Macroeconomic Performance Module 5

Module 5: Macroeconomic Performance

• This module emphasizes measuring a nation's output and income, and the circular flow of economic activity.
• Students are expected to understand:
  • How Gross Domestic Product (GDP) and Gross National Product (GNP) are measured.
  • The limitations of GDP and GNP.
  • The importance of GDP and GNP in a country's economic growth.
  • How output production generates income through different sectors of the economy.

Introduction

• The Philippine economy experienced its deepest contraction on record in the second quarter of 2020, revised downwards with a forecast of 16.5% shrinkage compared to the previous year.
• This was due to strict lockdowns and the coronavirus pandemic.
• The median forecast in a Bloomberg survey of economists predicted a 9.4% contraction.
• The country's economic managers now project a 5.5% decline in 2020, down from earlier estimates of 2% to 3.4%.
• A rebound is expected in the following year.

Lesson 1: GDP - The Measure of National Output

• Gross Domestic Product (GDP) is a comprehensive measure of national output and income.
• GDP equals total expenditures for all final goods and services produced within a country during a specific period.
• The Philippines is the 36th largest economy globally (nominal GDP, 2019 estimate).
• It is the 13th largest in Asia and 3rd largest in ASEAN (after Indonesia and Thailand).
• The Philippines was the sixth-richest in Southeast Asia by GDP per capita (2019), ahead of countries like Thailand.
• The Philippine economy is primarily a newly industrialized country, transitioning from agriculture to services and manufacturing.
• GDP by purchasing power parity (PPP) was estimated at $1.980 trillion in 2017.

Measuring Current GDP

• Measuring GDP involves multiplying the quantity of each good by its price and summing the results.
• Due to the large amount of goods and services produced, scientific sampling is used to estimate the quantities and prices of individual goods.
• GDP figures are usually estimated quarterly, revised subsequently, and thus take several months to be finalised.

Some Things Excluded from GDP

• GDP measures final goods and excludes intermediate products, which have already been counted in an earlier stage of production.
• Replacement product purchases are included (e.g., tires for a vehicle) but intermediate items (parts to create a new product) are excluded.
• Secondly, secondhand sales are excluded, as no new production takes place.
• Non-market transactions, such as home repairs or gardening, aren't included unless done for pay in the market.
• Transactions in the underground economy are also excluded as they are not reported for tax purposes.

Lesson 2: GNP - The Measure of National Income

• Gross National Product (GNP) measures income from all Filipinos, regardless of where the goods or services are produced (domestically or abroad).
• GNP subtracts payments to foreign-owned businesses and adds payments made by Filipinos residing outside of the Philippines (like OFWs).
• GNP provides a more comprehensive measure of national income.

Income Approach (Lesson 2) and Expenditure Approach

• GDP can be measured using three approaches: Expenditure, Income, and Industrial Origin.

• The expenditure approach sums expenditures of four key sectors:

  • Personal Consumption.
  • Gross Private Domestic Investment.
  • Government Spending.
  • Net Exports (Exports - Imports).

• The income approach focuses on total income and includes:

  • Rent.
  • Interest.
  • Wages and Salaries.
  • Profits or Proprietors' Income.
  • Indirect Business Taxes.
  • Capital Consumption Allowance.

Lesson 3: Economic Sectors and Circular Flows

• The output of an economy generates income which flows through different sectors.
• The three main sectors are the household, business and government sectors.
• Income generated by production flows to different sectors and is used to purchase the national output, creating a circular flow.

Lesson 4: The Output-Expenditure Model

• GDP is the sum of aggregate demand—demand by consumers, investment, government, and the foreign sector. Mathematically, it can be represented as: GDP = C + I + G + (X – M)
• The model is used to understand and analyze overall economic performance.

Lesson 5: Reasons for Income Inequality

• Factors contributing to income inequality include:
  • Education levels (e.g., a college degree is associated with higher income).
  • Wealth distribution (wealthier families often have more opportunities for education and economic mobility). -Tax law changes (reductions in higher tax brackets compared to lower ones, can increase inequality).
  • Structural changes (Shift from goods-producing industry to service-producing industries, which tend to offer lower-paying jobs).
  • Monopoly power (influence of unions and other organizations in limiting supply).
  • Economic discrimination (discrimination based on gender, ethnicity, or other characteristics can lower income opportunities.
  • Changing family structures (decreased influence of two-parent families compared to single-parent households leads to lower potential family income).

Task and Activities

• The document lists questions relating to the concepts learned in those lessons but does not provide the answers.

References

• Provides a list of books and articles that could be used for further reading.