CVCITC

CAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.

#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 – 0139

BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION

DEPARTMENT

TOPIC: MARKET SYSTEM, MEASURING DOMESTIC

OUTPUT, NATIONAL INCOME AND PRICE LEVEL AND
INTERNATIONAL TRADE
MODULE FOR PRE-FINAL PERIOD
SUBJECT: ECO2A- ECONONOMIC DEVELOPMENT

I. LESSON 6: THE MARKET SYSTEM

CHARACTERISTICS OF THE MARKET SYSTEM
The market system, as practice in industrial advanced economies,
has several notable characteristics.
1. Private Property - In market system, private individuals and firms, not the
government, own most of the property resources (land and capital). This right
of private property, coupled with the freedom to negotiate binding legal
contracts, enables individual and business to obtain, use, and dispose of
property resources as they fit.
2. Freedom of Enterprise - ensures that entrepreneurs and private business
are free to obtain and use economic resources to produce their choice of
goods and services and to sell the in their chosen markets.
3. Freedom of Choice - enables owners to employ or dispose of their property
and money as they see fit.
4. Self-interest - The motivating force of all the various economic units as they
express their free choice.
5. Competition - Independent acting sellers and buyers operating in a
particular product or resources market. Freedom of sellers and buyers to
enter or leave markets, on the basis of their economic self-interest.
6. Markets and Prices - Markets and price are key characteristics of the
market system. They give the system its ability to coordinate millions of daily
economic decisions.
7. Reliance on Technology and Capital Goods - In the market system,
competition, freedom of choice, self-interest ; and personal reward provide
the opportunity and motivation for technology advance. the market system
therefore encourages extensive use and rapid development of complex
capital goods.
E.g : tools, machinery, large-scale factories, and facilities for storage,
communication, transportation, and marketing.
8. Specialization - The extent to which market economies rely on
specialization is extraordinary. The majority of consumers produce virtually
none of the goods and services they consume, and they consume little or
nothing of what they produce.
9. Division of Labor - Specialization makes use of differences in ability:
Specialization fosters learning by doing: Specialization saves time.
10. Geographic Specialization - Specialization also works on a regional
and international basis.
11. Use of money - Money perform several functions, but first and
foremost it is a medium of exchange. It makes transaction easier.
12. Active, but Limited, Government - The final characteristics of the
market system, as evidenced in modern economies, is an active, but limited,
government. although a market system promotes a high degree of efficiency
in the use of its resources, it has certain short comings.
 CVCITC
CAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.
#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 – 0139

Market System at Work

• Four fundamental questions
 What goods and services will be produce?
 How will the goods and services be produce?
 Who will get the goods and services?
 How will the system accommodate change?

II. LESSON 7 : THEORY OF PRODUCTION

• Production Function - Plant size and the efficiency if its resources (Land,
Labor, Capital) determine plant capacity
( maximum output).
The Law of Diminishing Returns
The production function shows that stretching the use of variable
resources against the limits of fixed resources decreases additional product
(MP). This is the law of diminishing returns which is basically due to the limits
of a fixed plant size.
The law of Diminishing Returns has three important lessons:
1st: the size of a resource, given the rest as fixed, should not go beyond its
product-maximizing point.
2nd: the lesson is that plant capacity can only increase with more resources
combined unless technology changes.
3rd: the resources are basically complementary.

• The Isoquant - Theoretically, there are infinite combination of resources

inputs which determine the same plant capacity (maximum output)
A hierarchy of isoquants is an array of isoquants which correspond to
different level of resource inputs and plant capacity.
Isocost curve and its hierarchy - Theoretically, there are infinite
combination of productions resources that a given budget can buy.
• Productivity - Productivity is the efficiency and, therefore, the power of
input to produce.
Advantage
Productivity improvement means more output per unit of input or with
the same total input as the increase in the efficiency indicates.
• Relative Resource Efficiency- Productivity resources are complementary
not only in function but also in efficiency. A better machine also enables its
operation to work faster or the way around.
One way to improve the plant’s overall resource efficiency or productivity is
to change the nature of the resource through innovation
 Trends in Computer Technology - Trends in Computer Technology
in the U.S demonstrate how deeper use of capital can crowd out scarce
labor and impact overall resource efficiency. In particular,
 CVCITC
CAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.
#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 – 0139

