Final DevEcon Lecture 1 (As of 30-01-2020)

San Beda University
College of Arts and Sciences

Department of Economics
Macroeconomic
Theory
MACROTH
Assistant Prof. C. B. Mendoza, Jr.

50 Years of Excellence in Economics
Preliminaries
Course House Rules
Index Card
Note: Provide 1.5 x 1.5 photo
Section / Class Schedule / Classroom Number Indicate if “Varsity” or “Scholar”
Family Name, Given Name, Middle Initial Nickname
Year / Course
Contact number
E-mail
Guardian name / Contact number
What is/are your expectation/s in this subject? Answer concisely.
Discussion Outline
• Introduction
• Course Description
• Course Objectives
• Learning Outcomes
• Course Requirements
• Grading System
• Other Matters
Credentials
CELEDONIO BOQUILON MENDOZA, JR.
Assistant Professor
AB Economics with Computer Applications
Batch 2001, San Beda University
Masters in Applied Business Economics

Batch 2015, University of Asia and the Pacific
Has almost sixteen years of industry work

experience: eight years as a Science Research
Specialist for the Philippine Government’s
Department of Energy; eight years as an
analyst/planner for an airline; and three months
of training as a research executive for a market
research agency.
Email: cbmjr.mnl@gmail.com
Contact No.: 0922-804-0084
Course Description
• Macroeconomics is a preparatory course

that introduces students to the
fundamental macroeconomic principles,
concepts, and theories
• It primarily deals with the macroeconomic
goals like economic growth, full
employment, price stability, trade balance,
and redistribution of income with focus on
the national income and how it affects the
various sectors of the economy
• It likewise explains to the students the
significance of consumption, savings and
investment functions; business cycle and
its effects on the economy as well as the two
fundamental policies undertaken by
government to stabilize the economy, i.e.,
fiscal and monetary policies, among others
Course Objectives
By the end of the semester, the students will

be able to do the following:
• Explain the basic macroeconomic
principles, concepts, and theories that
guide the operations of an aggregate
economy;
• Identify basic macroeconomic problems and
issues and describe how the principles,
concept, and theories are utilized to analyze
such problems;
• Formulate appropriate policies to address
economic problems and issues;
• Understand the Philippine macroeconomic
problems and issues; and
• Appreciate the importance of economics on
their development as individuals and as
members of society through the proper use
of scarce resources.
Learning Outcomes
• Acquire a broad perspective in various

economic principles, concepts, and
theories
• Apply economic principles, concepts,
and theories for planning and decision-
making
• Demonstrate awareness on various
economic and social issues being faced
by select world economies, particularly
the Philippines
Course Requirement
• Classroom activities:
• Recitation
• Group Reporting
• Assignment / Project
• Quizzes and Unit Tests via Khan
• Midterms
• Finals
• Economic Paper
• Attendance
Course Requirement
• Classroom activities:
• Recitation
• Group Reporting
• Case Analyses, Article Review, Policy Analysis
• Assignment / Project
• Quizzes and Unit Tests
• Midterms and Finals Written Exams
• Final Economic Paper: CONCEPTUAL AND
THEORETICAL FRAMEWORK PAPER
• Attendance
Basic
House Rules
❖ Attendance
✓ Allowable LOA is 7 sessions
❖ Punctuality
✓ Tardiness exceeding 30
minutes is considered
Absence
❖ Phones
✓ Must be in silent mode
❖ Come to class prepared
❖ Comply all the requirements
❖ No Silly Questions
❖ CHEATING IS A CRIME
Computation of
Midterm Grades
❖ Class Activities (CS, 60 %)
✓ Quizzes
✓ Case Analysis / Assignments
✓ Group discussions / Report
❖ Examination (MX, 40%)
✓ Midterm Examination
❖ MIDTERM GRADE
✓ MG = CS + MX
✓ 100%
Computation of
Final Grades
❖ Class Standing (CS, 50 %)
✓ Group discussions / Report
✓ Case Analysis / Assignments
✓ Quizzes
❖ Midterm Examination (MX,
20%)
❖ Final Examination (FX,
30%)
✓ FINAL Paper
❖ FINAL GRADE
✓ FG = CS + MX + FX
✓ 100%
Grade
Equivalent
Percentage Grade Point Description
Equivalent
Below 74 5.00 Failure
75 - 76 3.00 Pass
77 - 79 2.75 Fair
80 - 82 2.50 Satisfactory
83 - 85 2.25 Very
Satisfactory
86 - 88 2.00 Good
89 - 90 1.75 Above Average
91 - 93 1.50 Very Good

