Introduction to Economics PDF

INTRODUCTION TO ECONOMICS Lesson 1 LESSON OBJECTIVES: 1. Understand the fundamental concepts and definitions of economics. 2. Differentiate between the various divisions of economics. 3. Identify the factors...

INTRODUCTION TO ECONOMICS Lesson 1 LESSON OBJECTIVES: 1. Understand the fundamental concepts and definitions of economics. 2. Differentiate between the various divisions of economics. 3. Identify the factors of production and the basic economic problems. 4. Explain different economic systems. 5. Comprehend the principles of national income accounting. ECONOMICS DEFINED: ❖ comes from the Greek term “Oikonomia” which means household management. “oikos”- household, nemein- management. ❖ The Science of Wealth. “An inquiry into the nature and causes of the wealth of the nations.” This focuses on three variables: Pursuit of Self Interest, Division of Labor, freedom of Trade. (Adam Smith, 1776). ❖ study of how society could use and share limited resources into different items products and services for all the sectors of society for present and future consumption. (Paul Samuelson) ❖ it is the study of how man works, looks for food, and finds material needs., economics emphasizes the problem in production of how to solve or minimize the problem. (Paul Wonnacott) ❖ the study of production, management, and use of scarce resources. (Lloyd Reynolds) ❖ is concerned with the wise allocation of scarce resources. (Cristobal Pagoso) ❖ the situation that needs the decision of how, when, and where the scarce resources are used. (Roger Le Roy Miller) ❖ a scientific study on how people and society decide. People have unlimited needs. To satisfy this, they get limited resources. Consumption may be today or tomorrow. (Gerardo Sicat) DIVISION OF ECONOMICS ❖ Microeconomics – pertains to the study of the small unit of society (family, household, person) consumption, spending, production, and investment. ❖ Macroeconomics – refers to the study of the large unit of society’s (banks, businesses, government, firms) consumption, spending, production, and investment. FACTORS OF PRODUCTION: 1. Land (Terrestrial Domain) – are resources found above and underneath the earth that are used to produce other goods. Introduction to EconomicsPage 1  ❖ Alienable and Disposable Land - those lands of the public domain that have been the subject of the present classification system and declared as not needed for forest purposes. ❖ Forest Land/ Timber Land - Forest land is defined as 10 percent forested by trees of any size. This includes land that may have been naturally or artificially regenerated. Timberland is forest land available to harvest and capable of productivity over a long time. 2. Labor – refers to the physical and mental components of human resources that contribute to converting raw materials into finished goods. Three Sectors of Labor 1. Employed 2. Unemployed (a condition where people are physically and mentally qualified and are willing to work but cannot find a job aligned to their educational attainment. ❖ Frictional unemployment/ Turnover unemployment – occurs in the job search process of individuals who quit their jobs. ❖ Seasonal unemployment – seasonal job ❖ Structural unemployment – mismatch/ alignment to the job ❖ Cyclical unemployment – the cycle of business operation. Prosperity and recession. 3. Underemployed 3. Capital - refers to finished goods used to create other goods. ❖ Physical Capital - Machinery, Equipment, Tools ❖ Financial capital – Money, Cash 4. Entrepreneurs – are part of the human resource who are experts in the management of production or the factors of production. BASIC ECONOMIC PROBLEMS: 1. What to produce? ❖ Consumption Goods and Services – are goods and services purchased by individual consumers for personal enjoyment and to improve the quality of life, ❖ Capital Goods – refer to goods utilized by the businesses to increase their productive output. ❖ Government Goods and services – goods needed and bought by the government to deliver services to the public. ❖ Export Goods and services – goods and services produced by one country to be sold to other countries. 2. How to Produce? (Process, techniques, procedures) – manufacturing 3. How much to produce? (Volume and quantity of the products to be produced) 4. For whom to produce? Refers to the market. Demographic profiling of the consumers. Consider the ability of the buyers to buy based on their income. TYPES OF ECONOMIC SYSTEMS Introduction to EconomicsPage 2  1. Capitalism (Market Economy) – an economic and political system in which a country's trade and industry are controlled by private owners for profit government intervention. The decision is popularly referred to in economics as Laissez Faire a French word meaning “leave alone” policy. (USA, Canada, Japan, Great Britain, Philippines) Characteristics: ❖ Presence of Economic Freedom ❖ The resources are privately owned ❖ No government intervention ❖ People are free to choose their occupation ❖ There is a substantial amount of competition. ❖ The kind and amount of production is determined by price and people searching for a profit. 2. Socialism – an economic system that allows the government to manage and control the major and key industries while the rest are left for the private to manage or acquire in socialism. The government decides what goods to be produced and sets the prices of the commodity. (Denmark, Finland, Netherlands, Norway, Belgium) (Portugal, Sri Lanka, India, Tanzania (blog.peerform.com) Characteristics: ❖ the government is allowed to manage and control the major and key industries. ❖ The government decides what goods to be produced. ❖ Private individuals are allowed to manage the other part of the industry. ❖ The government sets the prices of the commodity. 