Macroeconomic Indicators

• This study note covers Macroeconomic Indicators

The Circular Flow Model

• It describes the flow of money and goods and services in an economy
• There are 4 main components of an economy: households, firms, government and foreigners
• The circular-flow diagram simplifies the economy by looking at payments and resources and includes only two sectors: households and firms
• The lower loop shows transactions in the factor markets
• Households supply labor, capital, land and entrepreneurial skills in exchange for wages, interest and dividends
• The upper loop includes transactions in the goods and services market
• Households demand goods and services from firms in exchange for money
• Goods, resources and payments flow as long as households consume and firms continue to produce
• Payments are equal between the producer and consumer sides
• Aggregate expenditure, national income and aggregate production are equal in monetary terms
• Government purchases of goods and services, government payments for factor services, transfer payments between different agents, tax payments, transactions with the foreign and financial sectors are also incorporated in a circular flow diagram
• Inflows or injections bring money into the economy, whereas outflows or leakages bring money out of the economy
• Investment (I), Government spending (G), and Exports (X) are considered inflows
• Savings (S), Taxes (T) and Imports (M) are outflows

Measurement of Economy's Output

• The primary statistic used as measurement is the Gross Domestic Product or GDP
• GDP is a measure of the market value of all final goods and services produced within a country in a time period
• GDP is limited to current production, excludes transfer payments, includes only final goods to prevent double counting
• Gross National Product (GNP) adds the income of Filipinos working abroad
• Expenditure approach: Calculates the sum of all expenditures on final goods
• The Income approach takes the sum of the payments for all factors of production such as: wages, interest, profits and rent
• The value-added approach measures the contribution of the different factors of production to the value of a good
• Value added is equal to sales minus purchases from other firms

The National Accounts of The Philllipines: Expenditure Approach

• GDP = Personal Consumption (C) + Gross domestic capital formation (I) + Government Consumption (G) + Exports - Imports + Statistical Discrepancy
• Add Net Factor Income from Abroad (NFIA) to GDP to get the Gross National Product

The National Accounts of The Phillipines: Income Approach

• GDP = Compensation of employeees + Net operating surplus + Indirect business taxes - subsidies + Depreciation
• Add depreciation to the Net National Product (NNP) to get GDP

Related Measures of Output

• GDP can be either be Nominal GDP, or Real GDP
• Nominal GDP uses the current prices
• Real GDP uses prices from a chosen base year
• Real GDP is more appropriate because it is more accurate due to discounting changing prices
• GDP per capita measures output or income received by an individual in an economy over time
• Real GDP Per Capita = Real GDP/population
• Real GDP per capita eliminates the effects of prices and relative population of a country

Limitations of GDP

• Does not include non-traded goods and services, transactions in the underground economy, non-measurable changes in well-being, household production, and externalities
• Fails to give an idea of distribution of wealth and income

Indicators of The Labor Market

• The population is divided into 3 categories: employed, unemployed, and not in the labor force
• The labor force is the sum of employed and unemployed people
• The labor force refers to the population, aged 15 years old and over, who work in the production of goods and services in the country
• Employed are those who have done some work for at least an hour during the reference period
• Unemployed, includes those who are without work, are currently without work and are seeking work or not seeking work because they believe there is no work available
• Unemployed, includes those awaiting results of previous job applications, those with bad weather or temporary illness
• The underemployed refers to employed individuals wanting more work
• Labor Force Participation Rate (LFPR) is the proportion of the total labor force to the total household population aged 15 years and older
• Employment Rate measures proportion of employed people to the total labor force
• Unemployment Rate measures proportion of unemployed persons to the total labor force
• Underemployment Rate measures proportion of underemployed people to the total number of employed people

Types of unemployment:

• Frictional: searching for work or soon taking a job
• Structural: jobs are obsolete because of technology
• Cyclical: workers temporarily laid off due to downturns and recessions
• Seasonal: workers in active employment due to the season ending
• A dynamic economy will always have some levels of frictional and structural unemployment
• The natural level of unemployment is equal to frictional unemployment plus structural unemployment, and signifies full employment

Issues in The Labor Market

• The employment rate does not specify between part-time and full-time workers
• The underemployment rate is used to illustrate how many people want to have more work
• Workers on casual and contractual are subjects to lower job satisfaction, lack of tenure and persistently low income

Inflation

• Inflation Rate is measured by the increase in the price level
• This is typically through the Consumer Price Index (CPI), which reflects the cost of living relative to that of the base year
• The Philippine Statistics Authority (PSA) measures this data from the measurement of commodity prices of a typical consumer basket
• The Producer Price Index (PPI) measures the general level of input prices in different sectors
• The Wholesale Price Index measures the price level of commodities that flow into the wholesale trade intermediaries
• To compute for rate of inflation using (CPI), one must fix the basket, find the prices, compute the basket/weight by commodity group, compute the CPY and finally, the rate of inflation
• Demand-pull inflation is an upward pressure on prices after a shortage in supply, due to: a growing economy, a freer government spending and expectations in inflation
• Cost-push inflation results from changes in the real activity in the economy like: supply shocks, higher wages and increase in indirect taxation