SYSNTHESIS

Economics, according to a widely accepted definition, is the

study of the allocation of scarce resources among unlimited and
competing uses. It is the social science that deals with the ways in
which men and societies seek to satisfy their material needs and
desires, since the means at their disposal do not permit them to do so
completely. In general, economics is the study of how agents (people,
firms, nations) use scarce resources to satisfy unlimited wants.
The

field

of

economics

is

divided

into

two

subfields:

microeconomics and macroeconomics. Microeconomics focuses on

the individual parts of the economy. It studies decision making by
households and firms and the interaction among households and
firms in the marketplace. It considers households both as suppliers of
factors of production (labor, land, capital, entrepreneurship) and as
ultimate consumers of final goods and services. It also analyzes
firms both as suppliers of goods and services and as demanders of
factors of production. By contrast, macroeconomics is the study of the
economy as a whole. It examines the cyclical movements and trends
in economy-wide phenomena, such as unemployment, inflation,
economic growth, money supply, budget deficits, and exchange rates.

The entire synthesis will focus on the study of macroeconomics and

its components.
Economists define macroeconomics as a field of economics that
studies the relationship between aggregate variables such as income,
purchasing power, price and money. This means macroeconomics
examines the function of the economy as a whole system, looking at
how demand and supply of products, services and resources are
determined and factors that influence them. Because the economywide events studied in macroeconomics arise from the interaction of
many households and firms, macroeconomics is inevitably rooted in
microeconomics. When economists study the economy as a whole,
they must consider the decisions of individual economic actors.
Macroeconomic events and the state of the economy affect all
members of society.
As economists, an overall view of money transactions with the
rest of the world is needed considering that trade at present revolves
in an open economy. The government system in analyzing this is the
Balance of Payments. The balance of payments records financial
transactions

made

between

consumers,

businesses

and

the

government in one country with others. The BOP figures provides the
information of how much is being spent by consumers and firms on

imported goods and services, and how successful firms have been in
exporting to other countries. It is governed by the accounting rule:
anything (goods, services, assets) that gives rise to a receipt from
(payment to) the rest of the world is a credit (debit) and enters as a
positive (negative) entry.
Economists also study consumer spending to project trends and
see how consumers affect the national and world economies.
Consumers divide income between consumption and savings, and
even if the household income goes to zero, consumption doesnt.
Consumers draw on future income or savings to support the
household

when

there

is

no

income.

This

is

autonomous

consumption, not dependent on the income level. If consumers have

extra peso, they spend part of that income as well.
The relationship between income and expenditure is the
consumption schedule or consumption function in economics. When
disposable income rises, consumption increases. The fraction of each
peso spent is the marginal propensity to consume. Consumption may
exceed

disposable

income

for

low-income

individuals.

As

the

disposable income increases, the average propensity to consume falls.

In other words, the consumer spends a smaller percentage of the

extra peso. Consumption increases with increased income, but shortterm increases affect consumption less than long-term increases.
In the short run, the equilibrium level of output is the level of
output at which aggregate expenditures and output are equal.
Aggregate expenditures are comprised of consumer expenditures,
private investment expenditures, government expenditures and net
export expenditures. The price level determines the supply of real
money balances. Hence, the price level and the equilibrium level of
aggregate expenditures are negatively related. An increase in
output causes many, but not all, production costs to increase, which
in turn causes the price level to increase. So, as demands are placed
on

an

economy

to

increase

production,

firms

can

increase

production to some extent; however, as production increases, some

factor

prices

and

the

amount

of

inputs

needed

to

increase

production also increase. Therefore, the economy's average price

level increases along with output.
When aggregate demand equals aggregate supply (potential
output), internal balance of the economy is achieved. Internal
balance is defined as a situation in which real output is at or close
to its potential or capacity level and the inflation rate is low and
non-accelerating.

