Applied Economics 2nd Qtr Reviewer PDF

Ways of Stating Economic Analysis APPLIED ECONOMICS Positive statements SECOND QUARTER REVIEWER Team President, Academics Committee ○ “what is”; employed in...

Ways of Stating Economic Analysis APPLIED ECONOMICS Positive statements SECOND QUARTER REVIEWER Team President, Academics Committee ○ “what is”; employed in qualitative and quantitative approaches ○ “Gross domestic product LESSON 1.4: Methods of measures the productivity of a Analyzing Economic Data nation.” Normative statements Methods of Economic Analysis ○ “should be”; “ought to be” ○ Value judgments on economic Theories and Models in Economics phenomena or policies ○ “The government should Economic Theories increase taxes on sugar to ○ Simplified version of certain decrease mortalities due to economic phenomena or diabetes.” relationships between economic variables Economic Models LESSON 1.5: Socio-economic ○ Representations of empirically Conditions of the Contemporary tested economic and social Philippines phenomena Assumptions Macroeconomic Statistics ○ Conditions set in an economic analysis - “ceteris paribus” Tools in Illustrating Economic Phenomena Economic Variables ○ elements/data in a study that can change Functions (f) ○ State the relationship between variables ○ D = f(p): Demand is a function of price Economic Equations ○ Mathematical expression of an economic concept ○ Y = C + I: Income is equal to consumption and investment Graphs ○ Visual representation of the relationship of two or more variables ​  Gross Domestic Product (GDP) LESSON 2: Market Structures A measure of the total value of goods What is a Market Structure? and services produced within a country’s An organization’s operating borders in a given period of time, usually environment is called a market a year. structure. By taking into account Includes goods and services: GDP elements like how difficult it is to enter includes everything produced, from cars the sector and how many vendors and computers to haircuts and engage, the market structure may restaurant meals. indicate how competitive the industry is. Measures market value: The value of goods and services is measured in terms of their market price. Produced within borders: Only things produced within the country’s borders are included in GDP, even if they are owned by a foreign company. Excludes intermediate goods: GDP does not include goods that are used to produce other goods, like steel or electricity. GDP = C + I + G + NX Consumption: What people spend on things they need and want, such as food, clothes, and entertainment. Investment: The money businesses spend to grow and improve, like buying new equipment or building factories. Government Spending: The money the government spends on things such as roads, schools, and defense. Net Exports: The difference between Different Market Structures what a country sells to other countries (exports_ and what is buys from other Perfect Competition countries (imports) = (X-M) A theoretical market structure in which there are no monopolies. Socio-economic Statistics Also known as Perfect Market The influence of consumers to market price is high ​  Oligopoly PERFECT COMPETITION A market structure with a small number Degree of Pure or Perfect (very high) of producers, none of which can keep competition others from having significant influence. Number of Many (price takers) Firms OLIGOPOLY MARKET Bargaining High Degree of Imperfect (Low) power of competition consumers Number of Two or more firms (price Barriers to Low Firms makers) entry Bargaining None Product Homogenous or identical power of differentiation consumers Example Wet Markets Barriers to High entry Monopolistic Market Product Differentiated An industry in which many firms offer differentiation products or services that are similar but Example Petroleum Industry not identical Differentiate their products through Monopoly pricing and marketing strategies Competition Examples: A market structure where one seller or ○ Smart Phone: iPhone vs producer is the sole supplier of a good Samsung or service in a market and has no ○ Soft Drink: Coca-Cola vs Pepsi substitutes ○ Clothing: Zara vs H&M Can lead to unfair consumer practices. They are discouraged in free-market MONOPOLISTIC MARKET economies Degree of Imperfect (high to