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AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics LEARNING OUTCOMES 1. Differentiate the approaches to GNP computations...

AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics LEARNING OUTCOMES 1. Differentiate the approaches to GNP computations 2. Describe the important measures of aggregate performance of the economy. 3. Discuss the economic cost of unemployment and inflation OVERVIEW OF THE MODULE This learning module will introduce you to the topics on National Income Account such as Approaches to GNP Computations and National Income Accounts; Consumption, Savings and Investment such as The Consumption Function, Factors Affecting the level of Aggregate Consumption CONTENT The general goal of the economy is to promote the economic well-being of the people. The provision of goods and services is of primary importance. National income (national product) – measure of the money value of the total flow of goods and services produced in an economy over a specified period of time. National income consists of the following: 1. Wage or salary – those generated by labor 2. Interest – those generated by lenders of funds 3. Rent – those generated by owners of real estate 4. Profit – those generated by the entrepreneurs 5. Net factor – income from abroad Gross Domestic Product – measure of the total flow of goods and services produced by the economy over a particular time period. GDP - Production within the Philippines by Philippine Nationals and by Foreign Nationals Gross National Product – measure the market value of the final goods and services produced by nationals or citizens of a country in a particular time period. This includes production within and outside of the country under consideration. GNP – Production within and outside the Philippines by Philippine Nationals The following nonproductive transactions must be excluded: Non productive transactions consist of the following: 1. Purely financial transactions, and 2. Secondhand sales – do not involve current production. Example: appliance that was bought last year, that transaction was included in last year’s computation of the GNP. Purely financial transactions include: 1. Public transfer payments – given by the government to individuals or households but which do not contribute to current production in return for them. Examples: old-age pensions, welfare payments, widows’ pensions 2. Private transfer payments – transfer of funds from one private individual to another and which does not entail production. Examples: gift checks from friends and relatives 3. Buying and selling securities – does not directly involve current production. Market Value – refers to the current price of goods and services produced in the economy. For instance, it would be difficult to determine the total value of 10,000 metric tons of fish and  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics 50,000 cavans of rice. Computing will be easier if market values are assigned to the commodities, say P5,000,000 for fish and 14,000,000 for rice. Value Added – refers to the difference between the value of goods produced and the cost of materials and supplies used in producing them. For example, a newly constructed house is valued at P1 million. If the cost of materials and supplies used in constructing the house is worth P650 thousand, value added is equal to P350 thousand. Consumption – expenditure by consumers on final goods and services. It specifically refers to the total amount spent by consumer on newly produced goods and services (excluding purchases of new homes, which are considered investment goods) Investment – an activity that uses resources now in such a way that they follow for greater production in the future and hence greater consumption in the future. Two types: 1. Fixed investment – good that is purchased to be used in order to make other goods and services. Example: equipment purchase 2. Inventory investment – those used to increase the amount of inventories of finished goods. Consumer durables – consumer goods such as appliances and furniture, that usually last for several years Government expenditure – the sum of the government payrolls and purchases which is the cost of government output. Such expenditures are used for the day-to-day operations and projects of the government. Net factor income from abroad – this is the difference between the income earned by citizens who owns resources used in the production process abroad and the income of foreigners who own resources used in the production process here in the Philippines. Approaches to national income estimation 1. Industrial approach – measures national income by determining the sum of the market value of the total production of all the major industries comprising the economy: The major industries are: a. Agriculture, fisheries and forestry b. Industrial sector c. Service sector 2. Product approach (expenditure approach) – way of estimating national income by calculating the sum of all expenditures on final goods. a. Private consumption expenditures – spending by the households on the following types of goods i. Durable consumer goods ii. Nondurable consumer goods – newspaper, toilet papers, soft drinks iii. Services – those provided by teachers, architects, electrician, etc b. Gross domestic investment – expenditure for newly produced capital goods like machinery, equipment, tools, buildings and additional inventory. c. Depreciation – refers to the reduction in value of an asset through wear and tear. d. Net national product – refers to the GNP less the part of the output needed to replace the capital goods worn out in producing the output.  