manufacturing sectors that use computers heavily substitute the

technology for labor as the former accumulates faster than the latter.
 Overcoming Decreasing and Negative returns - In the real world,
size is not a handicap after all when innovation are made to overcame
the causes of decreasing and negative returns.
 Returns to Scale and Productivity - Returns to scale measures how
output changes relative to resource inputs in the long-run and
indicates how overall resource efficiency change with plant size.

III. LESSON 8: MEASURING DOMESTIC OUTPUT, NATIONAL

INCOME AND THE PRICE LEVEL

A. ASSESSING THE ECONOMY’S PERFORMANCE

• National income accounting measures the economy’s overall performance.
• It does not for the economy as a whole what private accounting does for the
individual firm or for the individual household.

B. GROSS DOMESTIC PRODUCT

• The primary measures of the economy’s performance is its annual total of
goods and services or, as it called, its aggregate output.
• Aggregate output is labelled gross domestic product (GDP); the total market
value of all final goods and services produced in a given year.
C. MONETARY MEASURE
• Monitor the price to each of the product to indicate how society evaluate their
relative worth.
D. AVOIDING MULTIPLE COUNTING
• To measure aggregate output accurate, all goods and services produced in a
particular year must be counted once and only once.

E. GDP EXCLUDES NONPRODUCTION TRANSACTION

• Although many monetary transactions in the economy involve final goods
and services, many others do not. Those nonproduction transactions must be
excluded from GDP because they have nothing to do with the generation of
final goods.

F. FINANCIAL TRANSACTION

• Public transfer payment - these are the social security payment, welfare
payment, and veteran’s payment that the government makes directly to
households.
• Private transfer payments - They produce no output. They simply transfer
fund from one private individuals to another and consequently do not enter
into GDP.
• Stock market transactions - The buying and selling of stock is just a
matter of swapping bits of paper. Stock market transaction create nothing in
the way of current production and are not included in GDP.
• Secondhand sales - It contribute nothing to current production and for that
reason are excluded from GDP.
• The expenditures approach - To determine GDP using the expenditures
approach, we add up all the spending on final goods and services that has
taken place throughout the year.
• Personal consumption expenditures - Cover all expenditures by
household on durable consumer goods, nondurable consumer goods and
consumer expenditures for services.
 CVCITC
CAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.
#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 – 0139

• Gross private domestic investment - All final purchases of machinery,

equipment, and tools by business enterprises, all construction, and changes
inventories.

G. NET EXPORT - The value of a country's total exports minus the value of its
total imports. It is used to calculate a country's aggregate expenditures, or
GDP, in an open economy

THE INCOME APPROACH

1. Compensation of employees- By far the largest share of national

income was paid as wages and salaries by business and government to
their employees.
2. Rents - Consist of the income receive by the households and business
that supply the property resources.
3. Interest - Consist of money paid by private business to the supplier of
money capital.
4. Proprietor’s income - Consist of the net income of sole proprietorship,
partnership, and other unincorporated business and corporate profits.
5. Corporate profits - Corporate profits is the earnings of owners of
corporation.
6. Corporate income taxes - These taxes are levied on corporation’s net
earnings and flow to the government.
7. Dividends - These are the part of corporate profits that are paid to the
corporate stockholders and thus flow to household.
8. Undistributed corporate profits - These are money saved by
corporations to be invested later in new plants and equipment. They also
called retained earnings.

IV. LESSON 9: INTERNATIONAL TRADE

OBJECTIVES:
• At the end of the chapter, students are expected to:
• Grasp the differences between absolute advantage and comparative
advantage
• Internalize the essence of Balance and Payments
• Have an adequate understanding of Foreign Exchange, and
• Realize that Trade Bureau are ways of protecting domestic jobs.