moderate) MONOPOLY MARKET competition Degree of None Number of Many (price makers) competition Firms Number of Only one (price makers) Bargaining Moderate Firms power of consumers Bargaining None power of Barriers to Low consumers entry Barriers to Extremely high Product Differentiated entry differentiation Product Unique (without substitute) Example Products at grocery stores differentiation Example Utilities providers ​ Other Market Structures demanded over the percent change in Monopsony: only one buyer price Oligopsony: few buyers Can be measured in two ways: Duopoly: two sellers 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑃𝐸𝐷 = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 Other Market Structures Considerations or %∆𝑄𝑑 Philippine Competition Art: prohibits ε= %∆𝑃 enterprises to enter into anti-competitive arrangements Arc Elasticity of Demand Philippine Competition Commission: Overseer Finite or discrete price changes Measures the elasticity at the midpoint LESSON 2A: Price Elasticities of between two selected points. Demand & Supply Also known as the Midpoint Elasticity %∆𝑄𝑑 Price Elasticity 𝐸𝑝 = %∆𝑃 Tells how reactive the demanders and suppliers on a certain price change %∆𝑄 | [(𝑄𝑑 −𝑄𝑑 )÷( 𝑄𝑑 +𝑄𝑑 )| 𝑛 𝑜 𝐸𝑝 = %∆𝑃 | 𝐴𝐸𝑝 = | 𝑛 𝑜 2 | (𝑃 +𝑃 ) | 𝑛 𝑜 | [(𝑃𝑛−𝑃𝑜)÷( 2 )] | Point Elasticity for Demand 𝐸𝑝= Coefficient of Point Elasticity of the Demand (or PED) Infinitesimally small price changes 𝑄𝑑𝑛𝑒𝑤 = New Quantity Demanded %∆𝑄𝑑 𝑄𝑑𝑜𝑙𝑑= Original Quantity Demanded 𝐸𝑝 = %∆𝑃 𝑃𝑛𝑒𝑤= New Price 𝑃𝑜𝑙𝑑 = Original Price | [(𝑄𝑑 −𝑄𝑑 )÷ 𝑄𝑑 ] | 𝑃𝐸𝑝 = | [(𝑃𝑛 −𝑃 𝑜)÷ 𝑃 ] 𝑜 | | 𝑛 𝑜 𝑜 | Point Elasticity for Supply 𝐸𝑝= Coefficient of Point Elasticity of the %∆𝑄𝑠 Demand (or PED) 𝐸𝑝 = %∆𝑃 𝑄𝑑𝑛𝑒𝑤 = New Quantity Demanded 𝑄𝑑𝑜𝑙𝑑= Original Quantity Demanded | [(𝑄𝑠𝑛−𝑄𝑠𝑜)÷𝑄𝑠𝑜] | 𝑃𝑛𝑒𝑤= New Price 𝐸𝑝 = || [(𝑃 −𝑃 )÷ 𝑃 ] || 𝑃𝑜𝑙𝑑 = Original Price | 𝑛 𝑜 𝑜 | 𝐸𝑝= Coefficient of Point Elasticity of the Price Elasticity of Demand (PED) Supply (or PES) 𝑄𝑠𝑛 = New Quantity Supplied A measurement of how responsive 𝑄𝑠𝑜= Original Quantity Supplied quantity demanded is to a price change; 𝑃𝑛𝑒𝑤= New Price the percent change in quantity ​  𝑃𝑜𝑙𝑑 = Original Price DEMAND or SUPPLY Arc Elasticity for Supply PERFECTLY 𝐸𝑝 = 0 INELASTIC Any change in price. %∆𝑄𝑠 No change in Qd or Qs. 𝐸𝑝 = %∆𝑃 | [(𝑄𝑠 −𝑄𝑠 )÷( 𝑄𝑠 +𝑄𝑠 )| 𝑛 𝑜 | 𝐴𝐸𝑝 = | 𝑛 𝑜 2 | (𝑃 +𝑃 ) | 𝑛 𝑜 | [(𝑃𝑛−𝑃𝑜)÷( 2 )] | 𝐸𝑝= Coefficient of Point Elasticity of the Supply (or PES) RELATIVELY 0 < 𝐸𝑝 < 1 INELASTIC Large change in price. 𝐴𝐸𝑝= Arc Elasticity if the Supply Small change in Qd or Qs. 𝑄𝑠𝑛 = New Quantity Supplied 𝑄𝑠𝑜= Original Quantity Supplied 𝑃𝑛𝑒𝑤= New Price 𝑃𝑜𝑙𝑑 = Original Price Elasticity Values If demand elasticity coefficient value is greater than 1, then demand is elastic UNITARY 𝐸𝑝 = 1 If demand elasticity coefficient value is INELASTIC Any change in price. equal to 1, then demand is unit elastic or unitary Same amount of change in Qd If demand elasticity coefficient value is or Qs. between 0 & 1, then demand is inelastic Elasticity Value Directory RELATIVELY 𝐸𝑝 > 1 ELASTIC Small change in price. Large change in Qd or Qs. PERFECTLY 𝐸𝑝 = 𝑈𝑁𝐷𝐸𝐹 ELASTIC No changes in price. Changes in Qd or Qs. ​  LESSON 2B: Price Elasticity of Demand and Total Revenue Total Revenue Test The elasticity of demand tells suppliers how their total revenue will change if their price changes. Total revenue equals total quantity sold multiplied by price of goods. Elastic Demand and Total Revenue LESSON 2C: Price Elasticity of Demand and Total Revenue Income Elasticity of Demand %∆𝑄 𝐸𝑦 = %∆𝑌 (𝑄𝑛−𝑄𝑜) (𝑄𝑛−𝑄𝑜)÷( 2 ) 𝐸𝑝 = (𝑌𝑛−𝑌𝑜) (𝑌𝑛−𝑌𝑜)÷( 2 ) 𝐸𝑦= Coefficient of Income Elasticity of Inelastic Demand and Total Revenue Demand 𝑄𝑛𝑒𝑤 = New Quantity Demanded 𝑄𝑜𝑙𝑑= Original Quantity Demanded 𝑌𝑛𝑒𝑤= New Income ​  𝑌𝑜𝑙𝑑 = Original Income DEMAND CURVE goes INELASTIC ○ If 𝐸𝑦 is positive = normal goods (Becomes taller) ○ If 𝐸𝑦 is negative = inferior goods No. of Related Few Consumer/Buyer Substitute (Monopsony to Oligopsony) ○ If 𝐸𝑦 is zero = essential goods Goods Time to Buy Little time to decide Cross Elasticity of Demand Percentage of Low Budget %∆𝑄𝑥 Budget spent 𝐸𝑥𝑦 = %∆𝑃𝑦 on Goods (𝑄𝑥𝑛−𝑄𝑥𝑜) Types of Inferior Goods (𝑄𝑥𝑛−𝑄𝑥𝑜)÷( ) Goods 2 𝐸𝑝 = (𝑃𝑦𝑛−𝑃𝑦𝑜) (𝑃𝑦𝑛−𝑃𝑦𝑜)÷( 2 ) 𝐸𝑥𝑦= Coefficient of Cross Elasticity of DEMAND CURVE goes ELASTIC Demand (Becomes flatter) 𝑄𝑥𝑛 = New Quantity Demanded