Gross Domestic Product

GDP- is the total market

value of all final goods and
services produced in a
country in a given year.
Key Concepts
Exports- goods and services that are
produced in the home country and
sold to a foreign country
Imports – goods produced in
another country bought by the
home country
Final goods- products that are
bought and sold in the market for
their final disposition
Intermediate goods- goods that have
undergone some manufacturing or
processing but have not yet reached the
stage of becoming final products
National income- represents the total
income received by land, labor, and
capital
Value-added- the difference between
the value of goods produced and the
cost of materials and supplies used in
producing them
Government consumption
expenditure- includes the
employees hired by the government
to provide social and economic
services
Personal consumption expenditure-
expenses made to satisfy personal
wants and needs
depreciation- process of normal
Gross Domestic Product- the total output
produced inside a country during a given year
Gross National Product- output produced by
factors owned by the citizens of a country
Investment- an economic activity that
forgoes present consumption with the goal of
increasing consumption in the future.
Ex. (Tangible Investments)- structures,
equipment
(Intangible Investments)-health, education
Total Market Value. We add up the
Peso value of all the stuff produced
in Philippines. This is because
producing a car is a way different
that producing a haircut or a can of
soup, but by converting everything
to Peso we have a uniform measure.
Final Goods and Services. We only
count final products ready to be
consumed, NOT products used to
make other goods. Ex. A car is counted
in the GDP but the steel used to make
the car is not counted. (The value of
the car already reflects in the value of
the steel, rubber, plastic etc.
Produced in a country. The
Philippines GDP counts only those
goods and service produced in the
physical borders of the Philippines.
So Toyota Cars made in Laguna are
counted, eventhough it is a
Japanese company.
Ex. Our imaginary economy produces
3 goods: mango, cellphones and
banana
 To calculate GDP, we simply multiply the price
and quantity of each good to get the Peso value,
and then add up all three values:

Year Mango Cellphones Banana

price quantity price quantity price quantity

2015 P5 500 P10,000 100 P90 400

GDP = (P5)(500) + (P10,000)(100)+
(P90)(400)=P2,500+P1,000,000
+P36,000=P1,038,500

With millions of goods and services

in the Philippines, the process a bit
more complicated, but the principle
is the same.
An economy’s goal is to
promote the economic
welfare of the people and the
production of goods and
services for the people is of
prime importance.
The income of one’s
country is determined by
the total earnings the
economy for a particular
period of time.
To determine whether the economy
has attained its goal there should be
a system of measuring its national
income. Goods and services,
estimated yearly in order to identify
whether the country’s economy is
improving or regressing.
GNP, per capita income (PCI) or per
capita GNP are examples of
indicators.

Indicators are basis on the

classification of the country whether
it is developed, intermediate or less
developed (developing)
The reference point is the per
capita GNP of the per capita
income of the US.

*highly developed
* less developed
National Income- defined as
a measure of the money
value of the total flow of
goods and services produced
in a economy over a specified
period of time.
Factors causing variations in National
Income

1. population
2. investments
3. saving
4. consumptions
Investment- process of
spending an amount with the
end view of getting a profit.

Investment > Savings and

Consumptions
Gross National Product-
the total market value of
all final goods and services
produced by the citizens of
a country in a given year.
 The formula to calculate the components of GNP
 Y=C+I+G+X+Z

Consumption + Investment + Government +

X (net exports or imports minus exports) +
Z (net income earned by domestic residents
from overseas investments - net income
earned by foreign residents from domestic
investment).
Terms to ponder:
Per Capita Income (PCI)-
refers to the income per head
Comparison between GNP and GDP

GNP GDP

Production is Production is
within the within the
Philippines by Philippines by
Filipinos Filipinos
Production is Production is
outside the within the
Philippines by
Philippines by
GDP – Expenditure Approach
It involves calculating the sum of all the
expenditures incurred in the production of
final goods.

Example. Buko juice and bread (complimentary

goods). If the price of bread is P20 and the
quantity sold is 50, the expenditures, in pesos is
P1,000. Buko juice, on the other hand is P10 per
unit in price and the quantity sold is 1,000, the
total expense incurred is P1,000.The GDP for
bread and juice is P2,000.
GDP Income Approach
 It involves getting the sum of all distributive
shares: wages (W), interest (I), profits (P) and the
rent (R). The formula can be sated as follows:

