Macroeconomics and Gross National Product (GNP)

• Macroeconomics is a branch of economics dealing with large scale economic phenomena like inflation, unemployment, and economic growth.
• Macroeconomics is also known as "Income & Employment Theory".
• Macroeconomics looks at:
• Aggregate price level
• Aggregate output
• Total employment
• The relationship between the domestic economy and the rest of the world

Gross National Product (GNP)

• GNP is the total value of goods and services produced.
• GNP is measured by the value of goods/services sold to final users plus the amount businesses add to their inventories.
• Value added is the net contribution to the final value of a product at each stage of production.
• Value added is calculated by subtracting the cost of intermediate goods/services purchased from the value of sales plus additions to inventory.
• There are 3 approaches to GNP computations:
• The Final Expenditure Approach
• The Factor Income Approach
• The Industrial Origin Approach

Final Expenditure Approach

• GNP is the sum of all final sales to end-users.
• Final sales classifications:
• Private consumption expenditures (C)
• Government consumption (G)
• Gross domestic investment (I)
• Sum of gross domestic investment (Ip)
• Public gross investment (Ig)
• Net foreign investment or (X-M), where X represents exports and M represents imports
• GNP in symbols: GNP = C + G + I + (X-M)

Consumption

• Consumption is the final expenditure of all private households during the period.
• Examples of consumption include food, shelter, light, personal services, entertainment, etc.

Investment (Capital Formation)

• Investment is the act of increasing the economy's stock of capital, meaning its stock of means of production made by people.

Capital

• Capital is defined as equipment, machinery, improvements on land, and other man-made productive means.

Components of Gross Investment

• Construction involves the construction of roads, buildings, ports, and harbor facilities applicable to individuals, corporations, and government agencies.
• Durable capital equipment involves the expansion of plant equipment, machinery, and other acquisitions of durable equipment.
• Depreciation (also known as capital consumption allowance) accounts for the wear and tear of capital during the year.
• Inventory change refers to change in inventory, which may increase, decrease, or stay the same.
• Inventory includes finished commodities or raw materials kept or held at any given time by any production unit.

GNP Derived from Factor Incomes/Factor Income Approach

• National Income at Factor Costs (NI) is the sum of all factor payments received by the owners of productive services.
• NI = wages and salaries (W) + rental payments (R) + interest payments (I) + profits (P)
• United Nations' suggested components of NI include:
• Compensation of employees
• Income from unincorporated enterprises
• Income from property
• Private corporate income
• Proprietary and corporate income of government
• GNP = NI + IBT + D

Indirect Taxes

• Indirect taxes are taxes paid by businesses on goods/services that are chargeable to business expenses and on the possession and use of goods/services by households.
• Examples include import/export, domestic sales, local, entertainment, business licenses, stamp, and motor vehicle taxes.
• Subsidies are current grants made by public agencies to producers and consumers.
• Net National Product (NNP) = GNP minus depreciation.
• Gross Domestic Product (GDP) is GNP, excluding net factor earnings from abroad.
• GDP = GNP – net factor incomes received from abroad
• National Domestic Product (NDP) = GDP – D = NNP - net factor incomes from abroad

The Industrial Origin Approach

• The value added originates in various industries/sectors into which the economy is divided and arranges all the data by industry.
• GNP = sum of all gross value added (GVA) of all sectors + indirect business taxes (IBT)
• GNP = sum of all net value added (NVA) of all sectors + IBT + D
• NNP = GNP – D

National Income Accounts

• National Income Data is compared over time in a given country, once there are observed year-to-year changes, appropriate deflating procedures have to be applied to arrive at the national income level
• Real GNP = current price GNP
• Factors that prevent immediate comparison between countries:
• Currencies
• Population
• Prices
• Estimation techniques
• Performance of various economies
• Per capita GNP = GNP/Population
• Per capita GNP is often used as a measurement of welfare and as a basis for classifying poor and rich countries.
• Purchasing power parity = (Price of rice in Phil pesos) / (Price of rice in US dollars)
• The estimation of some segments of GNP accounts may differ by country, depending on the nature of available primary statistics.
• If the statistical basis for estimation is poor, adjustments have to be made for practical reasons.