for 𝑥 No. of Related Many Consumer/Byer 𝑄𝑥𝑜= Original Quantity Demanded for 𝑥 Substitute (Monopsonistic competition to Goods Perfect Competition) 𝑃𝑦𝑛= New Price of 𝑦 Time to Buy A lot of time to decide 𝑃𝑦𝑜 = Original Price of 𝑦 Percentage of High Budget ○ If 𝐸𝑥𝑦 is positive = substitute Budget spent goods on Goods ○ If 𝐸𝑥𝑦 is negative = Types of Luxury Goods complementary goods Goods Normal Goods LESSON 3: Determinants of Price Elasticity Determinants of the Price Elasticity of Supply Determinants of the Price Elasticity of Demand ​  Sectors if the Economy and Related SUPPLY CURVE goes INELASTIC (Becomes taller) Industries Primary Production Difficult to adjust the ○ Agricultural side Capacity capacity/output Agriculture, forestry (extraction of Production Variation of goods is materials from trees), and fishing Variation impossible/difficult (marine life-related) ○ Business extraction of raw materials Production Slow to produce from natural resources Speed Secondary Production Difficult to store ○ Industrial side Storage ○ Mining and quarrying ○ Manufacturing Production Difficult and/or Expensive Mobility Logisitcs ○ Electricity, steam, water and waste management Production Cost grows slowly as time ○ Construction Valuation goes by and/or as production ○ Using raw materials extracted from the (Market Time increase Frame) primary sector to product another product Tertiary ○ Service side SUPPLY CURVE goes ELASTIC ○ Wholesale and retail trade, repair of (Becomes flatter) motor vehicles and motorcycles Production Easy to adjust the ○ Transportation and storage Capacity capacity/output ○ Accommodation and food service activities Production Variation of goods is Variation possible/easy ○ Information and communication ○ Financial and insurance activities Production Quick to produce ○ Real estate and ownership dwellings Speed ○ Professional and business services ○ Public Administration and defense; Production Easy/Nothing to store Storage compulsory social activities ○ Education Production Easy and/or cheap Logistics ○ Human health and social work activities Mobility ○ Provides services to individuals and Production Cost grows faster as time goes businesses Valuation by and/or as production (Market Time increase Philippine Standard Industrial Classification Frame) (PSIC) Definition: ○ Detailed classification of industries LESSON 4: Industry Classification prevailing in the country and Analysis Summary of PSIC: ○ 21 sections Related Industries One-digit alphabetic codes ○ 88 divisions ​  2-digit codes ○ Persons not in the labor force ○ 245 groups Not looking for work due to the 3-digit codes reasons such as housekeeping, ○ 520 classes schooling, and permanent disability. 5-digit codes ○ Too Young 14 years old and below Can’t work Five Macroeconomic Goals ○ Retired Full Very few population is Not working Employment unemployed Work ○ Any economic activity a person does for Price Stability Stabilizing the currency’s purchasing power pay during the past week. Labor Force Fair Income Narrowing the wealth gap ○ Contribute to the production of goods Distribution between the rich and the poor and services in the country High and Measured by economic ○ Employed sustainable productivity Reference period are 15 years old economic and over as of their last birthday. growth Bop Quantities of exports and Types of Employed Equilibrium imports are equal At work Do any work even for one hour during the reference period for pay or profit Measuring Employment (Labor Force Survey) Labor Force Survey (LFS) Work without pay on the farm or ○ Provides a quantitative framework for business enterprise operated the preparations of plans and by a member of the same household that are blood formulation of policies related. ○ Provides statistics on levels and trends of employment, unemployment, and underemployment for the country With job but These are people who have job not at work or business but are not at work Total Population Sub-Category because of temporary illness or injury, vacation or other reason. Young or Uncapable (14 They are expected to report for Inactive Population and below) work to start operation of a farm or business enterprise within 2 Retired weeks from the date of the enumerator’s visit. Labor Force Unemployed (No work) Underemployed - 15 and over - Willing to Underemployed ○ Employed persons who express the work (wants more work) desire to have additional hours of work - Able to work in their present job or additional job, or Employed have a new job with longer working (satisfied on work) hours. Inactive Population ​  Types of UnderEmployed Unemployed reported as: Visibly People who work less than 40 Without work Had no job or business during hours during the reference the reference period period and want additional hours of work. Currently Were available and willing to available for take up work in paid Invisibly Work for 40 hours or more work employment or self-employment during the basic survey during the reference period reference period and still want additional hours of work in their Seeking work Had taken specific steps to look present job or additional job. for a job or establish a business or not seeking work due to Type 3 Referred to as “marginally following reasons attached to the labor force” 1. Tired or believed no It includes people who have work available looked for employment in the 2. Awaiting results of past year, who would like to previous job application work, and are available for work 3. Temporary illness or but are “discouraged workers” disability or those who have given up 4. Bad weather looking for employment 5. Waiting for rehire or job altogether because of their recall prolonged inability to find work. Working Poor People with full-time employment but who live below the poverty line. Types of Unemployed Unemployed Frictional Consists those people with no work because they are still ○ Reference period are 15 years old and looking that have transferable over as of their last birthday. skills ○ These are people who don’t have work, available to work, or seeking for work. Structural Consists those people with no work because of obsoletion without transferable skills Cyclical Consists those with no work because of recession Employed, Underemployed, or Unemployed? 1. Berto is a fresh graduate. Currently, he is waiting for the results of his employment application to two separate companies Answer: Unemployed (Frictional) 2. Roberta is already a retired teacher. She has no intention to work. Answer: Persons not in the Labor Force (Inactive Population) 3. Jessica is temporarily ill due to an accident. Because of this, her employer ​  recommended that she files for a sick live until she gets better Sample Problem for Employment Answer: Employed Statistics: 4. Sir Ben cannot find a job due to the sudden decrease on the demand for Total Population Sub-Category Number Filipino teachers Answer: Underemployed (Structural) Young or 10,000 5. Manong Kiko was laid off due to the Inactive Population Uncapable (14 and below) economic recession fueled by the Covid-19 pandemic Retired 5,000 Answer: Unemployed (Cyclical) Labor Force Unemployed 5,000 Employment Statistics (No work) - 15 and Labor Force Participation Rate (LFPR) over Underemploye 10,000 ○ Proportion of total labor force to the total - Willing to d household population 15 years and over work (wants more ○ Labor force population = employed + - Able to work) work unemployed Employed 70,000 (satisfied on work) LFPR Formula LFPR Labor force population/Total population 15 years old and above SOLUTION in the SAMPLE PROBLEM Labor Force Employed + Unemployed Labor Force Participation Rate Sample Population LFPR = Labor force population/Total Total Population Employed + unemployed + population 15 years old and above 15 years old and retired above LFPR = 75,000/80,000 = 0.9375 or 93.75% Employment Rate Sample Employment Rate (ER) ER = Employed/Labor Force Population ○ Proportion of employed persons to the ER = 70,000/75,000 = 0.9333 or 93.33% total labor force ○ ER = Employed/Labor Force Population Unemployment Rate Sample Unemployment Rate (UnER) UnER = Unemployed/Labor Force Population ○ Proportion of unemployed persons to UnER = 5,000/75,000 = 0.0667 or 6.67% the total labor force ○ UNER= Unemployed/Labor Force Underemployment Rate Sample Population UnderER = Underemployed/Employed ○ Labor Force Population = UnderER = 10,000/75,000 = 0.1429 or 14.3% employed+unemployed Underemployment Rate (UnderER) Income Inequality ○ Proportion of underemployment persons to the total number of employed person. Extent to which income is distributed ○ UnderER=Underemployed/Employed