MACROECONOMIC

INDICATORS
Part 2
INFLATION
  Inflation
 Refers to the increase in the general price
level (GP) or prices as a whole. It is
calculated using the following formula

 If the estimated inflation rate is 3.2 then it

is interpreted that in period t the prices on
the average are 3.2 percent higher than
prices in period t-1.
INFLATION
 The official statistics presents two measures
of the inflation rate which are the following:
 Headline Inflation rate
 It uses the Consumer Price Index

(CPI) as a measure of the general price

level.
 CPI is a weighted average of the cost

of a bundle of 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.
 This is the traditional and most common
INFLATION
 Core Inflation Rate
 Uses a price index that excludes the

prices of commodities that are deemed

to be volatile.
 It is viewed as a better measure of long

term movements in process for a

country.
 The core inflation rate of the Philippines

excludes the prices of rice, corn, fruits,

and vegetables, liquefied petroleum gas,
kerosene, oil, gasoline, and diesel (BSP
2008).
UNEMPLOYMENT
 Unemployment
 It implies that 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 (15 years and

above in the case of the Philippines) who are:

 Working or are engaged in business and

 Not working or engaged in business but are

actively looking for work

 this means that unemployment does not include those
people who are too young, too old, or not looking for
work.
UNEMPLOYMENT
   order to assess the employment situation
In
in the country we examine an indicator
known as the unemployment rate.

 Unemployment rate (u)

UNDEREMPLOYMENT
   examining the employment data, it is also
In
important to note that not all employed
persons are able to work as much as they
want. Some of these people may be working
less than the standard 40-hour workweek.
Others may be working less than the
standard 40-hour workweek. Others may be
working 40 hours a week but still want to
work longer hours. These employed
individuals are considered underemployed.
SIMPLE INCOME DETERMINATION
  
Aggregate Expenditure and National Income
Aggregate expenditure
 Refers to the total amount that economic
agents want to plan to spend on goods and
services, if we limit ourselves to an economy
with only firms and households, AE is equal
to the sum of consumption spending (C) and
investment (I). Thus, if aggregate
consumption spending is 800 pesos and
investment is 200 pesos , then AE=
800+200=1,000 pesos.
 Mathematically it is represented as:
SIMPLE INCOME DETERMINATION
 When national income or output (Y) increases it would lead to higher
consumption which would lead to higher aggregate expenditure. It is
illustrated by the table below :
Y C I AE
0 50 50 100
50 90 50 140
100 130 50 180
150 170 50 220
200 210 50 260
250 250 50 300
300 290 50 340
350 330 50 380
400 370 50 420
450 410 50 460
500 450 50 500
550 490 50 540
600 530 50 580
650 570 50 620
700 610 50 660
750 650 50 700
800 690 50 740
SIMPLE INCOME DETERMINATION
 Relationship of consumption spending and
income
 Consumption spending tends to be higher
than income. Looking at the extreme
situation in which there is zero income
consumption spending is equal to 50
pesos. This means that even without
income people still want to spend. This
spending may be for basic necessities such
as food and shelter.
SIMPLE INCOME DETERMINATION
 Relationship of consumption spending and
income
 Next you might notice that for every 100
peso change in income there is an
equivalent 80 peso change in consumption
spending . If we divide the change in
consumption spending (ΔC) by the change
in income(ΔY) we arrive at an estimate of
the marginal propensity to consume
(mpc).
SIMPLE INCOME DETERMINATION
    the marginal propensity to consume
(mpc)
 Indicates the amount by which