What is Macroeconomics

• Macroeconomics studies the behavior of an overall economy, encompassing markets, businesses, consumers, and governments.
• Macroeconomics examines economy-wide phenomena such as inflation, price levels, the rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.

Business Cycle

• The business cycle consists of fluctuating levels of economic activity in an economy over a period of time measured from one recession to the next.
• The business cycle represents the rise and fall of economic activity in a country, including production, employment, spending, and income.
• Recession is a period when the economy slows down, leading to businesses making less money, job losses, and decreased spending.
• Expansion denotes increasing economic activity, higher employment, and rising GDP.
• Peak refers to the highest point of economic activity before a downturn.
• Contraction (Recession) denotes decreasing economic activity, rising unemployment, and declining GDP.
• Trough defines the lowest point of economic activity, signaling the end of a contraction.
• Recovery refers to the stage where the economy starts growing again after a trough.

The Circular Flow Model

• The circular flow model demonstrates how money moves through society.
• Money flows from producers to workers as wages and back to producers as payment for products, showing an endless circular flow of money.
• The circular flow explains how money, goods, and services move between households, businesses, and the government.
• The continuous exchange of resources and payments in the economy is what it is about.
• The business cycle illustrates how the overall level of economic activity expands and contracts over time.
• The circular flow means the unending flow of production of goods/services, income, and expenditure in an economy.
• Money flows from producers to workers as wages and back to producers as payment for products.
• Businesses produce goods and services and need workers to produce them.
• Workers provide their labor to businesses in exchange for wages and can use those wages to buy goods/services from producers.
• Producers pay workers wages for their labor from businesses to households
• Workers spend their wages to buy goods/services from businesses from households to businesses.

Circular Flow Model Sectors

• There are 5 sectors in the Circular Flow Model:
• Households spend money on goods and services and provide labor, land, and capital to businesses.
• Businesses produce goods and services using resources from households, then sell to consumers.
• Banking & Finance manages savings and investments and provides loans between sectors.
• Government collects taxes and spends on public services, supporting the economy.
• Foreign Sector imports goods and exports domestically produced goods to other countries.

Consumption

• Consumption is the total value of goods and services purchased by households.
• The consumption function defines the relationship between consumption and those economic variables that determine the decision to consume.
• Households generally spend more on consumption goods when they have higher incomes (C = Co + C1 Y)
• Co = a positive constant; the intercept represents the amount of consumption when income (Y) is zero.
• C1 = the marginal propensity to consume; slope of the line.
• Average propensity to consume (APC) is the fraction of income that households spend on consumption, expressed as a ratio C/Y.
• Factors affecting the level of aggregate consumption:
• Level of income
• Level of interest rate
• Increase in the level of employment
• Level of output in the economy
• Price level
• Exchange rate movement
• Foreign trade

Investment and Saving

• Saving is the part of income that is not used for consumption.
• Investment is gross private domestic investment and is the total of new plant and equipment, non-residential structures, residential structures and inventory accumulation purchased in a given period.
• Inventory accumulation is the change in business inventory in a given period.
• Saving is defined as income less consumption
• S=Y-C
• Y = C + I, which implies Y – C = I = S
• Marginal Propensity to Consume (MPC) is the proportion of each added dollar of real disposable income that households devote to real consumption and measures the dollar change in consumption for a $1 change in income.
• Aggregate output = Y = C + I but Y = C + S then, C + I = C + S & S = I
• The multiplier is the ratio of the change in the equilibrium level of output to a change in some autonomous variable.
• An autonomous variable is assumed not to depend on the state of the economy that is taken as given.
• Investment multiplier = 1/MPS, that is ∆Υ = ΔΙx 1/MPS =∆Ι/1-MPC
• The national income accountants' framework in this economy is Y = C + Ir', where C = consumption and Ir' = net realized investment.
• Realized investment means the net investment regardless of whether it is intentional or unintentional.