unevenly across people ​  Economists measure income inequality using the Lorenz curve and Gini coefficient. Major Types of Inflation Lorenz Curve ○ Graphical representation of income Headline Inflation inequality It measures changes in the cost of living ○ The lower the gap, the lower the based on the movements in prices of a inequality specified basket of major commodities Gini Coefficient ○ The area between the Lorenz curve and Core Inflation the 45-degree line, divided by the total It refers to the year-on-year rate of change area under the 45-degree line of the monthly headline CPI after excluding ○ The lower the gini vue, the more equal food and energy items. the society is. Exclude items that are volatile or changes rapidly from time to time. LESSON 5: Measuring Inflation and GDP Types of Inflation by Cause Inflation Demand-Pull Inflation Definition It arises when the aggregate demand goes ○ It is the rising general level of prices that up rapidly than the aggregate supply in an reduces the “purchasing power” of economy. money. Caused by following: Classifying Inflation ○ Increase in government spending ○ Major Types: without the change in tax revenue Headline Inflation ○ Fall in tax rates, with no change in Core Inflation government spending ○ Types of Causes: ○ Increase in investments and exports Demand-pull inflation ○ Decrease in saving and imports Cost-Push Inflation Causes of Inflation Cost-Push Inflation The government prints too much money Increase in general prices level caused by (the quantity theory) the rise in prices of the factors of production, ○ Governments that keep printing due to the shortage of inputs money pay debts end up with Caused by following: hyperinflation ○ Wage-push Inflation ○ QUANTITY THEORY OF Increase in wages and salary MONEY ○ Profit-push inflation ○ MV = PY Increase in profit margin by M = money supply monopolistic or oligopolistic firms V = velocity ○ Supply-shock inflation P = price level Fall in the supply of necessary Y = quantity of output consumer goods or major industrial Velocity – is the inputs average times a peso is spent and re-spent in a year ​  Additional NOTES 𝐶𝑃𝐼𝑡 = consumer price index in current period Market Basket 𝐶𝑃𝐼𝑜 = consumer price index in previous period ○ All goods in the market, identified by PSA. Shrinkflation Measuring Economic Growth ○ Certain of goods customers can buy will LOSERS during Inflation reduce due to inflation Inflation Rate Fixed Income Earners (including ○ Growth rate of CPI pensioners) - Nominal income does not ○ Deflation = price decrease, negative ○ Inflation = price increase, positive rise with prices Savers - the interest rate of savings might not cover the cost of inflation Creditors - by the time they receive payment, the amount of goods and Sample Questions: Inflation services that can be bought by the sum 1. Which has a smaller market basket, of money has less purchasing power headline or core inflation? during inflationary times. Answer: Core Inflation Holders of Securities - (securities = 2. Which inflation excludes price changes in bonds/stocks) volatile products, headline or core inflation? GAINERS during Inflation Answer: Core Inflation Debtors - They pay back “cheap” pesos 3. Which inflation caused by having high that have less purchasing power to their demand for a product with few supply, creditors demand-pull or cost-push? Fixed asset owners - Land owners gain Answer: demand-pull inflation during inflation as the value of land and other fixed assets appreciate Producers - As the price of commodities Consumer Price Index increases, business firms gain higher income Formula Economic Growth Refers to an increase in the real output of CPI 𝐶𝑃𝐼𝑡 = ( ) 𝑥 100 𝐶𝑡 𝐶𝑜 goods and services in the country Relates to gradual increase in GDP Whereas: Measured by quantitative factors such as 𝐶𝑃𝐼𝑡 = consumer price index in current period increase in real GDP or per capita income 𝐶𝑡 = cost of market basket in current period 𝐶𝑜 = cost of market basket in BASE period Economic Development Refers to changes in income, savings, and Inflation Rate investment along with progressive changes in socioeconomic structure IR 𝐼𝑅𝑡 = ( 𝐶𝑃𝐼𝑡− 𝐶𝑃𝐼𝑜 𝐶𝑃𝐼𝑜 ) 𝑥 100 Relates to favorable changes in human capital, equality, and quality of life Whereas: Includes qualitative measures such as 