Applied Economics PDF

**BME 115: APPLIED ECONOMICS** **CHAPTER 1: INTRODUCTION TO ECONOMICS** **Learning Outcomes** - Explain the principles of economics as social science - Identify the causes of economic problem - Describe how productive systems operate in the economies - Explain economic theories in appl...

**BME 115: APPLIED ECONOMICS** **CHAPTER 1: INTRODUCTION TO ECONOMICS** **Learning Outcomes** - Explain the principles of economics as social science - Identify the causes of economic problem - Describe how productive systems operate in the economies - Explain economic theories in applied economics. **1.2 ECONOMICS AS APPLIED SCIENCE** " Applied economics is the application of theories and principles to real world situations with the desired aim of predicting potential outcomes. The use of applied economics with the desired aim of predicting potential outcomes without the "noise" associated with explanations that are not backed by numbers. Applied economics can involve the use of econometrics and case studies. According to Sicat (Economics 1983 THEORY) is an attempt to explain how particular events or observations are related to one another. He also said that theory and observations are linked together. Understanding economic theories and principles enables one policy officer to draft an economic policy to resolve economic problem. Economic policy provides a way of approaching problems not only in the economy, but in all aspects of our lives, such as personal, business and government. (Blade and Parkn, 2011). 1.3 **BASIC ECONOMIC PROBLEMS AND THE SOCIOECONOMIC DEVELOPMENT IN THE 21^ST^ CENTURY** **ECONOMIC PROBLEMS**- are issues and concerns in the economies that need to be resolved. According to Sicat (Economics 1983)- the problems of economics arise because human wants can be satisfied only at a sacrifice." To sacrifice is to deprive oneself that could satisfy him. Because there is scarcity of resources, thus, it simply means that there is shortage. Since resources are not enough for everyone, then people battle with economic problems, and this is a global phenomenon. **Production Efficiency**- is defined by Bade and Parkin as a situation in which the economy is getting all that it can from its resources and cannot produce more of one good or service without producing less of something else. For production to be efficient, there must be full employment of all available factors of production. Economic problems is not only concerned with economic issues, but also of social issues. The combination of these different issues on social and economics is commonly referred to as socioeconomic problems, the problems of the society and the economy. Social issues pertains to peoples activities involving their welfare as members of the society; how their needs are satisfied. These problems emanate from our basic economic needs that are not met because of shortages of the economy's productive resources. **THE BASIC ECONOMIC PROBLEMS** **Basic economic problems** here would refer to a person's inability to satisfy the basic needs of man in order to live a normal life, namely, food, clothing, shelter, and education. The limited resources, as well as the improper management of the economy's resources, often results to economic problem. This problem is commonly observed and experienced by people situated in emerging market and developing economies. The following problems are considered here as basic economic problems, and common in developing economies, like the Philippines and other Southeast Asian countries: 1. **POVERTY**- A situation where people encounters difficulty in satisfying their basic need on a regular basis. Their poverty category maybe determined by their threshold income. Because of their much lower average income, or extremely low income, most people in this state, lacks money or other material possessions basic to their survival as human beings. 2. **UNEMPLOYMENT**- A condition where people, physically and mentally qualified, and are willing to work, cannot find a job aligned with their educational attainment. There are 4 causes of unemployment: 1. **Frictional unemployment**- which happens when job seekers and employers need time to find each other. Frictional unemployment also refers as Turnover unemployment. According to Gordon (2012), turn over unemployment occurs in the process of job search by individuals who have voluntarily quit their jobs, are entering the labor force for the first time, or are reentering the labor force. 2. **Seasonal unemployment**- this is due to the seasonal changes in the demand for certain kinds of labor. Examples of these jobs are those related to construction and agriculture. 3. **Structural unemployment**- the reason for this kind of unemployment attributed to changes in taste, technology, government policies and competition. This kind of unemployment may also occur when there is a mismatch between the skill or location requirements of job vacancies and the present skills or location of members of the labor force. 4. **Cyclical Unemployment**- this unemployment results from changes or fluctuation in economic activity because of business cycle, or different business conditions. R. Gordon defined cyclical unemployment as the difference between the actual unemployment rate and the natural rate of unemployment rate. Natural unemployment rate he said, designates the level of unemployment at which the inflation rate is constant, with no tendency to accelerate or decelerate. It means that it is the minimum or lowest attainable level of unemployment that is compatible with avoiding an acceleration of employment (Gordon, 2012) 3. **Population high growth rate**. - This means that rate of growth in population is higher than the set rate by the government. High growth rate in population with no corresponding increase in economic growth and productivity would result to unemployment. 4. **High cost of Education.** - This problem is related to the total expenses incurred in earning a degree wherein the cost is beyond the income level capacity of the family. Majority of Filipino students cannot afford financially to pursue tertiary education even in government funded higher educational institutions due to high tuition fees, and cost of living, especially in urban areas. 