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics e. Indirect taxes – taxes such as sales, excise and business property taxes, license fees and tariffs which firm treat as costs of producing a product or service and pass on (full or partial) to buyers by charging them high prices. f. Subsidies – payment of funds, goods, and services by a government, business, or household for which it receives no good or service in return. Formula in computing using expenditure approach. GNP = C + I + G + (X-M) Where: GNP – Gross National Product C – Consumption (personal consumption expenditure) I – Investment (gross domestic capital formation) G – Government expenditure X – Exports M – Imports 3. Income approach – way of estimating national income by calculating the total earnings received in the form of rent, wages and salaries, interest, dividends and profit. Disposable income - part of the national income that is available to households for consumption or savings. - Estimated by deducting from GNP all taxes, business saving, and depreciation, then adding government and other transfer payments and government interest payments. Government transfer payments – those made by the government to individuals for which the individuals perform no current service in return. Examples: retirement and gratuity payments and unemployment insurance. Formula in computing disposable income DI = GNP – TBD + (GTP+GIP) Where DI – disposable income GNP – Gross National Product TBD – all taxes, business savings, and depreciation GTP – government and other transfer payments GIP – government interest payments. Consumption - Completes the circular flow of production process - Total expenditure in an economy on goods and services by individuals or a nation during a given period. - Direct satisfaction of human wants. Consumption function – the relationship between total consumption expenditure in the economy and total consumers’ income. It is introduced by Keynes which indicates that as the disposable income of the consumer rises, consumption expenditures will also rise but not at the same as the rise in income. Consumption pattern – when there is a change in income, there is also a change in consumption behavior. As income increases, the consumption of lower priority goods is felt but only after basic necessities are sufficiently covered. With lower income, expenditures for necessities like food predominate. When there is an increase in income, expenditure on certain goods like automobiles begin to appear. Further increases in income give way to spending in medical care, education, recreation and other.  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics Saving – the amount that he/she decides not to spend Reasons for savings: 1. To provide for old age 2. To provide for children’s’ education 3. To accumulate funds for acquisition of capital goods 4. To accumulate wealth The Savings Flow Goods and services Exports Business Firms Households Investment Financial intermediaries savings Total Savings and Its components 1. Personal savings – those made by individual household for the purpose of future consumption. 2. Business savings – depreciation allowances and retained earnings 3. Government savings – achieved when the government unit runs a budget surplus. This means that the government unit will spend less than its income. 4. Foreign savings – when foreign investment is bigger than the country’s investment abroad. The net inflow of foreign funds is important source of savings. Savings Function – refers to the relationship between savings and income. Average Propensity to Consume (APC) – refers to the proportion of income devoted to consumption. APC = CE/ DI, CE – consumption expenditures, DI – disposable income Average Propensity to Save (APS) – refers to the proportion of income which is not spend on consumption of goods and services. APS = S/DI, S-savings, DI – disposable income Marginal Propensity to Consume (MPC) – refers to the proportion of a small increase in income which will be devoted to increased consumption expenditure. MPC = change in consumption/ change in disposable income Marginal Propensity to Save (MPS) – refers to the proportion of an increase in income that is saved. MPS = change in savings/ change in disposable income  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics Determinants in the level of consumption 1. Distribution of national income – when large portion of the national income goes to a small segment of the entire population, there is uneven distribution of purchasing power. The consumption needs of that privileged segment is limited and these affect the total consumption of the economy. The small income of the less privileged segments of the society severely limits their consumption. On the contrary, total consumption will tend to be larger if national income is evenly distributed. 2. Rate if interest – when interest rates are high, people are motivated to save more and thus, to consume less. When interest rates are lower than the earning capacity of some assets, these assets are acquired thereby reducing savings. 