3. Communism (Command Economy)– derived from the French term Communisme- common. The government owns and controls the factors of production. Both political and economic systems. Classless society. (China, Cuba, Laos. North Korea, Vietnam). This was proposed by Plato, who believed that money and trade must be subject to administrative interest and control and the equal or just distribution of opportunities to individuals. Proposes the theory of money and the market. Characteristics: ❖ Resource allocation is done by the government. ❖ No Economic Freedom ❖ Presence of central planning of all economic activities. ❖ There is no free competition. ❖ Only the government plays the role of setting the legal framework for economic life production and distribution of goods and services. 4. Mixed Economy– characterized by the presence of private ownership of the different means of production and the presence of a government that is in control of the implementation of the fiscal and monetary Policies. The government also intervenes in other areas of the economy such as providing public services such as health, education, waste management, and the regulation of private business. (Iceland, Sweden, France, Introduction to EconomicsPage 3  United Kingdom, USA, Russia, India, Hongkong, Philippines). Sets the ceiling price and the floor price of the commodities. Characteristics: ❖ The means of production are owned and controlled by the private sector as well as the government. ❖ The people decide on economic activities within the economy. ❖ The combination of the best features of capitalist and command economies is observable in the market. 5. Traditional Economy- decisions are based on customs, beliefs, and practices handed down from generation to generation. Thus, considered a backward type of economy. Characteristics: ❖ Communal Land Ownership ❖ The leader decides on the management of agricultural production which is the basis of the economy. ❖ The production, distribution, and use of economic resources are based on traditional practices. ❖ New technologies are not welcomed since they are in contrast of the traditional practices of their ancestors. ❖ The economy is only its third priority, while culture and religion and are their foremost priority. ❖ Mines are used to gather raw materials for production. NATIONAL INCOME ❖ National income is the total value of all the goods and services manufactured by the residents of the country, in a year., within its domestic boundaries or outside. ❖ It is the citizens' net income by production in a year. ❖ The labor and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. SOURCES OF NATIONAL INCOME 1. Gross National Product- Gross National Product (GNP) is an estimated value of all goods and services produced by a country’s residents and businesses. GNP does not include the services used to produce manufactured goods because its value is included in the price of the finished product. It also includes net income arising in a country from abroad. COMPONENTS OF GNP ❖ Consumer goods and services ❖ Gross private domestic income ❖ Goods produced or services rendered Introduction to EconomicsPage 4  ❖ Income arising from abroad. FORMULA TO CALCULATE GNP GNP = GDP + NR (Net income from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets). 2. Gross Domestic Product - the aggregate value of goods and services produced in a country. GDP is calculated over regular time intervals, such as a quarter or a year. GDP as an economic indicator is used worldwide to measure the growth of a country's economy. COMPONENTS OF GROSS DOMESTIC PRODUCT ❖ Wages and Salaries ❖ Rent ❖ Interest ❖ Undistributed profits ❖ Mixed-income ❖ Direct taxes ❖ Dividend ❖ Depreciation THE FORMULA FOR THE CALCULATION OF GDP GDP = consumption + investment + government spending + exports - imports. APPROACHES TO DETERMINING GROSS DOMESTIC PRODUCT 1. Income Approach – adds up the income received by the country in one year. This income derives from those who participated in producing goods and services. This may include wages, interest, rent, and profit. GDP = Wages + Rent + Interest + Profits + Taxes + Depreciation 2. Expenditure approach – adds up the spending on all final goods and services produced in the country in one year. This may include consumption, investment, government expenditure, and Net Export. GDP = Consumption + Investment + Government Expenditures + Exports – Imports Introduction to EconomicsPage 5 PROBLEM ANALYSIS: 1. Assume the following figures for a country Y: wages (W) amount to 5,000 billion, rent (R) totals 800 billion, interest (I) equals 1,200 billion, and profits (P) are 2,000 billion. Additionally, indirect taxes less subsidies (T) are 400 billion, and depreciation (D) is 500 billion. In an unexpected twist, the government decides to introduce a new policy that increases wages by 10% but also imposes a new tax on profits, reducing them by 5%. How does this policy affect the GDP calculated using the income approach? 2. To further assess the economic health of this country, calculate its GDP using the expenditure approach. Given the following data: consumption (C) is 6,000 billion, investment (I) is 1,500 billion, government spending (G) is 2,500 billion, exports (X) are 1,200 billion, and imports (M) total 1,300 billion, use the expenditure approach formula to determine the GDP. During your calculations, you learn that the government plans to increase its spending by 20% while exports are projected to grow by 15%. How will these changes impact the GDP calculated using the expenditure approach? 3. Country X has an economy with various components contributing to its entire economic activity. The consumption expenditures by the households amount to PHP27,500 billion, while businesses invest PHP11,000 billion. The government contributes PHP 16,500 billion through its purchases of goods and services. Additionally, the country exports goods and services worth PHP 8,250 billion but imports goods and services worth PHP 5,500 billion. Furthermore, income earned by foreign residents within Country X totals PHP 2,750 billion, whereas residents of Country X earn PHP 1,650 billion abroad. Compute for the GDP and GNP of the Country X. Introduction to EconomicsPage 6  Food Introduction to EconomicsPage 7  End of the Lesson Introduction to EconomicsPage 8