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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.