MACROECONOMICS

Macroeconomics covers the overall aspect of the economy. It deals with the total performance of the economy rather than the performance of individual units. Scope: a. Economys Total Output or GNP Sector b. Money c. Problems on Employment and Inflation d. Public Finance
M N YIN O E O E C M (W G S R N S A E, E T , IN E E T P O IT ) T RS, R F S

C S OT

RS U C EO R E MR E A KT
RS U CS EOR E
L N ,L B R C P A , A D A O , A IT L E T E R N U A A IL Y N R P E E R L B IT

B S ES U IN S

H UE OD O SH L S

G O SA D O D N S R IC S E V E

G O SA D O D N S R IC S E V E

P O U T R D C MR E A KT
RVN E E E U C N U P IO O S MT N E P N IT R S X E D U E

Difference between GNP and GDP: GNP: Gross National Product is the total final output produced with labor or capital owned by a countrys citizens, regardless of where the output is produced. GDP: Gross Domestic Product is the output produced with labor and capital located within a country.

Principal Methods of Measuring GNP

The Expenditure Approach: is a way of computing national income by adding up the peso value at current market prices of all final goods and services. Consider the following: a. Consumption Expenditures: refers to the final expenditure of all private households during the period being considered. These include expenditure for durable consumer goods (those that last for more than a year) nondurable consumption goods such as food, gasoline and services. b. Gross Domestic Investments: are the activities that use resources which allow for more production in the future and consequently more future consumption. This covers both government and private investment. c. Government Expenditures: such as expenses for infrastructure projects and salaries of government employees. d. Net Exports: are the total exports minus the value of total imports. Summing up all these expenditures from each sector would give us the equation: GNP= C + I + G + (X-M) Where: C= Consumption Expenditures I= Investment Expenditures G= Government Expenditures X= Exports M= Imports The Income Approach: to break down GNP into three components: National Income, Indirect Taxes minus Subsidies and Depreciation. a. National Income: The total income earned by factors of production owned by a countrys citizens. It includes the following: 1. Compensation of Employees 2. Proprietors Income 3. Private Corporate income 4. Rental Income 5. Proprietary and Corporate Income of Government b. Depreciation: is the decrease in the value of an asset due to wear and tear. c. Indirect Taxes minus Subsidies: is the difference between sales taxes, customs duties, and license fees, etc. on one side and payments made by the government for which it receives no goods or services in return, on the other. Some Weakness of GNP Accounting: 1. Per Capita GNP which is a countrys GNP divided by its total population is a better measure of the average persons well-being than GNP. 2. Underground Economy is almost impossible to estimate the income because it is often unreported and unrecorded. Most of the economic activities are illegal or off the hook to avoid taxes. 3. Unincluded items such as do-it-yourself articles, household chores, etc. 4. ECONOMIC BADS such as increased pollution and crimes would have to be subtracted from GNP figures for a more accurate measure.

Unemployment

 one who is on temporary layoff looking for a job waiting to start a new job Unemployment Rate: the percentage of the measured labor force that is not employed Computed by dividing the total number of unemployed individuals by the number of those in the labor force. (National Statistical Coordination Board) all persons 15 years old and over and are reported as: without work currently available for work, and/or would be available and willing to take up work in paid employment or self-employment seeking work, or not seeking work due to the following reasons: a. tired/believe no work available b. awaiting results of previous job application c. temporary illness/ disability d. bad weather e. waiting for rehire/job recall If the economy fails to generate enough jobs for its ever-growing labor force, the unemployment rate rises.

Major Types of Unemployment

1. Frictional Unemployment > This results from the continuous movement of individuals from job to job or from one stage of the life cycle to another > Those who have resigned from their jobs and are looking for new ones > New graduates who are looking for jobs 2. Cyclical Unemployment >This arises when aggregate demand for labor is low 3. Seasonal Unemployment > This results from the seasonal pattern of work in specific industries like construction, agriculture and the like 4. Structural Unemployment > This is caused by a mismatch between the available jobs and the unemployed > The structure of the unemployed labor does not fit the characteristics needed for the available jobs 5. Technological Unemployment > This results from the displacement of workers by machines

Unemployment Affects All Sectors of the Economy

1. The jobless and their families are directly affected by unemployment 2. Unemployment affects real output. This means a decline in production output 3. Social and Economic effects

INFLATION is a situation wherein there is a sustained rise in the weighted average of all prices and not just a one-time increase. Theories:

1.

DEMAND-PULL INFLATION: This occurs when total demand in the economy is rising while the available output of goods is limited. Supply may be limited either because there are not enough firms producing the goods or because the economy is not giving solutions fast enough to meet the needs. This condition causes the increase in the general level of prices.

Aggregate Demand > Aggregate Supply = Demand pull Inflation

2.

COST-PUSH INFLATION or WAGE PRICE SPIRAL: When the supply of production outputs decreases or when the total demand increases, inflation results. When inflation comes from the supply side, it is called cost-push inflation. a. Union Monopoly Power or Wage-Price Spiral: When strong unions demands a wage hike without a corresponding increase in productivity, producers increase their prices to give in to the demand and still maintain their profit margin. b. Big Business Monopoly Power or Price-wage Spiral: When powerful tycoons want bigger profits to finance new or other ventures, wage-price increases and cost of living goes up. The vicious cycle goes on if both sectors increase wage or profits. c. Raw Materials-Push Inflation: When all prices of basic input went up, all prices will automatically increase and vice versa.

MONETARY INFLATION: Monetarists believe that change in money supply is the main cause of inflation. This is explained by the Fisher Equation of Exchange which states that the total amount spent during a period of time must be the same as the total value of goods and services transacted. If the value of transactions remains the same as it would at full employment, and the velocity or rate of the turn over of money is constant, an increase in money supply necessarily results in a rise in the price level. This relationship between and money supply and the price level is summarized this way: MxV=PxQ Where: M = Money Supply V = Velocity of Money P = Price Level Q = Real Output How is Inflation Measured? When prices of almost everything increase, there is inflation; consequently the cost of living also increases. But how exactly is the inflation rate determined? Price Level (Year t) Price Level (Year t -1) X 100

Inflation Rate (year t) =

Price Level (Year t -1)

Where: Price Level = weighted average of the prices of the different goods and services in the economy Year t = year under consideration Reasons:

Inflation
Government expenses Import Dependent Debts outside the country Monopoly

Export Orientation