𝐼𝑅𝑡 = inflation rate in current period Human Development Index or HDI, infant mortality rate, etc. ​  Measuring Economic Growth GDP GNP Gross Domestic Product (GDP) Gross Domestic Gross National Product Product Focuses on the location of production Refers to changes in income, savings, and An estimated value of An estimated value of investment along with progressive changes the total worth of a the total worth of in socioeconomic structure country’s production production and services and services, within its by the citizens of a The market value of all final goods and boundary, by its country, on its land or services produced within an economy in a nationals and on foreign land, given period of time. foreigners, calculated calculated over the Total Income = Total expenditure everyone over the course of one course of one year year in the economy + the economy’s output of goods and services GDP = consumption + GNP = GDP - nR (Net Total production within a country’s borders investment + Income inflow from (government assets abroad or Net spending) + (exports - Income Receipts) - NP Gross National Product (GNP) imports) (Net payment outflow to foreign assets) Focuses on the nationality of the producer Uses: Business, Uses: Business, Measures the total income generated by a Economic Forecasting Economic Forecasting country’s residents and businesses, regardless of its location To see the strength of To see how the Income sent abroad by foreign workers and a country’s local nationals of a country economy are doing economically businesses operating within the country Total value of products Total value of goods & Gross National Income (GNI) & services produced services produced by all within the territorial nationals of a country Measure of a country’s total income boundary of a country (whether within or Total earnings of all the people and outside the country) businesses in a country, whether they’re earned inside or outside the country’s borders. Rules for GDP Computation Total salary of all employees of that Used Goods - Sale of used goods company (secondhand cellular phone) is not included Includes money earned from working as part of GDP. abroad, investments, and other sources. Treatment of Inventories - A good is Includes income from foreign investments “purchased” by the owner for the firm’s and work inventory, the payment is counted as an expenditure by the firm owners. Simple Formulas: GNP and GNI Intermediate Goods - (Case 1) GDP includes only the value of final goods. (Case Gross National Income 2) GDP includes the sum of the value added ○ GNI = GDP + Net Income at each stage of production. The value Received from abroad added equals the value of the final goods Gross National Product less the value of the intermediate goods ○ GDP + Net Income Recieved used. from Abroad - Net Income Paid Imputations - The value estimated for Abroad goods and services without market prices. ​  Without Imputations - (1) Rent for cars, Income Approach jewelries, and other durable goods owned Add up all the income that resulted from by households; (2) Goods produced and selling all final goods and services consumed at home; & (3) Value of goods produced in a given year and services sold in the underground Y = COE + GOS + GMI + (T-S) economy. Y= GDP; COE= Compensation of Employees; GOS= Gross Operating Calculating Gross Domestic Product (GDP) Surplus; GMI= Gross Mixed Income; (T-S)= Net Indirect Taxes Components of Expenditure Y= A + I + S; Agriculture, Industry, Services Consumption ○ Includes household expenses such Industrial Origin Approach as payment for nondurable goods, Measured GDP by determining the sum durable goods, and services. of the market value of the total production Investment of all major industries comprising the ○ Consists of goods bought for future economy use ○ Agriculture, Fishery, and Forestry Government Purchases Sector + Industry Sector (Mining, ○ Consists of goods and services Manufacturing, Construction, bought by the government, such as Electricity, Gas, and Water) military equipment and administrative ○ Service Sector (transportation, services. communication and storage, Net Exports trade, finance, owners of ○ Goods and services sold to other dwellings and real estate, countries (X) minus the value of services – private & government) goods and