3. The desire to hold cash 4. Price levels – the prices of goods and services sometimes move upward and sometimes downward. When there is an increase in the price level, consumption tends to decrease. When there is a decrease in the price level, consumption tends to increase. 5. Population – when everything is equal, a bigger number of people will consume more than a smaller number of people. 6. Income – people with higher incomes tend to consume more than those with lower incomes 7. Taxes – reduce money for consumption 8. Attitudes and values Investment The ideal flow of economic activity is for the total income received by households to be spent entirely on products and services produced by the firm. When households save, however, there is a leak in the flow and the total output of firms are at risk of partial disposal. When this happens, there is an imbalance in the relationship between households and firms. There is a balancing factor, however, and it is called investment. Sources and Uses of Investment Funds The funds used for investment purposes come from two sources: 1. Public sector – refers to the government units whether national or local. 2. Private sector – consists of private individuals and organizations Investment fund is a result of either any or both the savings and borrowings. Investment are undertaken by the government (e.g. public works), business firms (e.g. machinery and equipment), and private individuals (e.g. for construction).  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics The Role of Investment 1. Investment constitutes a major portion of aggregate demand. Construction laborers Project P30 million for wages P70 million for materials and supplies companies Wages, materials, When there is a change in investment levels, the demand for the various factors of production is seriously affected. supplies Figure2. Investment 1. The economicpaved Effectsthe way for increasing the nation’s output as well as promoting long of Investment run economic growth. - New buildings - New equipment Increased capacity of Investment - Manpower business firms Spending training Higher level of employment Bigger potential output and of resources aggregate supply Investment Figure and the 2. Investment, Multiplier Potential Effect Output, and Economic Growth An increase in investments generally gives rise to an increase in income, a number of time larger than the original investments. The ratio of change in income to a change in investment is called the multiplier. The formula of calculating multiplier.  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑌 𝐾 = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼 Where, K= multiplier, Y = Income, I = Investment Example: Old income = P3,000 Billion New income = P3,500 Billion Old Investment = P250 billion New investment = P450 billion To solve for multiplier: 𝑛𝑒𝑤 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑜𝑙𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 𝐾 = 𝑛𝑒𝑤 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝑜𝑙𝑑 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑃3,500𝐵 − 𝑃3,000𝐵 𝐾 = = 2.5 𝑃450𝐵 − 𝑃250 𝐵 Another formula using MPC 1 𝐾 = 1 − 𝑀𝑃𝐶 Where K = Multiplier, MPC = marginal propensity to consume Thus, if MPC = 0.60 1 𝐾 = = 2.5 1 − 0.60 Types of Investment: 1. Tangible capital – classified as structures, equipment, and inventories 2. Intangible capital – classified as those for education, or human capital, research and development, and health. Investment may also be either gross or net investment. Gross investment is investment without allowance for depreciation. Net investment is the gross expenditure for capital formation minus the amount of required to replace work-out and obsolete plant and equipment. Determinants of Investment 1. Interest rate – when rates are high, investments tend to be low. This is specially true when borrowing is used as a means to obtain investment funds. Investors would borrow money even if interest are high as long as the return of investment (ROI) is higher. Money is invested by business firms with expectation that a reasonable return of investment will be realized. If interest rate is high, lending rather than investing becomes the preferred option. 2. Innovations – innovation refers to the introduction of new products or production process. When the prospect of innovation has good financial potentials, investments on it will be pushed through. 3. Profit – business firms invest in the hope of making profits. When costs are high and revenues are low, profits will also be low. Even if the interest rates are low, this advantage may still be offset by great increases in other costs like those incurred for labor, rent, and taxes. 4. Expectations – the investment decision of the prospective investor will be based more on expectations of future income and sales rather than current income levels.  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics Real and Nominal Interest Rates - As investors borrow money to finance their investments, they will have to make decisions based on the real interest rates. To compute for the real rate of interest, the expected inflation rate is deducted from the nominal rate. The interest rate that is actually paid and received in the marketplace is referred to as the nominal rate of interest. - When there are sharp increases in the rate of interest, it is assumed that investment will decline. This will only be true if inflation increases at a slower rate than the nominal rate of interest. Labor – refers to the exertion of human effort to acquire an income. Human effort includes physical and mental exertion. Characteristics of Labor: 1. Labor is perishable – labor that is wasted is lost forever. This characteristic makes labor incapable of being stored. 