 GDP=W + I + P + R
 Given
 W = P200
 I = P20
 P =P15
 R=150
Elasticity is a measure of
how much buyers and
sellers respond to the
changes in market
conditions
The Elasticity of Demand
Consumers usually buy more of a
good when the prices are lower,
when their incomes are higher,
when the prices of the
substitutes for the good are
higher, or when the prices of the
complements of the good are
lower.
The Price Elasticity of Demand and Its
Determinants
The law of demand states that a
fall in the price of a good raises
the quantity demanded.
The price elasticity of demand
measures how much the
quantity demanded responds to
a change in price.
Demand for a good is said to
be elastic if the quantity
demanded responds
substantially to changes in
price. Demand is said to be
inelastic if the quantity
demanded responds only
slightly to changes in price.
The price elasticity of
demand for any good
measures how willing
consumers are to buy less of a
good as its price rises. Thus,
the elasticity reflects the
many economic, social, and
psychological forces that
Inelastic is an economic term
referring to the static quantity of a
good or service when its price
changes. Inelastic means that when
the price goes up, consumer’s
buying habits stay about the same,
and when the price goes down ,
consumers’ buying habits also
remain unchanged.
Elastic is a term used in
economics to describe a
change in the behavior of
buyers and sellers in
response to a price change
for a good or service
Three general rules that determines
the price elasticity of demand.
1. Availability of close
substitutes
* the more substitutes, the more elastic the
demand will be

Ex. If the price of a cup of coffee goes up by

P5, consumer replace their morning caffeine
with a cup of tea. This means that a coffee is
elastic good because a raise in price will cause
a large decrease in demand as consumers
start buying more tea instead of coffee.
However, if the price of caffeine were to
up as a whole, we probably see little
change in the consumption of coffee or
tea because there are few substitutes for
caffeine. Most people are not willing to
give up their morning cup of caffeine no
matter what the price, therefore caffeine
is an inelastic product because its lack of
substitutes.

Diamonds are unique goods and

2. Amount of income available
to spend on the good
This factor affecting demand elasticity
refers to the total a person can spend
on a particular good or service.
Ex. If the price of a Coke goes up from P20
to P40 pesos and income stays the same,
the income that is available to spend on
coke, which is P80, is now enough for only
two rather that four cans of coke. Thus, if
there is an increase in price and no
change in the amount of income available
to spend on the good, there will be an
elastic reaction in demand; demand will
be sensitive to a change in price if there is
no change in income.
3. Time
If the price of cigarettes goes up
P100 per pack, a smoker with a very
few available substitutes will most
likely continue buying his or her daily
cigarettes. This means that tobacco is
inelastic because the change in price
will not have a significant influence
on the quantity demanded.
However, if that smoker finds that
he or she cannot afford to spend the
extra P100 per day and begins to
kick off the habit over a period of
time, the price elasticity of
cigarettes for that consumer
becomes elastic in the long run,
Computing the Price Elasticity of
Demand

Percentage change in the quantity
demanded of a given product that
results because of a given change in the
price of that product.

It measures how much buyers respond

to the change in the price.
If the number is more than zero but less
than one = demand is relatively inelastic
(It means that buyers reduce their buying,
but very little, as the price of the product
rises)
• If the number is more than 1=demand is
relatively elastic
• (It means that buyers not only reduce
their buying, but they reduce it
considerably, as the price rises).
If the number exactly equals one =
demand is unit elastic (“Unit” means one)

If the number exactly equals zero =

demand is perfectly inelastic
(This means that buyers do not change
their quantity demanded at all if the
price rises).
Ex.
The price of gasoline increased
from P45 to P50 per liter due to
TRAIN Second Trance.
Consequently, the daily average
market quantity demanded
changed from 150 liters to 145
liters.
 Decision tool for Price Elasticity of Demand if the
absolute value of the coefficient is:

 Demand is:
 < 1 Inelastic
 > 1 Elastic
 = 1 Unit Elastic
 = 0 Perfectly Inelastic



Costs of Production
Identify the costs at Mr. A’s Cookie
Factory

Mr. A, the owner of the firm, buys

flour, sugar, chocolate chips, and
other ingredients. He also buys the
mixers and ovens and hires workers
to run this equipment. He then sells
the cookies to consumers.
Firm’s Objective: make money, maximize
profit, passion
Total Revenue- the amount that the firm
receives for the sale of its output
(cookies)
Total Cost – the amount that the firm to
buy inputs (flour, sugar etc) and salaries
of workers
Profit – firm’s total revenue minus its
total cost
Opportunity cost of an item – refers
to all things that must be forgone to
acquire that item

Explicit cost – costs that require an

outlay of money by the firm
Implicit cost – costs that do not
require an outlay of money by the
firm
Economic profit as the firm’s total
revenue minus all the opportunity
costs (explicit and implicit) of
producing the goods and services sold.
Economic losses ( economic profits
are negative) , the business owners
are failing to earn enough revenue to
cover all the costs of production.
The Various Measures of Cost

1. Fixed cost- costs that do not vary

with the quantity of output
produced.

* Incurred even if the firm produces

nothing at all
Ex. Rent, bookkeeper’s salary
2. Variable Costs

Costs that vary with the quantity of

output produced
Total Costs – The market value of all
input that a firm uses in a
production

TC=FC + VC