services that foreigners Value-Added Approach sell us (M). Y=A+I+S ○ NX = X - M A= Agriculture; I= Industry; S= Services ○ Whereas: (export = x, import =m) NOT INCLUDED in GDP Simple Formula of GDP Purely Financial Transactions ○ Public transfer payments - e.g. GDP = C+G + I +NX Pensions ○ Private transfer payments - e.g. Gift Expenditure Approach certificates given by a private individual Add up all the spending on final goods to another and services produced in a given year Second-hand Sales Y = C + I + G + NX Underground Economy Y= GDP; C= Consumption; I= ○ Activities that are illegal (i.e. illegal drug Investment; G= Government Purchases; trade, prostitution, piracy) NX= Net Exports ○ Activities that are unrecorded for tax purposes Sample Questions: GDP or NOT? ​  1. Furniture stored for future sale ○ Total value of goods and Answer: GDP services is measured using a Treatment of Inventories constant set of prices 2. Refined sugar in donut production ○ generally considered a Answer: GDP more reliable indicator of Intermediate Goods economic health than nominal 3. Preloved books GDP. Answer: Not GDP Used Goods Sample 4. Purchase of clothes previously not sold but stored for future sale GDP GDP = (Price of Apples x Qty of Apples) Answer: Not GDP + Quantity of Oranges) Treatment of Inventories = (Php 80.00 x 4) + (Php 70.00 x 3) 5. Any sold or consumed final goods in the = 320 + 210 = 530 initial sale Misleading GDP increase Answer: GDP “For this purpose, economist used real Intermediate Goods GDP” Sample Questions: GDP GDP Deflator Formula 1. According to the Statista research, the average lifespan of smartphones has slightly decreased from 2.75 years in GDP Deflator 𝐺𝐷𝑃𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = ( 𝐺𝐷𝑃𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑟𝑒𝑎𝑙 ) 𝑥 100 2021 to 2.58 years in 2023. Given this, Whereas: smartphones can be considered as what 𝐺𝐷𝑃𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = measures ratio of nominal to real type of good in terms of consumption? GDP Answer: Non-durable 𝐺𝐷𝑃𝑁𝑜𝑚𝑖𝑛𝑎𝑙 = economic output w/o adjustments 2. When there is a trade surplus, What is 𝐺𝐷𝑃𝑅𝑒𝑎𝑙 = economic without adj for price changes the algebraic sign of net exports in terms of the expenditure formula of GDP? Answer: Positive GDP Growth Rate 𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 = ( 𝐺𝐷𝑃𝑡 −𝐺𝐷𝑃𝑜 𝐺𝐷𝑃𝑜 ) 𝑥 100 3. If jollibee acquires a new piece of land to 𝐺𝐷𝑃𝑜 = GDP in the previous period further expand its fast food business. 𝐺𝐷𝑃𝑡 = GDP in the current period Jolibee is spending on what type of business fixed investments? Answer: Structures GDP per capita 𝐺𝐷𝑃𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 = ( 𝐺𝐷𝑃 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑙𝑎𝑐𝑒 𝑃𝑜𝑝 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑙𝑎𝑐𝑒 ) Nominal and Real GDP Example 3, 600 𝑈𝑆𝐷 = ( 360,000,000 𝑃𝑜𝑝 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑙𝑎𝑐𝑒 ) Nominal GDP Macroeconomic Policies: Fiscal ○ Total value of goods and services measured at current Exhaustion of government revenue prices collection Real GDP Making use of government funds to influence the economy ​  Used for inflation-like monetary policies and achieve a certain level of employment Macroeconomic Policies: Trade Fiscal Expansionary Contractionary Policies (Pump Priming) (Belt Tightening) TARIFFS QUOTAS Taxation Government Government decreases taxes increases taxes Definition Imposed on Limit on the quantity imported goods of a particular good Spending Government Government and services that can be increases decreases imported spending spending Purpose To make foreign To limit foreign goods more competition and Macroeconomic Policies: Monetary expensive and keep prices protect artificially high Controlling the money supply to the domestic industries influence inflation or even economic growth in such a manner Done by central banks or federal reserve banks Contents from Ma’am Alminda Dacoco, Sir Von Marano’s Video Lectures and Ma’am Sharon Monetary Expansionary Contractionary Albacete Powerpoints Policy Tools Discount Decreases Increases Rates discount rates discounts rates Open Buys securities Sells securities Market Operations Reserve Requires low Requires high Requireme RRR RRR nt Ratio Proofread by Team Secretary and Team President ​