Unemployment, Employment, and Inflation

• Employment is the population that is employed.
• The labor force is the total number of people in the economy who are either employed or unemployed.
• Unemployment is a situation wherein people in the labor force are unemployed but actively looking for work.
• The unemployment rate is the percentage of people in the labor force who are unemployed.

Types of Unemployment

• Frictional unemployment is due to the normal workings of an economy.
• Workers quit to find better jobs
• Employers fire workers and look for better ones to replace them
• Consumers change the goods they buy, thereby reducing jobs previously available
• Technological progress makes the skills of some workers obsolete
• Structural unemployment is accounted for by people who are out of work for long periods because their skills do not match those required for available jobs.
• Changes in the geographical or industrial structure of the economy
• Cyclical unemployment arises from the downturns of the business cycle.
• When economists say the economy is at full employment, they mean that there is no cyclical unemployment.

Employment Status

• Family members have jobs or are actively looking for work.
• Those who are on temporary layoff from a job, do not want to take paid employment, or are sick/unable to work.

Causes of Unemployment

• Quitting jobs to look for better ones or discontent with salary/benefits.
• Company retrenchment/closure, co-terminus work status, or project-based employment.
• Not wanting to take paid employment, incapacitation, under/over qualification, or no vacancy.

Effects of Unemployment

• Poverty as a consequence of unemployment for many workers.
• High human toll on the unemployed.
• Lower aggregate output or real GNP that is less than the economy's potential.

Measures to Address Unemployment

• Rural agricultural mobilization, promotion of industrialization/expansion of exports, labor policies, education, and efficient resource allocation.
• Improving the political environment, institutional reforms, and infrastructure improvements.

Inflation

• Inflation is sustained increases in the price level as measured by a price index, an ongoing increase in the price level/overall prices.
• Hyperinflation is a period of very rapid increases in the overall price level.
• Stagflation is a period of low economic growth and abnormally high inflation.
• Deflation is a decrease in the general price level.
• The most common measures of inflation:
• The Consumer Price Index (CPI) tracks the prices of purchases made by typical households in a given year relative to those prices in a base year.
• The Implicit price deflator for GNP is the price level for all GNP and is computed as the ratio of nominal to real GNP.

Causes of Inflation

• Aggregate demand: Continuing increases in aggregate demand with a fixed aggregate supply.
• Aggregate supply: A rise in the cost of goods and services.
• Expectation of inflation: Upward shifts in aggregate supply even with no increase in aggregate demand.
• Sudden contractions of the supply of specific commodities/shocks to aggregate supply.
• Increase in the cost of production (cost-push or supply side inflation).
• Increase in money supply leads to sustained inflation or hyperinflation.
• Structural limitations are the inability of some industries/sectors to adjust to changes in demand.
• Distortion of the price system caused by price support policies.

Economic Effects of Inflation

• Living standards grew very slowly or declined in some years.
• Unstable prices leading to unemployment.
• Workers and firms change the conditions under which they are willing to supply output
• Shifts in price-setting and wage-setting behavior.
• Aggregate supply schedule keep rising overtime
• Higher costs with no off-setting increases in output.
• It provides a bad reputation to existing political leadership

Depreciation

• Depreciation (of a currency) is a decline in the value of a country's currency relative to another.
• Dollar, where a given sum of money will buy the same market basket of goods/services when converted from one currency to another at prevailing exchange rates.
• Nominal exchange rate is the exchange rate expressed in terms of current units of foreign currency per current dollar.
• The real exchange rate is the nominal exchange rate adjusted for changes in the price levels of both countries relative to a chosen base year.