Therefore,

situations

such

as

low

inflation

combined with slow or negative growth or rapid growth combined

with high inflation dont exist. If there is internal balance, there is
also external balance. External balance is often defined as a current
account position that can be sustained by capital flows on terms
compatible with the growth prospects of the economy without resort to
restrictions on trade and payments, so that the level of international
reserves is adequate and relatively stable. Both internal balance
and external balance depend on two fundamental variables the
level of real domestic demand and the real exchange rate which,
in

turn,

reflect

the

underlying

economic

conditions

and

macroeconomic policies. For example, a current account deficit

occurs if the real exchange rate is overly appreciated and/or excess
real domestic demand exists. The opposite situation results in a
current account surplus. The policy authorities generally strive to
achieve

internal and

external balance

simultaneously, which

requires a particular combination of the real exchange rate and

real domestic demand.
In order to engage in transactions buying and selling goods
and services, individuals demand money. Because the price level is
the average price of goods in terms of money, the inverse of the price
level is the price of money in terms of goods. Money is supplied by the

governments monetary authority. In equilibrium, the quantity of

money supplied equals the quantity of money demanded. The price
level adjusts until the money market is in equilibrium. Inflation is
the continuous rise in the price level. When the money supply is
growing continuously, the price level grows at the same rate as the
money supply which causes the demand for money to fall. Thus the
price level must jump upward to maintain equilibrium in the money
market.
The Central Bank of ones country is held responsible in
maintaining money market equilibrium. The primary function of
the central bank is to control money supply in the economy. It is the
central authority responsible for issuing of currency on behalf of the
government. In addition to this primary function, the central bank
performs the following duties: (1) it receives the state revenues, keeps
deposits of various departments and make payments on behalf of the
government; (2) it keeps the cash reserves of the commercial banks,
acts as a clearing-house in the inter-bank transactions and as a
lender of last resort; (3) it controls the money and capital markets
by changing the supply of money and thereby the rate of interest; (4)
it is the custodian of the foreign exchange; (5) it is the adviser to the
government in all the monetary affairs.

When a country saves a large fraction of its income, more

resources are available for investment in capital, and higher capital
raises the economys productivity, raising living standards still
further. According to the savingsinvestment spending identity,
savings and investment spending are always equal for the economy
as a whole. The government is a source of savings when it runs a
positive budget balance or budget surplus; it is a source of dissavings
when

it

runs

negative

budget

balance

or

budget

deficit.

Households invest their current savings or wealth by purchasing

assets. Assets come in the form of either a financial asset or a
physical asset. A financial asset is also a liability from the point of
view of its seller. There are four main types of financial assets: loans,
bonds, stocks, and bank deposits. Each of them serves a different
purpose in addressing the three fundamental tasks of a financial
system: (1) reducing transaction costs; (2) reducing financial risk;
and

(3)

providing

liquid

assets.

Financial

intermediaries

institutions such as mutual funds, pension funds, life insurance

companies, and banksare critical components of the financial
system. They are institutions through which savers supply funds
indirectly to borrowers. The market for loanable funds coordinates

individuals decisions so that saving and investment are always

equal in the aggregate.
Although individuals and firms demand money for use in
transactions, there is an opportunity cost of holding money, namely,
the interest that could be earned by holding another asset such as a
savings account or a bond. At a higher interest rate, individuals
will economize on money holdings; at a lower interest, they will hold
relatively more savings as money and less in nonmonetary assets.
Because individuals hold money-fixed assets, wealth will change
with changes in the price level. Consumption will change as a
consequence. In addition, the real money supply will change with
the changes in the price level. Two aggregate-demand effects follow.
First, investment will change with changes in interest rates; second,
consumption will change with changes in interest rates. Finally,
changes in the price level affect net exports, a fourth component of
aggregate demand. Thus, aggregate real output demanded will
change with changes in the price level. Because the changes are
caused by changes in the price level rather than by changes in
desired investment or consumption that are independent of pricelevel changes, however, these price-level-induced changes determine
the slope of the aggregate demand curve.

