Macroeconomics: Business Cycles

• Macroeconomics studies the behavior of an overall economy, encompassing markets, businesses, consumers, and governments.

Business Cycle

• Fluctuating levels of economic activity in an economy over a period from one recession to the next
• Represents the overall rise and fall of economic activity, including production, employment, spending, and income.

Business Cycle Stages

• Expansion involves increasing economic activity, higher employment, and rising GDP.
• Peak represents the highest point of economic activity before a downturn, leading to inflation, scarce resources, and business struggles.
• Contraction (Recession) involves decreasing economic activity, rising unemployment, and declining GDP due to decreased demand.
• Trough signifies the lowest point of economic activity, signaling the end of a contraction.
• Recovery begins as the economy starts growing again after a trough.

Prosperity Phase/Expansion

• Characterized by expansion of output, income, employment, prices, profits, and a rise in the standard of living
• High level of output and trade
• Effective demand and high level of income and employment
• Rising interest rates and inflation
• Large expansion of bank credit and overall business optimism
• High level of MEC (Marginal efficiency of capital) and investment

Recession Phase

• Economic activities slow down
• Overproduction and future investment plans are abandoned as demand falls
• Steady decline in output, income, employment, prices, and profits
• Businessmen lose confidence and become pessimistic, reducing investment
• Banks and people seek greater liquidity, contracting credit and halting business expansion
• Stock market falls as orders are cancelled and people lose jobs
• Increased unemployment leads to a sharp decline in income and aggregate demand

Depression Phase

• Continuous decrease in output, income, employment, prices, and profits, results in a fall in the standard of living
• Fall in volume of output and trade
• Fall in income and rise in unemployment
• Decline in consumption and demand

Recovery Phase

• Transition from depression to expansion
• Expansions and a rise in economic activities when demand starts rising and affects investment
• Steady rise in output, income, employment, prices and profits

Circular Flow Model

• Illustrates how money moves through society, from producers to workers as wages and back to producers as payment for products

Circular Flow of Income and Expenditure

• Refers to the unending flow of production of goods and services, income, and expenditure in an economy

Circular flow sectors

• Households spend money on goods/services and provide labor, land, and capital
• Businesses produce goods/services using resources from households, then sell to consumers
• Banking and Finance manage savings/investments, and provide loans between sectors.
• Government collects taxes and spends on public services, supporting the economy
• Foreign Sector imports goods from abroad and exports domestically produced goods

Measures of a nation's economic output

• Gross Domestic Product (GDP): Total value of all goods and services produced within a country's borders in a specific time period
• GDP per capita: The average GDP per person in a country.
• Gross National Product (GNP): Measures the total value of goods and services produced by a country's residents (including overseas income earned by citizens working abroad).
• Net National Product (NNP): GNP minus depreciation (loss of value in capital goods over time), reflects sustainable output.
• National Income (NI): Total income earned by a country's residents from production, including wages, profits, rents, and interest.

Gross Domestic Product (GDP): How Measured

• Consumer spending, government spending, business investments and inventory changes

Purpose of tracking GDP

• Measuring Economic Growth
• Indicates whether the economy is producing more, with increased spending and growing businesses
• Shrinking GDP may signal a slowdown or recession.
• For Setting Economic Policies
• Governments and central banks use GDP data to decide on interest rates, taxes, and government spending.

Types of GDP

• Nominal GDP measures GDP using current market prices and includes inflation
• Real GDP measures GDP using constant prices (adjusted for inflation)

Microeconomics vs Macroeconomics

• Microeconomics studies individual income, demand and supply of labor, and decisions of households and firms along with individual prices and goods
• Macroeconomics studies national income, total employment, aggregate decisions, the overall price level, and aggregate supply/demand

Indicators of Economic Activity

• Six key indicators include Real Gross Domestic Product (GDP),Unemployment Rate, Inflation Rate, Interest Rate, Stock Market Level and Exchange Rate

Real Gross Domestic Product (GDP)

• Measures the total value of goods and services produced in a country, adjusted for inflation, showing overall economic health

Indicators - Unemployment Rate

• Percentage of people actively looking for work but unable to find a job, indicating labor market strength

Indicators - Inflation Rate

• The rate at which prices of goods and services increase over time, affecting purchasing power

Indicators - Interest Rate

• Cost of borrowing money or the return on savings, influencing spending and investment

Indicators - Stock Market Level:

• Reflects investor confidence and future economic expectations through stock prices

Indicators - Exchange Rate

• Value of a country's currency compared to others, affecting trade and capital flows

Real GDP

• Nominal GDP is the total value of production using current market prices
• Real GDP is the total value of production using market prices from a specific base year to adjust for changes in price levels.