Monetary Policy

• Manipulation of interest rates and credit conditions by a nation's central bank has a powerful influence on the economy.
• Monetary policy works when the central bank reduces interest rates and increases the availability of credit.
• As a result, business investment and other types of spending increase, causing GDP and employment to grow.

Fiscal Policy

• The use of government spending and taxation to influence the economy.
• Governments use fiscal policy to promote strong/sustainable growth and reduce poverty.
• Money, loans, and banks are all interconnected.
• Money is deposited in bank accounts, which is then loaned to businesses, individuals, and other banks.
• When the interlocking system of money, loans, and banks works well, economic transactions smoothly occur.
• Should the money and banking system fail, the economy can fall into recession or suffer prolonged inflation.
• The government of every country has public policies to support the system of money, loans, and banking.
• However, these policies do not always work perfectly.
• A safe and stable national financial system is a critical concern of the Central Bank of every country.
• The goal is to protect the integrity of the financial system itself and individuals' savings.
• Bank regulation maintains banks' solvency by avoiding excessive risk.
• Regulation falls into different categories, including reserve requirements, capital requirements, and restrictions on the types of investments banks may make.
• Reserve requirements are a portion of bank reserves held as cash (mostly in the bank's account) to cover desired withdrawals by depositors.
• Regulation mandates that banks maintain a minimum net worth, usually expressed as a percentage of their assets, to protect their depositors and other creditors
• A bank must maintain a positive net worth

Bank Restrictions

• banks are permitted to make loans to businesses, individuals, and other banks,
• Banks can purchase securities but are not permitted to invest in the stock market or other assets deemed too risky to protect depositors.
• Government agencies monitor banks' balance sheets to ensure they have a positive net worth.
• Bank supervision can run into both practical and political questions.
• Depositors racing to the bank to withdraw their deposits – “Bank run” and whoever withdrew their deposits first received all of their money, and those who did not rush to the bank quickly enough, lost their money

Deposit Insurance

• Deposit insurance is an insurance system that ensures depositors in a bank do not lose their money, even if the bank goes bankrupt, and the Philippines has the Philippines Deposit Insurance Corporation (PDIC)
• Banks pay an insurance premium to the PDIC, based on the bank's level of deposits, then adjusted according to the riskiness of a bank's financial situation.

Lender of Last Resort

• Central Banks stands ready to lend to banks and other financial institutions when they cannot obtain funds from anywhere else.
• Lending of last resort tasks can arise in other financial crises as well.

Crowding Out

• Crowding out is a phenomenon that occurs when increased government involvement in a sector of the market economy affects the remainder of the market, either on the supply or demand side. it refers to the negative impact that government spending can have on private investment.
• The theory suggests that when the government increases its spending, it will increase the demand for goods/services, which can lead to higher interest rates and inflation.
• The crowding-out effect describes how increased government spending can lead to a reduction in private sector investment.
• Occurs when government borrowing drives up interest rates, making it more expensive for businesses and individuals to borrow money.

Government Spending

• Higher Demand for Loans: The government's borrowing increases the demand for funds in the financial markets.
• Rising Interest Rates- To attract investors to buy its bonds, the government might offer higher interest rates which pushes up overall interest rates in the economy.
• Reduced Private Investment- Higher interest rates make borrowing more expensive for businesses and individuals
• While government spending might boost demand in the short term, the reduction in private investment can hinder long-term economic growth.
• Direct Crowding Out - Government provides services/goods that replace those that could be provided by the private sector. occurs when
• Indirect (Financial) Crowding Out happens when government borrowing leads to higher interest rates, discouraging private investment.
• Government spending covers a range of services that the national and local governments provide.
• Budget deficit - Government spends more money than it receives in taxes in a given year.
• Budget surplus - Government receives more money in taxes than it spends in a year.
• Balanced budget - Government spending and taxes are equal.
• In 2025, the national budget initially amounting to PhP6. 352 trillion was reduced to PhP6. 326 trillion following the veto.