94 - 95 1.25 Superior
96 - 100 1.00 Excellent
Recommended Textbooks
The Science of
Macroeconomics
Learning objectives
This chapter introduces you to

• the issues macroeconomists study
• the tools macroeconomists use
• some important concepts in
macroeconomic analysis
ECONOMICS
• From the Greek word OEKONOMIA = management of HH
• Common Problem: matching limited resources available to
HH with unlimited wants and needs of HH
• Philosophical Definition: Study of how men work to overcome
scarcity
• Specific Definition: Social science that studies and seeks the
efficient allocation of scarce resources to satisfy the unlimited
human wants and needs
• Common questions/problems: What to produce? How much?
How to produce? For whom?
• Branches: Micro, macro etc.
ECONOMICS: Micro vs Macro
Objective: The efficient allocation of scarce resources to satisfy
human needs and wants
MACROECONOMICS MICROECONOMICS
❖ Studies the behavior of ❖ Studies the behavior of
aggregate economic variables individual economic units (HH,
(national level) firms)
❖ Economics of the nation ❖ Economics of the firm

If the economy was a forest
Macroeconomics examines the Forest
Microeconomics
examines the trees
Micro and Macroeconomics
MICROECONOMICS MACROECONOMICS
Scope Firm / Industry National Economy
Viewpoint Business Manager Govt Policymaker
What to produce? Needs of the customers Of buyers and sellers
How much? Max profit, utility, quality Max production,

productivity,
employment, equity,
stability
How? Available resources + Devt objectives
For whom? Owners / shareholders Society at large
Goal Competitiveness Sustained Eco Devy
Factors With some measure of External

control or influence
What is the Influence to
Managers?
❖ How markets and How the macro and regulatory
consumers behavior affects environment influences the
revenues factors of microeconomics
❖ How production technology
and input costs affects
costs
❖ How competition responds
to firm’s strategies
SIGNFICANCE: SIGNFICANCE:
❖ Utility of Tools / Concepts ????
(e.g. Market structure, profit

max, relative prices, Porters
Five Forces)
Significance of Macroeconomics
MACROECONOMICS, the study of the

economy as a whole, addresses many topical
issues:
• Why does the cost of living keep rising?
• Why are millions of people unemployed, even when
the economy is booming?
• Why are there recessions? Can the government do
anything to combat recessions? Should it??
Important issues in
macroeconomics
MACROECONOMICS, the study of the
economy as a whole, addresses many topical
issues:
• What is the government budget deficit? How does
it affect the economy?
• Why does the country have such a huge trade
deficit?
• Why are so many countries poor?
What policies might help them grow out of poverty?
Important issues in
macroeconomics
• Why does the cost of living keep rising?
• Why are millions of people unemployed,
even when the economy is booming?
• Why are there recessions?
Can the government do anything to combat
recessions? Should it??
Important issues in
macroeconomics
• What is the government budget deficit?
How does it affect the economy?
• Why does the Philippines have such a huge
trade deficit?
• Why are so many countries poor?
What policies might help them grow out of
poverty?
Key Macroeconomic Indicators
PHI Gross Domestic Product, in billions pesos at 2000 constant prices
10,000 Asian Financial 50.0
Crisis World Financial
9,000 Crisis
40.0
8,000 Martial Law
years
7,000POST war Era EDSA People
Power 30.0
PERCENT CHANGE
IN BILLION PESOS
6,000
5,000 20.0
4,000
10.0
3,000
2,000
0.0
1,000
0 -10.0
1947 52 57 62 67 72 77 82 87 92 97 02 07 12 17
Actual % Growth Expon. (Actual)
Why learn macroeconomics?
1. The macroeconomy affects society’s well-
being.
▪ example: Unemployment and social
problems
Each one-point increase in the u-rate is associated with:
▪ 920 more suicides
▪ 650 more homicides
▪ 4000 more people admitted to state mental
institutions
▪ 3300 more people sent to state prisons
▪ 37, 000 more deaths
▪ increases in domestic violence and homelessness
2. The macroeconomy affects your well-being.
▪ Unemployment and earnings growth
5
4
3
2
1
%
0
-1
-2
-3
-4
-5
1965 1970 1975 1980 1985 1990 1995 2000
growth rate of inflation-adjusted hourly earnings