A. Comparative Advantage

• The more an economy produces any one good, the more costly it
becomes to produce the next unit.
• Rising cost of production leads to a search for less costly ways to
produce and consume those goods.
• this search leads to a potential trading partner who has comparative
advantage in the production of good.
• If Nation ABC can produce a good at lower opportunity cost than can
Nation XYZ, it is said that Nation ABC has comparative advantage

B. Absolute Advantage
 CVCITC
CAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.
#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 – 0139

• Because Luzon can produce more soybeans than Mindanao, Luzon is

said to have an absolute advantage over Mindanao in soybeans
production.
• Mindanao has absolute advantage over Luzon in Timber production.
• Trade does not rely on absolute advantages, but on comparative
advantage.

C. Balance of Payments
• If Filipino citizens wish to purchase U.S. soybeans, the Filipino must
pay in dollars. If U.S. citizens wish to buy Spanish olives, the
Americans must pay in Euros
• Before goods can be exchanged between foreign trading partners, the
currency of importing nation must first be converted to the currency of
the exporting nation.

D. Changes in Exchange Rates

There are several determinants that affect the currency appreciation
and depreciation:
1. Consumer taste - When domestic consumer builds a stronger
preference for foreign-produced goods and services, the demand for
those currencies increases and the peso depreciates.
On the other hand, if foreign consumers increase their demand
for Filipino made goods, the peso increases.

2. Relative income - When one nation’s macroeconomy is strong and

incomes are rising, all else equal, they increase their demand for all
goods, including those produced abroad.
So, if Europeans are enjoying economic growth and the U.S. is in
recession, the relative buying power of European citizen is growing.

3. Relative inflation - If one nation’s price level is rising faster than

other nation, consumers seek the goods that are relatively less
expensive.
If European inflation is higher than inflation in U.S., American
made goods are relative bargain to German consumers and the
dollar appreciates.

4. Speculation- Because foreign currencies can be traded as assets,

there are investors who seek to profit from buying currency at a low
rate and selling it at a higher rate.
• Example: it is appearing that future interest rates will fall in the
U.S. relative to interest rates in Japan, the yen is looking like a good
investment. Speculators would then increase their demand for
Japanese assets, thus appreciating the yen and depreciating the dollar.

E. TARIFFS
In general, there are two types of tariffs:
1. Revenue Tariff- It is an excise tax levied on goods that are not
produced in the domestic markets
Example: The U.S. does not produce bananas. If a revenue tariff
were levied on bananas, it would not a serious impediment to trade,
and it would raise a little revenue for the government.
 CVCITC
CAGAYAN VALLEY COMPUTER & INFORMATION TECHNOLOGY COLLEGE, INC.
#28 Carreon Street, Centro East, Santiago City. Tel. No. (078) 305 – 0139

• A protective tariff is an excise tax levied on a good that is

produced in the domestic market.
• Though tariff also raises revenue, its purpose is to protect the
domestic industry from global competition by increasing the price
of foreign products.

ECONOMIC EFFECTS OF THE TARIFF

• CONSUMERS PAY HIGHER PRICES AND CONSUME LESS- if

you are building airplanes or door hinges, you have seen an
increase in your costs.
• Consumer surplus has been lost.
• Domestic producers increase output
• Declining imports
• Tariff Revenue
• Inefficiency

2. Quotas - An import quota is a maximum amount of a good that can

be imported into the domestic market. With quota, the government
only allows two million tons to be imported

Tariffs and Quotas share many of the same economic effects:

• Both hurt consumers with artificially high prices and lower consumer
surplus.
• Both protect inefficient domestic producers at the expense of efficient
foreign firms, creating dead weight loss.
• Both reallocate economic resources toward inefficient producers.
• Tariffs collect revenue for the government, while quotas do not.