Macroeconomics Chapter 1-4 PDF

THE CONSUMPTION FUNCTION MACROECONOMICS Chapter 1  PERSONAL INCOME  study of how we can best increase our country ' s wealth  DISPOSABLE INCOME (Yd) given the available resources and how these resources are...

THE CONSUMPTION FUNCTION MACROECONOMICS Chapter 1  PERSONAL INCOME  study of how we can best increase our country ' s wealth  DISPOSABLE INCOME (Yd) given the available resources and how these resources are - Available income for transformed by entrepreneurs consumption excluding into final goods and services taxes which we ultimately consume to satisfy our needs and wants - Yd = Personal Income –  The study of the aggregate Personal Tax economic behavior (government, business,  CONSUMPTION households and international EXPENDITURE trade) - Yd – Savings  The study of the economic behavior of the state Marginal Propensity to Consume (MPC) Goals of Macroeconomics - For every unit of income, how much do you spend 1. Sustained economic growth - for consumption expansion of production, Marginal Propensity to Save (MPS) increase national income, increase employment, decrease - For every unit of income, poverty how much do you save 2. Price stability - absence of rapid MPC + MPS = 1 inflation and the absence of wide price fluctuation THE CONSUMPTION FUNCTION 3. Full employment - all resources  C = a + b (Yd) are fully utilized, no workers - a = level of consumption should be involuntarily out of at 0 income work - b = MPC 4. Trade balance – imports = - Yd = Disposable Income exports 5. Redistribution of income - equal THE MULTIPLIER CONCEPT distribution of wealth and income - Multiplier (k) – process of 6. Efficiency - producing output at generating income through the a minimum opportunity costs of circular flow of exchange the inputs used in production between the household and the 7. Economic development - firm improvement in the quality of life of the people 8. Economic security - fulfillment - Relationship of MPC to K = of the economic needs of every direct member of the society including - Relationship of MPS to K = the handicapped indirect   Nominal GNP/GDP: CHAPTER 2 - Measures the value of output in a given period in the prices of NATIONAL INCOME ACCOUNTING that period, or, as it is sometimes put, in current  Measuring the performance of pesos. the economy is one of the main  Real GNP/GDP or GNP/GDP at concerns of macroeconomics. constant prices: - Measures changes in physical  GROSS NATIONAL PRODUCT output in the economy between (GNP): different time periods by valuing - Is the market value or money all goods produced in the two value of all final goods and periods at the same prices, or in services produced by all constant pesos. nationals in the economy during a given period of time. PER CAPITA INCOME  GROSS DOMESTIC  GDP / Population PRODUCT (GDP): - Measures the market value of NATIONAL INCOME ACCOUNTING all final goods and services produced within the boundaries  NET NATIONAL PRODUCT of the Philippines, whether by (NNP): Filipinos or foreign-supplied GNP – Depreciation resources. NATIONAL INCOME ACCOUNTING Characteristics of GNP/GDP:  NATIONAL INCOME (NI): NNP – Indirect Taxes 1. It is a flow concept, measured as the quantity of final goods Approaches to GDP Measurement and services produced by the economy per period of time. A. EXPENDITURE APPROACH 2. It is measured in monetary terms.  In this approach, the GNP/GDP 3. It includes goods and services is computed by getting the sum bought for final use, not of the final expenditures of the unfinished goods in their four major sectors of the intermediate stages of economy. These major sectors production that are purchased include the following: for further processing & resale. o Household – personal 4. It includes only final goods and consumption expenditure services produced during the (C) accounting year. o Businesses – private 5. It is a measure of productive domestic investment (I) activities only. o Government – government consumption GROSS NATIONAL PRODUCT expenditures (G) o Foreign Sector – net exports (X – M) GDP = C + I + G + (X - M)  Measures changes in the prices paid by consumers for a basket B. INCOME APPROACH of goods and services.  General measures of average  GDP = W + R + i + P + IBT + D monthly and annual changes in o W = Wages, Salaries, the retail prices of commodities. and Supplements /  Approximate reflection of the Compensation of prices of the final goods and Employees services of the economy. o R = Rental Income of  MARKET BASKET – refers to a Persons sample of goods and services, o i = Net interest which meant to represent the o P = Corporate profits totality of all goods and services before taxes + Income of purchased by households unincorporated relative to a base year. enterprises o IBT = Indirect Business Inflation Taxes, adjustments, stat discrepancy  Inflation – continuous & o D = Depreciation sustained increase in prices.  