2. Labor and the individual are inseparable – a man working for wages cannot separate his physical self from his labor if he wants to enjoy the comforts of another room. 3. Labor supply does not change quickly. The supply of labor increases steadily as population grows. When there is war or famine, the possibility of a labor shortage is present. 4. Most enjoyable people do not like to move. Kinds of Labor: 1. Manual Labor – involves exertion of physical effort such as construction workers, farm workers, etc 2. Clerical labor – higher in order than manual labor. Though it requires a physical effort but the intensity of effort is not as great as manual labor. Examples are sales clerks, office clerks, etc 3. Professional labor – requires higher degree of intelligence than those of clerks. Examples are physicians, lawyers, engineers, etc. 4. The labor of management – managers of all kinds and types. Examples are supervisors, middle managers, top managers, etc 5. Labor of entrepreneur – one who organizes the business and sees to it that the business becomes stable. 6. The labor of inventors – important ingredient for economic development like the inventor of electrical lamp, etc Problems of Labor A. Unemployment – occurs when a person who is of working age (at least 15 years old), is willing and able to work but cannot find work. Willingness to work is an important requisite for unemployment to be properly recognized. Unemployment is economic problem with undesirable social consequences. When unemployment is high, society pays a higher price in the form of the following: a. Lost output and income b. Depreciation of human capital c. Human dignity d. Increases in crime e. Human dignity  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics Underemployment – when a person works either part-time or full time but which in both cases receive very little pay. Underemployed people are not fully utilized by the society. Causes of Unemployment 1. Rapid growth of population – 2. Slow growth of the economy 3. Technology used 4. Lack of skills Types of Unemployment 1. Seasonal unemployment – these are jobs that are seasonal in nature such as farm workers. 2. Frictional unemployment – a person may get dissatisfied with his job, resigns, and starts looking for a new one. Examples are fresh graduates 3. Structural unemployment – there are available and willing workers, but the skills and training are not those required by the business firms. 4. Cyclical unemployment – when the demand for workers is less than the supply, some will be unemployed. B. Inadequate wages Inadequate wages have become a perennial problem of labor. Wage is inadequate if it fails to meet the basic needs of the worker’s family. The possible causes: a) Inflation b) Lack of skills c) Too many dependents C. Industrial and Labor-Management Conflict Strikes and lockouts are actions that bring misery to both the employer and workers. In both cases, the worker is deprived of wages and employers of profit. D. Economic Insecurities Workers worry about having a permanent source of income. They are much concerned about layoffs and dismissals, illnesses, accidents, and even death. 1. Prosperity Phase – is the period where continuous expansion of economic activity happens. It includes the following: a. High prices and great business activity b. Large profit for business firms c. Production is at full capacity d. Increasing demand for many commodities e. Increasing demand for labor f. Increasing volume for sales g. Increasing volume of credit extensions by lenders. h. Large demand for credit i. Rising interest rates 2. Crisis or Recession Phase – when the economy has reached the peak of expansion and contraction begins to take shape, the crisis or recession phase has already started. It includes the following: a. The demand for goods decreases b. The margin of profits gradually shrinks c. The volume of sales decreases  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics d. Trading slow down e. The production of goods is reduced f. The demand for labor, capital, and land decreases g. Prices go down h. The ability of the business firms to meet their financial obligations is impaired. i. Unemployment begins to bother labor j. No further extensions of credit or renewals of old loans are made by banks. 3. Depression Phase – when the contraction of economic activities which began in the recession phase has reached its lowest level, the depression phase has taken over. It includes: a. Many businesses have ceased operations b. Profits are minimal, if it is still possible to make some c. Banks have plenty of idle funds d. Banks gradually reduce interest rates e. Credit starts to become available f. Unemployment is at its highest level. g. Many unemployed people are willing to work at lower wages h. The prices of raw materials and supplies are low. 4. Recovery Phase – the depression phase cannot continue indefinitely. As the prices of the various economic resources are low, some business firms that have previously ceased operations will attempt to operate again. Those which stayed but reduced their outputs will now make arrangements for normalizing production. It includes: a. As the supply of commodities in