Formula: Real GDP:

• Real GDP = Nominal GDP ÷ Price Index

Components of Real GDP Measure

• "Domestic" includes activity within the country
• "Product" measures the production of final goods and services

Real GDP measurement Includes

• Consumption goods (things people buy and use) and investment goods
• Government purchases

Real GDP

• Measure per person shows how well the economy provides useful goods and services wihout realting to wealth distribution.
• "Real" corrects for changes in the overall level of prices
• "Gross" includes replacement of equipment and structures and new investment

Producing Sectors of an Economy

• To determine the output of the economy, classification divides into three sectors
• Primary includes: Agriculture,Mining and quarrying,Fishing and Animal Husbandry
• Secondary: Manufacturing and Construction
• Tertiary: Trade,Hotels and restaurants,Banking, insurance, and finance

Flow of Goods between countries

• Exports are goods and services produced domestically and sold abroad
• Imports are goods and services produced abroad and sold domestically
• The 'Net exports (NX)' are the value of a nation's exports minus the value of its imports

Definitions

• 'Export' is the sale of goods and services to foreign countries
• 'Import' is the purchase of goods and services from foreign countries
• 'Net Export = Export – Import'
• 'Net factor income' includes Net factor income from Abroad = factor income received from abroad – factor income paid to abroad.

Taxes

• Taxes include: Direct Taxes on income and capital, Indirect taxes on goods and services
• 'Subsidies' are: Economic grants to cover losses when the cost of production is more than market prices
• 'Net Indirect Tax' is: Indirect Tax – Subsidies
• Transfer payments occur without contribution to production (for example: Unemployment benefits

Concepts of National Income

• 'Gross National Product (GNP)' Market value of all final goods/services produced by domestically owned factors in a country in that year.
• 'Net National Product (NNP)' NNP = GNP minus depreciation of capital stock.
• 'NNP at factor cost' NNP at market price minus Indirect Business Tax minus Non-tax liabilities

Gross Domestic Product (GDP)

• GDP is: The sum total of values of all goods and services produced within the geographical boundary of the country without adding factor income from abroad.
• 'Distinction' is the difference between Gross National Product and Gross Domestic Product (ex: all income earned by Country aboard)

Types of Economy

• 'Open Economy' -Foreign trade (imports and exports).
• 'Closed Economy' No foreign trade.

Methods of National Income

• Production Method involves: Calculating the total value of output produced in the economy.
• Income Method involves: Adding up all the incomes earned by individuals and businesses, including wages, rent, interest, and profit
• Expenditure Method involves: Calculating the total expenditure incurred by households, businesses, and the government
• National Income Formula = C + I + G + (X – M), C = Consumption expenditure etc
• Macroeconomics is a branch of economics popularized by J.M. Keynes that deals with large-scale economic phenomena, particularly inflation, unemployment, and economic growth, also called "Income & Employment Theory."
• Macroeconomic concerns include aggregate price level, aggregate output, total employment and the relationship of its economy to the rest of the world

National Income Accounting

• Gross National Product (GNP) measures 'the total value of goods/services produced and is: Measured by the value of goods/services sold to final users

Value Added

• Net contribution to the final value of a product at each stage of production
• Value Added Formula = Value of Sales + Additions to Inventory - Cost of Intermediate Goods & Services Three Approaches to GNP Computation:
• Final Expenditure Approach – add all the money spent on final goods and services (consumption, investment, government spending, and net exports).
• Factor Income Approach – add all the income earned by people and businesses (wages, profits, rents, and interest).
• Industrial Origin Approach – Adds up the value produced by each industry (agriculture, manufacturing, services, etc.).

The Final Expenditure Approach Includes

• GNP as the sum of all final sales to end-users, categorized as private consumption expenditures (C), and government consumption (G)
• Formula: GNP = C + G + I + (X - M)

Consumption & Investment

• Consumption is the final expenditure of all private households.(examples: Food, shelter, light, personal services, entertainment)
• Investment - Definition: Increasing the economy's stock of capital (means of production)/ Equipment, machinery, improvements on land and other productive assets

Components of Gross Investment

• Construction includes: Roads, buildings, ports, harbors, and other facilities
• Durable Capital Equipment.Expansion of plants, machinery, and durable acquisitions.
• Wear and tear of capital goods.