The demand exchange rate is the price of foreign money in

terms of domestic money. The foreign exchange rate is the price of
domestic money in terms of the foreign money. It is the relative price
of one currency in terms of another. Exchange rates can be either
determined in free markets, under a flexible-exchange-rate regime,
or set by each central bank in a fixed-exchange-rate regime. In a
flexible-exchange-rate system, as traders demand more or less
foreign currency to purchase foreign goods so as to take advantage
of potential arbitrage opportunities, the value of the foreign
currency appreciates or depreciates, respectively. Under a fixedexchange-rate system, the central bank sets the exchange rate and
offers to buy or sell foreign exchange at that price. However, a
central bank can control either the money supply or the exchange
rate, but not both. If it chooses to control or fix the exchange rate,
then the countrys money supply will be determined by the private
sector. If the exchange rate is set at a level far from what the market
would be, the central bank will accumulate or run down its stock of
foreign currency. In an extreme case, the central bank can run out
foreign currency, and hence be required to devalue its own currency.
Public

goods

can

be

provided

more

efficiently

by

the

government than by the private sector, because they are either

nonexcludable or nonrivalrous or both. When the government

provides public goods, it can increase the total amount of goods
available for consumption. Government spending falls into three
categories. Some government spending is wasteful meaning its
benefits are less than its cost. Some government spending is
productive meaning it provides an excess of benefits over cost. Some
government spending consists of pure transfers, in which case the
benefits are exactly equal to cost. In analyzing the effects of a
government spending program, it is important to know whether the
spending is wasteful or productive or is a pure transfer and whether
the program representing expenditure is temporary or permanent.
Wasteful government spending causes the supply of current goods to
shift leftward, productive government spending causes the supply of
current goods to shift rightward, and pure transfers have no effect
on supply. Wasteful government spending makes people poorer and
therefore causes the demand for current goods to shift leftward.
Productive government spending makes people richer and therefore
causes the demand for current goods to shift rightward. Pure
transfers have no effect on demand.
To spend, the government must tax. Tax is the lifeblood of a
nation. Tax revenues are used to support government spending.

Health care, defense, social security, and politicians' salaries are all
government expenses. From an economic standpoint, it is reasonable
to think of the Philippine government as one large company. The
total

amount

of

government

spending

is

dictated

by

the

governmental budget, just as the spending of a company is dictated

by the budget. Through taxes and government spending, the
government has a direct hand in the workings of the economy. By
changing either taxes or government spending, the government
affects the amount of money available to the public. Changes in
taxation and in government spending are called fiscal policy. The
government actively uses fiscal policy to steer the economy. Fiscal
policy describes two governmental actions by the government. The
first is taxation. By levying taxes the government receives revenue
from the populace. Taxes come in many varieties and serve different
specific purposes, but the key concept is that taxation is a transfer of
assets from the people to the government. The second action is
government

spending.

This

may

take

the

form

of

wages

to

government employees, social security benefits, smooth roads, or

fancy weapons. When the government spends, it transfers assets from
itself to the public. Through the fiscal policy, the government can
play a significant role in reducing inequality of income and wealth,

as well as inequality of opportunity. Both tax and spending policies

need to be carefully designed to balance distributional and
efficiency objectives.
Market economies tend to cycle. For one group of graduating
seniors, jobs may relatively easy to find because unemployment rate
is low; for another, jobs may be much more difficult to find because
unemployment

rate

is

high.

Sometimes

individuals

find

that

purchasing assets is relatively more difficult and more costly because

interest rates are low. More generally, an economys total output
increases at some times and decreases at other times. During
downturns,

resources

are

idle.

During

upturns,

resources

are

employed once again. These fluctuations occur when real output is

less than potential output. When this happens, labor resources are
unemployed.
A

countrys

balance

of

payments

accounts

records

its

international trading, borrowing, and lending. There are in fact

three balance of payments accounts: (1) Current account, (2)
Capital account, and (3) Official settlements account. The current
account records payments for imports of goods and services from
abroad, receipts from exports of goods and services sold abroad, net
interest paid abroad, and net transfers. The Capital account records

foreign investment in the Philippines minus Philippine investment

abroad. The official settlements account records the change in the
official Philippine reserves. The sum of the balances on the three
accounts always equals zero. That is, to pay our current account
deficit, either the country must borrow more from abroad than lend
abroad or use official reserves to cover the shortfall.
When we buy foreign goods or invest in another country, we
have to obtain some of that countrys currency to make the
transaction. The foreign exchange market is the market in which the
currency of one country is exchanged for the currency of another.
The exchange rate is determined by the demand and supply in the
foreign exchange market. Changes in interest rates and in expected
future exchange rate change both demand and supply and bring
changes in the exchange rate.