change in Unemployment rate
Unemployment and earnings growth
14.00 30.00
12.00 25.00
10.00 20.00
8.00 15.00
6.00 10.00
4.00 5.00
2.00 0.00
0.00 (5.00)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Unemployment Rate WAGE % Change Unemployment % Change Avg HH Income % Change
2. The macroeconomy affects your well-being.
▪ Interest rates and mortgage payments
For a $150,000 30-year mortgage:
actual rate
monthly annual
date on 30-year
payment payment
mortgage
6/21/2019 6.63% $960 $11,520
6/20/2020 5.21% $824 $9,888

3. The macroeconomy affects politics & current
events.
▪ Inflation and unemployment in election years
year U rate inflation rate elec. outcome
1976 7.7% 5.8% Carter (D)
1980 7.1% 13.5% Reagan (R)
1984 7.5% 4.3% Reagan (R)
1988 5.5% 4.1% Bush I (R)
1992 7.5% 3.0% Clinton (D)
1996 5.4% 3.3% Clinton (D)
2000 4.0% 3.4% Bush II (R)
Review of Basic
Microeconomic Concepts
Foundations for understanding
economic growth and changes in the
national income
Economic models
…are simplified versions of a more

complex reality
• irrelevant details are stripped away
…are used to
• show relationships between variables
• explain the economy’s behavior
• devise policies to improve economic
performance
Example of a model:
Supply & demand for new cars
• shows how various events affect price and quantity
of cars
• assumes the market is competitive: each buyer
and seller is too small to affect the market price
• Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
The demand for cars
demand equation: Q d = D (P,Y )

• shows that the quantity of cars
consumers demand is related to the
price of cars and aggregate income
Digression: functional notation
• General functional notation

shows only that the variables are
related.
Q d = D (P,Y )
A list of the
• A specific functional form shows
variables
the precise
that affect quantitative
Qd relationship.
• Example:
D (P,Y ) = 60 – 10P + 2Y
THE MARKET FOR CARS: DEMAND
demand equation: P
Price
Q d
= D (P ,Y ) of cars
The demand curve

shows the relationship
between quantity D
demanded and price, Q
other things equal. Quantity
of cars
THE MARKET FOR CARS: SUPPLY
supply equation: P
Price
Q = S (P , Ps )
s
of cars S
The supply curve shows

the relationship
between quantity D
supplied and price, Q
other things equal. Quantity
of cars
THE MARKET FOR CARS:
EQUILIBRIUM
P
Price
of cars S
equilibrium
price
D
Q
Quantity
of cars
equilibrium
quantity
The effects of an increase in income
demand equation: P
Q d = D (P ,Y ) Price
of cars S
An increase in income
increases the quantity P2
of cars consumers P1
demand at each price… D2
D1
Q
…which increases the Q1 Q 2
Quantity
equilibrium price and
of cars
quantity.
The effects of a steel price increase
supply equation: P S2
Q = S (P , Ps )
s
Price
of cars S1
An increase in Ps reduces
the quantity of cars P2
producers supply at each P1
price…
D
Q
…which increases the Q2 Q1
market price and Quantity
reduces the quantity. of cars
CHAPTER
Department 1
of Economics The Science of Macroeconomics
Economic models
…are simplified versions of a more complex
reality
• irrelevant details are stripped away
Used to
• show the relationships between economic
variables
• explain the economy’s behavior
• devise policies to improve economic
performance
Endogenous vs. exogenous
variables
• The values of endogenous variables
are determined in the model.
• The values of exogenous variables
are determined outside the model:
the model takes their values & behavior
as given.
• In the model of supply & demand for cars,
endogenous: P , Qd , Qs
exogenous: Y , Ps
A multitude of models
• No one model can address all the