Hyperinflation – it is the higher C. INDUSTRIAL ORIGIN APPROACH destruction of the value of the currency.  GDP = AS + IS + SS o AS = Agrifishery Kinds of Inflation o IS = Industry Sector o SS = Services Sector 1. Demand Pull Inflation – due to the shift in the economies GDP Shortcomings demand curve.  Non-market Transactions (homemade production, childcare, homemade services like repairs and maintenance)  Distribution, Kind, and Quality of Products 1. Increased money supply  Underground Economy 2. Cyclical boom  Economic Bads 3. Wartime period 4. Election time 2. Cost Push Inflation – due to CHAPTER 3 the shift in the economies supply curve. Inflation  Inflation – continuous & sustained increase in prices. CONSUMER PRICE INDEX 1. Increase in Oil Prices  2. Increase in Wages 1. EXPANSION 3. Monopolies o During expansion, the economy experiences Losers of Inflation relatively rapid growth, interest rates tend to be 1. Fixed income earner low, and production 2. Pensioners increases. 3. Creditors o The economic indicators associated with growth, Gainers of Inflation such as employment and wages, corporate profits 1. Flexible Income and output, aggregate 2. Speculators – perceptive demand, and the supply businessmen of goods and services, 3. Debtors tend to show sustained uptrends through the DIFFERENT ECONOMIC expansionary stage. CONDITIONS 2. PEAK o The peak of a cycle is  Inflation when growth hits its  Hyperinflation maximum rate.  Recession o Prices and economic  Depression indicators may stabilize  Stagnation for a short period before reversing to the Economic Cycles downside. o Peak growth typically  An economic cycle, also known creates some as a business cycle, refers to imbalances in the economic fluctuations between economy that need to be periods of expansion and corrected. As a result, contraction. businesses may start to  Factors such as gross domestic reevaluate their budgets product (GDP), interest rates, and spending when they total employment, and believe that the consumer spending can help economic cycle has determine the current economic reached its peak. cycle stage. 3. CONTRACTION  Finished in 5 - 7 years. o A correction occurs when growth slows, employment falls, and prices stagnate. o As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices.  If the contraction o 2. Precautionary demand – for continues, the unforeseen events/emergency recessionary purposes environment may spiral 3. Speculative demand – for into a depression. liquidity purposes 4. RECOVERY (investments/luxuries) o The recovery phase is when the economy hits MONEY SUPPLY its trough, bottoms out, and begins the cycle  Money in circulation in the anew. economy o Policies enacted during  Stock of money serving as a the contraction phase vehicle of economic activities begin to bear fruit. Businesses that MONEY SUPPLY retrenched during the contraction begin to ramp 1. Coins and bills in circulation up again. Stock values 2. Demand deposits in the bank – tend to rise as investors current account/checking see greater potential account returns in stocks than 3. Quasi money – money used by bonds. Production ramps the bank though owned by up to meet rising different individuals consumer demand and 4. Deposit substitutes – savings in with it, business bank, loan associations, and expansion, employment, credit unions income, and GDP. Sources of Money Supply: CHAPTER 4 1. Printing of New Money MONEY MARKET o Should be backed up with gold MONEY o This is called monetization of debt  Medium for exchange since government is exchanging interest- CURRENCY bearing for non-interest- bearing debt.  Money of a certain country Without commodity to back up MONEY DEMAND creation of money:  Money held by the bank a. Token coins – issued coin is not worth its face value DEMAND FOR MONEY b. Credit or fiat paper currency 1. Transactions demand – everyday transactions  2. Lending operation of the banking system Lending MS? Lending MS? 3. Foreign Currency Inflows  Inflows > Outflows = MS?  Inflows < Outflows = MS? 4. Taxes  Increase Tax – MS?  Decrease Tax – MS? MONEY SUPPLY  High money supply can lead to high national income due to increased multiplier. o HIGH MONEY SUPPLY o HIGH DEMAND o HIGH CONSUMPTION o HIGH MULTIPLIER o HIGH NATIONAL INCOME