Yd
(I) = P 100 billion
Y = 20 + 4/5 Yd + 100; Yd = Y
Simplifying: Y – 4/5 Yd = 120
1/5 Y = 120
National Income : Y = 600 billion
Aggregate Consumption : C = 20 + 4/5 (600) = 500 B
Aggregate saving : S = Y – C = 600 – 480 =100 B
Note that Investment = Savings that is,
100 billion = 100 billion

Figure 1 The Consumption and Savings Functions
Then with the government

Figure 2 Equilibrium in a Two-Sector Economy

Investment Multiplier
 measures the increase in the equilibrium
income for 1 peso increase in investment
spending.

Given b=0.8 the value of the multiplier can be computed as :
αI = 1/0.2
= 5
If b = .5 then the value of the multiplier is,
αI = 1/0.5
= 2
Note that the higher the value of b (MPC) the
higher is the value of the multiplier.
Knowledge about the multiplier helps us predict the
response of the equilibrium income to changes in
investment. We can show that the change in
equilibrium income is equal to the product of the
multiplier and the change in investment. That is,
Δ Y = αI
. ΔI

Given: αI = 5
I = 100
ΔY = 5 x 100
= 500
Given: αI = 2
I = 100
ΔY = 2 x 100
= 200

GOVERNMENT IN THE MACROECONOMY
Government plays an important role in the economy.
Government buys good and services for its day-to-
day operations of the project,
participates in the financial market through
borrowing and lending, and collects taxes.
Its policies, or lack thereof, affects the different
economic agents and their transactions.
Government Budget
presents the public sector’s expenditure and
sources of finance.
Government expenditures indicate how much
government spends and on what activities . On the other
hand, sources of finance state where the money that
government sends comes from.

The Budget Deficit and the Budget Surplus
 National Government Net Budgetary position –
is the difference between government revenues
and expenditures
 If revenue exceed expenditures, we say that
government has a budget surplus.
 If revenues are less than expenditures then the
government has a budget deficit.
 Financing account represents the national
government’s borrowing. This indicate where the
government borrows its money in the case of a
deficit or where it sends its excess revenues in case
of a surplus.

Government Revenues
Tax Revenues represent the government’s
earnings from taxes imposed on income, property
and different transactions in the economy.
Non-tax Revenues include the national
government’s earnings from services to the public,
capital and grants.
Major sources of tax revenues for the Philippine Government:
Taxes on net income and profits represent the taxes paid
by households, firms , and corporations on their earnings for
a particular period.
Taxes on goods and services represent the taxes levied on
purchases of goods and services.
Taxes on international trade and transactions are taxes
levied on the country’s transactions with the rest of the world.

1. Total Revenue : Taxes in income, Taxes in international trade,
Exercise and sales tax, other taxes and
non-tax revenue
Component of National Budget
2. Current Operation Expenditures: Personal Services,
Maintenance, Interest, Transfer to corporations
and Allotment local government
3. Capital Outlays: Infrastructure, Other capital, Capitalization
(equity contributions), and Net lending
4.Overall deficit : Foreign borrowing (net), Borrowing from
banking system, and Other domestic borrowing
5. Current operation surplus

Government Spending
The major components:
Personal Services represents expenditures on
the salaries and benefits of government workers.
Transfer Payments composed mainly of
government grants and subsidies. It also includes
items like retirement benefits and gratuities.
Debt Service
Maintenance and other operating expenditures
(MOE) represents expenditures for the day to day
operations of the national government
Capital Outlay represents expenditures on
infrastructure and investment.

National Government Cash Budget of the
Philippines (in million pesos)
ITEM 2009 2010 2011
Revenues
Expenditures
Surplus (Deficit)
1,359,942
1,557,696
(197,754)
1,207,926
1,522,384
(314,458)
1,123,211
1,421,743
(298,532)
Source: Bureau of the Treasury

EQUILIBRIUM INCOME IN A THREE-SECTOR
ECONOMY
1. Y = C + I + G or
2. I + G = S + T
Where: I + G = total injections
S + T = total leakages
In this case disposable income (Yd) = Y – T
where: T = tax
Disposable income (Yd) represents the income that
households are free to spend and save.
Requirements for equilibrium:

C = a + b( Y – T)
With the inclusion of the government sector into
the model, the consumption function can now be written
as:
And equilibrium income,
Ye = a + b(Y – T) + I + G
From this figure

Figure 3 Equilibrium Income for Three-Sector Economy

Inflation
refers to the increase in the general price level (GP)
or prices as a whole
Types of Inflation
Demand-Pull Inflation
Inflation is said to be demand-pull if those who buy
goods and services desire to purchase goods and
services greater than what the economy can
produce.
In other words, excess demand for commodities
would tend to push prices up.

