Measuring Economy: GNP & GDP

• Macroeconomics studies the economy on a large scale.
• Examines inflation, unemployment, and economic growth.
• It is sometimes called "Income & Employment Theory."
• Focuses on aggregate price level, output, employment, and international interactions.

Measuring Economy: GNP & GDP

• Gross National Product (GNP) represents the total value of goods and services produced by a country.
• This includes all sold items plus business inventory.
• GNP can be calculated using the final expenditure approach, factor income approach, and industrial origin approach.

Final Expenditure Approach

• This adds up spending on goods and services.
• The formula is GNP = C + G + I + (X-M)
• C = Private consumption (food, shelter, entertainment)
• G = Government spending (roads, schools, military)
• I = Investment (businesses buying equipment)
• (X-M) = Exports (X) minus Imports (M)

Factor Income Approach

• This approach totals the income earned from jobs, rent, and businesses.
• The formula is GNP = Wages (W) + Rent (R) + Interest (I) + Profits (P)

Industrial Origin Approach

• This method sums the value added by each industry.
• The formula is GNP = Sum of Gross Value Added (GVA) + Indirect Business Taxes (IBT) + Depreciation (D)

GNP vs. GDP

• GNP counts everything produced by a country's citizens, even abroad.
• Gross Domestic Product (GDP) only counts what is made inside the country.
• GDP = GNP - Net Factor Income from Abroad

Components of Investment

• Investment is spending on items that help make more products like factories, machines, and buildings.
• Types of investment include: construction, durable capital equipment, depreciation, and inventory change.
• Construction includes roads, buildings, and ports.
• Durable capital equipment includes machines and factory tools.
• Depreciation accounts for the wear and tear of machines and equipment.
• Inventory change refers to the addition or removal of items from storage by businesses.

Business Cycle

• The economy goes through cycles of growth instead of growing at a steady rate.
• Expansion stage: the economy is growing, businesses thrive, and jobs increase.
• Peak: the economy is at its highest point, but prices are rising rapidly (inflation).
• Contraction (Recession): businesses slow down, people lose jobs, and spending decreases.
• Trough: the economy hits rock bottom.
• Recovery: the economy begins to improve again.

Circular Flow Model

• Money flows continuously between different groups.
• Five sectors of the economy: households, businesses, banking & finance, government, and foreign sector.
• Households are people who work and spend money on goods and services.
• Businesses produce goods and pay workers.
• Banking & Finance manages savings and gives loans.
• Government collects taxes and spends on public services.
• Foreign Sector trades with other countries.

Savings and Investment

• People use their income for consumption, saving, and investment.
• Consumption includes spending on food, rent, entertainment, etc.
• Saving is keeping money for the future.
• Investment involves using money to create more wealth.
• Savings (S) = Income (Y) – Consumption (C)
• Investment Multiplier = 1 / MPS
• MPS (Marginal Propensity to Save) measures how much of each extra dollar people save.

Unemployment

• Unemployment is when people want to work but cannot find jobs.
• Types of unemployment include: frictional, structural, and cyclical.
• Frictional Unemployment: People change jobs.
• Structural Unemployment: People don't have the right skills for available jobs.
• Cyclical Unemployment: This occurs when the economy slows down.

Inflation

• Inflation is when prices rise over time.
• Deflation occurs when prices drop, which can be bad because people stop spending.
• Hyperinflation involves very rapid price increases.
• Causes of inflation: too much demand, higher production costs, and too much money in circulation.

Exchange Rates & Currency Value

• Exchange Rate: The price of one currency compared to another.
• Depreciation: When a currency loses value.
• Purchasing Power Parity (PPP): Money should buy the same goods in different countries.
• The peso loses value 7% faster than the dollar, if inflation in the Philippines is 10% and in the U.S. is 3%.

Monetary & Fiscal Policy

• Monetary Policy: Managed by the Central Bank using money and interest rates to control inflation and economic growth.
• Lower interest rates = More borrowing and spending.
• Higher interest rates = Less borrowing and slower inflation.
• Fiscal Policy: Government influences the economy through taxes and spending.
• Budget Deficit: Government spends more than it earns.
• Budget Surplus: Government earns more than it spends.

Banking System & Regulations

• People deposit money in banks, and banks give loans to businesses and individuals.
• Problems banks face: Bank Runs and finding enough liquidity.
• Bank Runs: When everyone withdraws their money at once, causing the bank to fail.
• Deposit Insurance: Protects people's money if a bank goes bankrupt (e.g., PDIC).

Crowding Out

• Crowding out happens when government borrows too much money, raising interest rates.
• Businesses find it harder to borrow money, reducing private investment.

Government Budget & Spending

• Key points about the 2025 Philippine Budget:
• Originally P6.352 trillion
• Reduced to P6.326 trillion
• Vetoed (removed) P194 billion that didn't match government priorities.