5. **High cost of health care services.** - The problem pertains to high cost of medication and consultation that deprives someone of proper treatment of disease. 6. **High dependence on remittance.** - Family members of OFWs are solely dependent on their remittances that, in most cases, has developed among OFWs members the attitude of laziness, dependency and extravagant lifestyle. 7. **Graft and corruption.** - Graft is the acquisition of money or wealth in dishonest or illegal ways. It is an illegal transaction, mostly committed or involving government officials. Corruption or illegal behaviour leads to mismanagement of resources resulting to inefficient delivery of public service. **[SOCIOECONOMIC DEVELOPMENT]** *Socioeconomic development is a process that seeks to identify both the social and the economic needs within a community, and seeks to create strategies that will address those needs in ways that are practical and in the best interests of the community over the long period of time.* *The Philippine Development Plan (PDP) 2017-2022* *(pdp.neda.gov.ph)* Goal of PDP: Rnable Filipinos to attain a Matatag, Maginhawa, at Panatag na Buhay The PDP Targets: 1. The Philippines will be an upper middle income country by 2022 2. Growth will be more inclusive as manifested by lower poverty incidence in the rural areas, from 30% in 2015 to 20% in 2022. 3. The Philippines will have a high level of human development by 2022. 4. The unemployment rate will decline from the current 5.5% to 3.5% in 2022 5. There will be greater trust in government and in society. 6. Individuals and communities will be more resilient. 7. Filipinos will have greater drive for innovation. The Three Pillars that support the PDP 2017-2022 to achieve the targets are: 1. "Malasakit" Enhancing the Social Fabric - It aims to regain peoples trust in public institutions. **Strategies** - Ensure people-centered clean and efficient government - Pursue swift and fair administration of justice - Promote Philippine culture and values 2. "Pagbabago" Ineqaulity- Reducing Transformation- It aims to reduce inequality by increasing income oppurtunities. Strategies - Expand economic opportunities - Increase access to economic opportunities - Implement strategic trade and fiscal policy, maintain macroeconomics stability, and promote competition - Accelerate human capital development - Reduce vulnerability of individuals 3. " Patuloy na Pag-unlad" Increasing Growth Potentials- It concentrates on sustaining economic growth by maximizing the demographic dividend and advancing science, technology and innovation. Strategies - Promote technology adoption - Stimulate innovation - Maximize demographic dividend **1.4 NATIONAL INCOME ACCOUNTING** The national income accounting is one way to understand how the economy operates and tracks the economy's performance. It will measure the economy's aggregate output by either an account of its expenses incurred or by the amount of income derived by producing it. GROSS DOMESTIC PRODUCT (GDP)- measures the market value of all final goods and services produced by the country's resources in one year period. Take note also, that only the market value of all final goods are included in GDP. Final goods are those goods or services sold to the end users. Therefore, all second hand sales, and cost of intermediate goods or raw materials are excluded in GDP tp avoid double counting. Double counting means counting the same production more than once. **APPROACHES IN DETERMINING GROSS DOMESTIC PRODUCT (GDP)** 1. **[Income Approach]**- is an approach in determining the GDP that adds up in the income received by the country in one year. The income or earnings are derived by those who participated in the production of goods and services using the country's production resources. These total earnings are obtained fro the resources used in the production process. Total earning include wages/salaries, interest, rent and profit. Components of GDP using the Income Approach: Earnings Factors of production Wages - derived or received by using labor/manpower in production process Interest - derived by using land in production process Rent - derived by using capital/machines or equipment in production process ; and Profit - derived by using the managerial skill or expertise of an entrepreneur in the proper use of production resources. For illustration purposes. Let us determine the value of GDP applying the income approach. The following hypothetical data (in billion pesos), will be used. Interest P 34,501 Wages P 1,909,333 Salaries P 202, 888 Rent P 85, 299 Profit P 81, 222 **GDP(national income) P 2,323,243.00** 2. **[Expenditure Approach]**- is an approach to determine the value of GDP by adding all the spending on all final goods and services produced in the country in one year. The different items included in expenditure approach are enumerated and defined as follows: **Consumption or personal consumption** - are purchases made by households in one year, which include durable goods like cars, new constructions, and nondurable goods such as shampoo, clothing. **Investments or gross domestic investments**- are spending on new capital goods like machine and addition to inventories like new stocks. **Government purchases or government consumption and gross investments. -** these are government spending for goods and services intended for its operation and for public service. **Net exports**, the last spending component, pertains to the country's participation in international trade. The value is determine by deducting total amounts imported from total amount exported. When total export is greater than imports, Net export is positive. When total import is greater than export, Net export is negative. Imports are goods bought from other countries, while exports are locally produced goods sold to other countries. The following computation presents the components of GDP using the Expenditure approach. Hypothetical data used was in billion pesos. Personal consumption (goods and services) P 1,303,004 Gross domestic investment P 932, 734 Government purchases P 73, 657 Net export: P 3, 848 Export P 180, 981 Less: Import P 177, 133 **GDP (national income) P 2, 313, 243**