Two measures of the inflation rate:
a)headline inflation rate
uses the Consumer Price Index (CPI) as a
measure of the general price level.
Cost-Push Inflation
Is the type of inflation where increases in the costs
of production push prices up

b) core inflation rate
uses a price index which excludes the prices of
commodities that are deemed to be volatile.
Consumers Price Index
 is a weighted average of the cost of a bundle goods
that is purchased by a typical household
 it is an index which expresses the costs of a bundle of
goods in one year relative to the base year.

Unemployment
implies that the productive resources are not being
fully utilized in the economy.
A person is considered unemployed if he/she is a
member of the labor force but is not engaged in
work or business
“labor force” refers to people of a certain age who are:
a) working or are engaged in the business; and
b) not working or engaged in business but are actively looking
for work

Underemployment
An underemployed is an employed person who
works for less than 40 hours per week, despite the
fat that he wants to work for more hours.
Visible underemployment is defined as the
number of people working less than 40 hours per
week and wanting additional work.
Invisible underemployment is defined as the
number of people working 40 hours or more per
week but still wanting additional work.

Effects of Unemployment and Inflation
1. Debtors and profit-earners benefit from inflation. Creditors and
fixed income individuals on the other hand, lose from inflation.
2. People who put their money in savings accounts in a bank can
earn say, 6% per year interest income. If prices rose by greater
than 10%, their savings are reduced in value. If interest income
is not higher than the rate of price inflation, savers with fixed
interest income suffer from inflation, the real value of this saving
falls.

Monetary Policy and Fiscal Policy
The Central Bank
is principally an institution designed to regulate the
monetary and financial systems.
It has a policy abroad which serves as the monetary
authority.
Fiscal Policy
 The “fiscal system” is a collective term for the combined
operation of public expenditure, taxation and debt.
 The term “public finance” refers in particular to the subject
of financing public expenditures.
 Public finance is approximately a study of the fiscal system.
The fiscal operations are reflected in the government
budget.

MONEY, CENTRAL BANKING, AND
MONETARY POLICY
Assets – are defined as anything which serves as
means to store value over a period of time.
 real assets – are physical in nature
 financial assets – are financial
Money – refers to all things that are generally
acceptable as means of payment for goods and
services (medium of exchange) and as payment
of debts (standard or deferred payment).

Functions of Money
1. Unit of Account
means that the value of goods and services are expressed
or quoted with the use of a single item, usually a country’s
currency.
2. Medium of Exchange
 means that you can trade your money in the market and in
return, get the goods and services that you want to
purchase because money is generally accepted as a
means of payment.
3. Store of Value or Standard of deferred payment
 means that you can keep or save money now and then
spend it at a future date because its capacity to buy the
same amount of goods and services is not lost or
diminished over time.

The Demand for Money
1. Transaction Motive – refers to the holding of money to enable
people and firms to pay off their daily transactions such
as paying for electricity and telephone bills, house rent,
education, food, clothing, etc.
2. Precautionary Motive – for contingency purposes or
unforeseen circumstances. This motive may be related to
the function of money as a store of value.
3. Speculative or portfolio allocation motive – It refers to the
holding of money for the purpose of taking advantage of
market opportunities such as buying shares of stocks in a
company or investing in bonds or treasury bills and other
assets that yield additional earnings for the households
and firms.

The Supply of Money
M1 – refers to the narrow definition of money which consists of
currency (e.g., paper bills and coins) in circulation plus
demand or checking deposits
M2 – refers to M1 plus savings and small time deposits
M3 – refers to money supply, peso savings, time deposits, plus
deposit substitutes of money generating banks, and negotiable
order of withdrawal (NOW) accounts.
RM – is the reserve money which represents liabilities of the BSP
to the public sector in the form of currency in circulation and to
the banking sector in the form of cash reserves.