the market get exhausted, demand for these begin to be felt. b. Optimism among businessmen slowly develops, prodding them to increase business entity c. The demand for labor increases, resulting to a decrease in unemployment. d. The purchasing power of the people rises, e. The low rates of interest will attract business borrowings f. Prices slowly rise g. There is an increase in product output h. Idle plants are used and plans for construction of new ones are considered. INFLATION - A rise in the average level of prices. It is a result of increased production costs, resulting to a fall in the purchasing power of money. Deflation - A decline in the average level of prices. It increases the purchasing power of money over time. Types of Inflation 1. Cost-push inflation – characterized by continual decreases in the aggregate supply, resulting to increases in the cost of production. It is the result where actual unemployment is higher than the natural rate of unemployment. 2. Demand-pull inflation – one caused by increases in aggregate demand. It happens when demand is higher than supply. 3. Inertial inflation is the steady inflation that occurs when inflation is built into contracts and people’s expectations. Measuring Inflation 𝐶𝑃𝐼 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑋 − 𝐶𝑃𝐼 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑌 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 𝑋 = 𝑋 100% 𝐶𝑃𝐼 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑌  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics Where CPI = consumer price index, Year X = year under consideration, Year Y = year immediately preceding year X Thus, if CPI for year X = 130, and CPI for year Y = 120 Therefore, 130 − 120 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 𝑋 = 𝑋 100% = 8.33% 120 Table 1. Inflation Rate for the Last Ten Years (Hypothetical Sample) YEAR CPI INFLATION RATE (%) 1990 100 0 1991 105 5 1992 110 4.76 1993 115 4.5 1994 120 4.3 1995 125 4.1 1996 130 4.0 1997 135 3.8 1998 140 3.7 1999 145 3.57 Losers and Gainers in Inflation Losers: 1. Fixed Income Earners – those who received fixed income like salaries, and rentals are at a big disadvantage. When prices go up, the quantity of goods they are able to buy is reduced. 2. Pensioners – the monthly pensions paid to retired employees are fixed, and inflation reduces the purchasing power they have 3. Creditors – those who lend money or extend credit to others lose out during times of inflation. A creditor who earns 10% interest of loaned money will instead lose value when the inflation rate is higher, say 25% Gainers: 1. Businessmen – those people will make big profits if they produce goods using inputs at pre-inflation prices, then sell them later at inflation prices. 2. Speculators – these people buy goods at low prices before inflation sets in. when prices go up, they sell the goods and make big profits. Land is a common object of speculation. 3. Debtors – the losses borne by creditors in an inflation become the gains of the debtors. The value of money borrowed becomes lower than when it was borrowed. References Medina, R. (2003). Principles of Economics. Rex Book Store Inc. Clayton, G. E. (2008). Economics: Principles and practices (Teachers wrap around edition). Glencoe/McGraw-Hill.  AG ECON 1 (AGRICULTURAL ECONOMICS AND MARKETING) Bachelor of Science in Agriculture 2 LEARNING MODULE 3: Macroeconomics Assignment LEARNING ACTIVITIES General Directions: 1. Read carefully the directions/ instructions. 2. Use separate A4/short-size sheet of paper for Module 2 learning activities. 2. If you have questions/ concerns/ clarifications on Module 2, please refer it to your Ag Econ 1 Instructor. Activity 1: From an old newspaper or magazine, select an item or items that you would want to buy but you still cannot afford to buy it. Paste it in an A4/short size bond paper. Answer the following reflection questions: 1. What personal values do these items represent? 2. How will these items help you achieve your goals? 3. Will those items make you feel happy? ASSESSMENT I. Identification: Identify what is being asked. 1. measure of the money value of the total flow of goods and services produced in an economy over a specified period of time. 2. consumer goods such as appliances and furniture, that usually last for several years 3. given by the government to individuals or households but which do not contribute to current production in return for them. 4. Examples: gift checks from friends and relatives 5. refers to the current price of goods and services produced in the economy. 6. It specifically refers to the total amount spent by consumer on newly produced goods and services (excluding purchases of new homes, which are considered investment goods) 7. the sum of the government payrolls and purchases which is the cost of government output. Such expenditures are used for the day-to-day operations and projects of the government. 8. part of the national income that is available to households for consumption or savings 9. those made by the government to individuals for which the individuals perform no current service in return. 10. Completes the circular flow of production process II. Discussion. Express your thoughts in no less than 100 words. 1. Differentiate the approaches to GNP computations. 2. Discuss the savings flow 3. Discuss the importance of knowing the Marginal Propensity to Consume and the Marginal Propensity to save.