Factor Income Approach (GNP from Factor Incomes)

• National Income at Factor Costs (NI) is the Sum of all payments received by the owners of productive services.(NI = Wages + Rental + Interest +Profits)

GNP Calculation formula

• GNP = NI + Indirect Taxes + Depreciation
• Key Terms: 'Indirect Taxes' are taxes paid on goods/services by businesses(Examples: Import/export taxes, sales taxes, business licenses) _ 'Subsidies' are: Grants made by public agencies to producers/consumers. Net National Product (NNP) = GNP - Depreciation
• Gross Domestic Product (GDP)=GNP - Net Factor Incomes from Abroad
• National Domestic Product (NDP) - Formula: NDP = GDP - Depreciation OR NDP = NNP - Net Factor Incomes from Abroad

Industrial Origin Approach

• Is The value added in different economic industries/sectors
• Formula: Sum of all Gross Value Added (GVA) + Indirect Taxes/ Subtracting indirect taxes and depreciation

National Income Accounts and Comparison

• Real GNP = Current Price GNP / Price Deflator

Comparison over countries

• Factors affecting immediate comparisons are
• Currencies
• Population and GNP + Population Formula
• Prices relative demand
• Purchasing Power Parity (PPP): PPP = (Price of Rice in Philippine Pesos) / (Price of Rice in US Dollars)
• 6 Key Indicators of economic activity are: Real Gross Domestic Product,Unemployment rate, Inflation rate, interest rate,stock market

Macroeconomics

• Macroeconomics: Consumption, Savings, and Investment
• Consumption: Total value of goods and services purchased by households
• Consumption Function: Relationship between consumption and economic variables C = Co + C1Y
• Factors Affecting Consumption:1. Level of income – More income

Investment and Saving

• Is saving on the economy if income is not spent on consumption and the purchase of new plant, equipment, residential structures, and inventory

Unemployment and Inflation

• Employment means - What is the population that is employed
• Labor force total number of people of the economy who are either employed or unemployed
• There is unemployment - Situation wherein people in the labor force are unemployed but at actively looking for work.

Types of Unemployment

• Frictional means: due to job changes/ Structural: Skills mismatch with available jobs Causes of Unemployment
• Cyclical: Due to economic downturns

Unemployment

• Measures to Address is agricultural programs, industrialization, education, infrastructure, labor policies Classification of employment status includes: family members/ those on temporary layoff/ do not want paid or are unable to work

Definition of Inflation

• Sustained rise in price levels when prices grow too much quickly
• Hyperinflation: Extremely rapid price increases Effect: Money becomes worthless
• Stagflation: High inflation + low growth
• Deflation: Falling prices

Inflation vs. Deflation

• Occur together

Types of Economy

• 'Inflation' occurs when quick goods create drop in availability
• 'Deflation' occurs when many goods are available with not enough money
• Two Common Measures Inflation. Consumer Price, GNP

Causes of Inflation

• Aggregate demand
• Aggregate supply
• Expectation of inflation.
• Supply contactions
• Cost of production increase
• Money supply rises
• Structural Limitations
• Distortion of price

Effects of Inflation

• Economic Effects such as unstable prices and workers and firms change
• Other effects include social and political consequences, because there is bad reputation political leaderships

Inflation Measures

• Monetarism and Market Solutions
• Demand Management (Fine-Tuning)
• Managing Aggregate Supply(Income Policies) Exchange Rate measures in two ways:
• Nominal exchange rate - Current units of foreign currency per current dollar Real exchange rate
• Monetary/ Fiscal Policy are used to control money supply.

The Philippine Financial System:

• Composed of all institutions and the banking system.
• Banking institutions a. Commercial banks/ Thrift banks/ Rural banks/ Specialized banks (DBP, LBP, Phil. Amanah Bank))

Nonbank financial institutions

• Investment houses/ Finance Companies/ Investment Companies/ Securities dealers/brokers/ Pawnshops

Fiscal System and Public Finance

• Fiscal System collective term for the combined operations of public expenditure, taxation and debt.
• Public Finance is.Government spending, Tax, Borrowing

Budget

• Two aspects for maintenance of expenses. Provide for agencies

Potential Output

• Potential output (GNP) is: Level of output can produce in a given year
• 3.5 MΟΝΕY AND BANKING/ 'Money' Asset that serves payments money is
• 1.Barter 2. money 3. currency 4. Managed currency

Functions of money

• Money as unit of value serve to accounting
• Money transaction for trade
• Money debts standard

Money supply

• Factors that are taken into account by the monetary authority such as of GNP's growth

Calssification

• Money general use circulation cash of coins or currency
• Demand Deposit
• General purpose money
• Broad money

Philippino Money

• M1 Cash and deposits used spent
• M1 cash and deposits near money
• Physical money the public

Money (Deposit)

• Easy or directly withdraw the money or banks

Theories of money demand

• Transaction money
• For firms in transaction

Velocity and money

Income transition.

• Money velocity turns over or uses

Fait Money

• Declared by the goverment is legal tender
• State issue not convertible fix

Chartalism

Currency to tax laibable

• Commercial bank accepts lender to borrower
• Function is Section 31 or banking act
• 1/deposits 2/ business commercial accept 3/ sell exchange
• Deposits is money or issued checks

Trust Fund

Money assets, managing condition.

• Goals of separated properties
• Reasons of trust
• -Reduce estate taxes
• -Supervision them

Policy Types

• Monetary policy
• Has the credit and controls of nation
• Affects the GDP.
• Banking has loans and bank accounts