THE ROLE OF MONETARY INSTITUTIONS IN
THE ECONOMY
The Bangko Sentral ng Pilipinas
 was established on June 15, 1948 by virtue of Republic Act
No. 265 or R.A. 265
 its objectives were:
(a) to maintain the monetary stability in the country;
(b) to preserve the international value of the peso ; and
(c) to promote rising level of production, employment, and
real income in the Philippines.
 on June 14, 1993, through R.A. 7653, the Bangko Sentral ng
Pilipinas (BSP) was put as a central monetary authority.
 likewise called the lender of the last resort from whom ailing
or bankrupt banks can borrow if other banks in the financial
system cannot provide them with the necessary funds.

The Philippine financial or monetary system is a network of
markets and institutions that transfer funds from individuals
and groups who save money to individuals and groups who
want to borrow money.
These financial institutions consist of banks and non-bank
institutions.
Financial Institutions
Banks are classified as:
1. universal and commercial banks;
2. rural banks; and
3. thrift banks which include savings and mortgage banks,
private development banks, microfinance institutions,
stock savings, and loan associations

Examples of non-banks institutions:
1. contractual savings institutions such as insurance companies
and pension funds like the Social Security System (SSS) and
Government Service Insurance System (GSIS);
2. investment institutions like mutual funds and finance
companies; and
3. securities market institutions which comprises securities
brokers and dealers, lending investors, and organized
exchanges like the Philippine Stock Exchange (PSE).
In 2003, credit card companies were also included, as well
as pawnshops to the list of non-bank financial institutions since
they give credit to individuals who turn in their valuables (e.g.,
jewelry) in exchange and then retrieve such valuables when they
have raised the mount that they borrowed plus the interest
charged.

Financial or monetary institutions are important in an
economy because of the following major functions or
roles:
1. they allocate or channel savings efficiently from savers to
borrowers;
2. they provide information, liquidity, and risk-sharing services;
3. they provide flexibility and divisibility of funds for the users and
sources of these funds; and
4. they are essential for ensuing capital formation and economic
growth.

SIMPLE MONEY CREATION
Reserve Requirement
 the percentage of deposits that banks are mandated by
BSP to keep as reserves for the purpose of servicing day-to-
day withdrawals and unexpected heavy withdrawals during
bank runs or in times of other emergencies.
In certain circumstances, banks may deem it necessary to
keep in their vaults an additional percentage of their deposits
which is above the reserve requirement. This is called excess
reserves.

Money multiplier
 is the factor by which money supply will change given a
change in monetary base, or in our example, given a change
in deposits.
mm = 1/rr

The change in money supply (M) is equal to the product of
the money multiplier (mm) and the change in monetary base (MB)
or deposits.
M = mm ∙ MB
MONETARY POLICY
Why is there a need to control money supply?
 If there is too much money held by households and firms,
then this can result in overspending and if manufacturers of
goods and services cannot catch up with the increase in
consumption, inflation can occur since the only way by
which firms can allocate the remaining inventories is to sell
these at higher prices.

 If there is too little money circulating, then,
unemployment of resources can occur
because firms will not be receiving as much
revenues to pay off their costs of operations
and they will be forced to cut down on their
production.

The following is a list of important instruments of monetary
control used by the Monetary Board of the BSP:
1. Reserve Requirement – is the percentage of deposits that the
banks are mandated to keep in their vaults for safekeeping by the
BSP
if the BSP wants to contract money supply (or “mop up
excess liquidity”) then it has to increase the reserve
requirement. This implies that lesser funds will then be
available for lending.
if BSP wants to expand money supply, then it has to lower or
decrease the reserve requirement. This means that a smaller
fraction of deposits will be kept in the banks’ vaults and more
funds will be available for lending.

2. Rediscount Rate – is the interest charged by BSP to banks who
wish to borrow from it
to contract money supply, the BSP has to increase the
rediscount rate to discourage banks from borrowing at higher
interest rates. This way less funds will be available for lending.
as an expansionary monetary policy, the BSP must decrease
the rediscount rate to encourage banks to borrow funds from it
thereby allowing more money to be available for lending.
3. Open Market Operations – refer to the buying and selling of
government securities by the BSP
open market purchase, means buying of government
securities (e.g., bonds) from private individuals or firms by
BSP. If BSP wants to to expand money supply, it has to
engage in open market purchase of securities – BSP gets the
public’s bonds and “gives” them money or cash in return.

open market sale refers to the sale of government securities
to private individuals or firms by the BSP. If BSP wants to
contract money supply, it has to engage in open market sale of
government securities. This way the BSP sells securities to the
public and “gets” their money in return. Hence, lesser money
will be circulating in the economy because people are holding
bonds instead of cash.
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