consumption spending changes in

response to a one peso change in
income.
 It is defined by the equation below

 So in our example mpc= 80/100= 0.8

 This means that consumption spending goes
up by 80 centavos whenever income
increases by 1 peso.
SIMPLE INCOME DETERMINATION
 In this situation we assume that Investment
(I) I autonomous and equal to 50 pesos, we
could see that AE increases whenever
income goes up.
 Equilibrium Income
 Represents the level of income in which there is
no incentive for firms to adjust production.
 It requires the equality between AE and Y. Since
AE= C+I then Y=C+I.
 Basing on the previous table the equilibrium
income is 500 pesos.
SIMPLE INCOME DETERMINATION
 Equilibrium Income
 So why does AE be equal to Y, let us take for an
example an economy which produces one good
let us say the economy produces hopia. If the
amount of hopia that the people want to buy
exceeds that of the supply then the firms are
incentivized to produce more. This is the same
with macroeconomic analysis but in this case we
consider all the goods and services produced in
an economy. If AE>Y the amount that the
economic agents want to buy exceeds the
quantities that were produced by all the firms in
the economy. This disrupts the production plans
of firms and allows them to increase production.
The opposite is true when AE is less than Y.
SIMPLE INCOME DETERMINATION
 The values in the previous table will help us depict
equilibrium with the aid of a simple diagram. We
could represent the positive relationship of AE and
Y with an upward sloping AE schedule. To find the
equilibrium position between AE and U.
Equilibrium in the economy will be represented
here by a 45 degree line on which all points
correspond to the equality between AE and Y.
 Equilibrium in the economy will be represented
here by the intersection between the AE schedule
and the 45 degree line at point E. From point E,
we can derive the equilibrium level of income (Y*).
This is the level of income that will exist in a
country over a given period if it is in equilibrium.
SIMPLE INCOME DETERMINATION
AE

E AE

45
o

100200300400500600700 Y
SIMPLE INCOME DETERMINATION
 Savings, Investment, and Income
Just like an ordinary household, the
country’s national income can be
allocated for consumption (C) or
savings (S). That is,
Y=C+S
This implies that savings represent
the component of income that is not
spent for consumption. In other
words,
S= Y-C
SIMPLE INCOME DETERMINATION
The table below shows the relationship
between consumption, income, and savings.
Y C I S
0 50 50 -50
50 90 50 -40
100 130 50 -30
150 170 50 -20
200 210 50 -10
250 250 50 0
300 290 50 10
350 330 50 20
400 370 50 30
450 410 50 40
500 450 50 50
550 490 50 60
600 530 50 70
650 570 50 80
700 610 50 90
750 650 50 100
800 690 50 110
SIMPLE INCOME DETERMINATION
 When savings is negative this means that
income is not sufficient to finance planned
consumption. This implies that households
are borrowing money and/or drawing from
existing assets (selling jewelry and property,
withdrawing money from a bank account,
etc.) to pay for their consumption. Second,
savings tend to increase with income. When
the level of income is equal to 300 pesos,
savings are equal to 10 pesos. Savings, in
turn, rise to 30 pesos when income further
increases to 400 pesos.
SIMPLE INCOME DETERMINATION
 We can easily establish the link between
savings and equilibrium income by recalling
that equilibrium requires Y=AE. Since Y=C+S
and AE=C+I, then C+S=C+I. If we eliminate
C from both sides of the equality, then we
arrive at an alternative equilibrium condition
given by,
S=I
SIMPLE INCOME DETERMINATION
 In other words, equilibrium also requires
savings to be equal to investment. The
values from the table allow us to construct
an upward-sloping savings schedule which
captures the idea that savings and income
move in the same direction. The values allow
us to draw a flat investment schedule
which represents our working assumption
that investment spending is autonomous.
The equilibrium position here is depicted by
the intersection (point E) between the two
schedules. At point E, we find that the
equilibrium level of income is given by Y* (=
500 pesos).
SIMPLE INCOME DETERMINATION
S

5
0

100200300400500600700
-50
INVESTMENT AND INCOME
 Investment and Income
 Suppose that a company decides to build a new
factory this will increase investment because of the
labor and materials needed to construct. Thus
increasing AE . Since AE must equal Y in equilibrium
the result is increase in equilibrium, the result is an
increase in equilibrium income of the country.
 The figure below depicts the increase in investment
by an upward shift in the AE schedule from AE 0 to
AE1 . At the initial level of output (Y 0 *), the increase
in investment causes AE to exceed Y 0 *. As
mentioned earlier, this is a signal for firms to
increase their production until a higher level of
output (Y0 *) is reached.
SIMPLE INCOME DETERMINATION
AE

AE1 = C+I1
 = 100

AE0 = C+I0

I1>I0

250 500 750 1000

Y
SIMPLE INCOME DETERMINATION
Increasing Investment
spending raised
equilibrium income by
250 pesos (750-500).
The 50 peso increase
in investment initially
creates a 50 peso
increase in income
thus results an
increase in
consumption spending
which results to
higher aggregate
expenditure which in
turn raises income.
But this does not end
here there will be
successive increases
in income which will