issues we care about.
• e.g., our supply-demand model of the
car market…
• can tell us how a fall in aggregate income
affects price & quantity of cars.
• cannot tell us why aggregate income
falls.
A multitude of models
• So we will learn different models for
studying different issues (e.g.,
unemployment, inflation, long-run growth).
• For each new model, you should keep track
of
• its assumptions
• which variables are endogenous,
which are exogenous
• the questions it can help us understand,
and those it cannot
Prices: flexible vs. sticky
• Market clearing: An assumption that prices are
flexible, adjust to equate supply and demand.
• In the short run, many prices are sticky –
adjust sluggishly in response to changes in supply
or demand. For example,
• many labor contracts fix the nominal wage for a year or
longer
• many magazine publishers change prices only once every
3-4 years
• Price stickiness (or sticky prices) is the resistance
of market price(s) to change quickly despite
changes in the broad economy that suggest a
different price is optimal
Prices: flexible vs. sticky
• The economy’s behavior depends partly on
whether prices are sticky or flexible:
• If prices are sticky, then demand won’t
always equal supply. This helps explain
• unemployment (excess supply of labor)
• why firms cannot always sell all the goods
they produce
• Long run: prices flexible, markets clear,
economy behaves very differently
In a nutshell
• Macroeconomics is the study of the

economy as a whole, including
• growth in incomes,
• changes in the overall level of prices,
• the unemployment rate.
• Macroeconomists attempt to explain
the economy and to devise policies to
improve its performance.
In a nutshell
• Economists use different models to examine

different issues.
• Models with flexible prices describe the
economy in the long run; models with sticky
prices describe the economy in the short
run.
• Macroeconomic events and performance
arise from many microeconomic
transactions, so macroeconomics uses
many of the tools of microeconomics.
The Economics of the
Nation
Economic Goals
productivity,
employment, equity,
stability
Goal Competitiveness Sustained
Economic
Development
Factors With some measure of control External
or influence
Governments Can Sometimes
Improve Market Outcomes
Economic Goals
1. Economic Freedom
2. Economic Equity
3. Economic Efficiency
4. Economic Security
5. Economic Stability
6. Economic Growth
Economic Freedom
❖ This goal is about the amount of choice
people have in where they work and live,
the type of career they have, what they do
with their income and what they buy or
sell.
❖ Economic freedom is restricted in some
cases to protect the rights of others, for
example there are laws prohibiting the
production, sale and purchase of illegal
drugs.
Economic Equity
❖ Means what is fair. This can be seen as an
equality of opportunity or an equality of
outcome
❖ This goal centers on fairness. People's beliefs
around what is right or wrong determine
how this goal is achieved.
❖ Issues that involve Economic Equity
certainly deal with redistribution of income.
Economic Efficiency
❖ An economic principle holding that
businesses and individuals should fulfill
as many of society’s needs as possible
while maximizing the provided resources.
❖ When a society achieves economic
efficiency, goods and services are
produced without a lot of waste and those
goods and services are what the
consumers want and or need the most.
Economic Security
❖ Protecting consumers, producers, and

resource owners from risks that exist in
society. Each society must decide from
which uncertainties individuals can and
should be protected
Economic Stability
❖ This goal involves three aspects: sustained

growth without large swings in output or
consumption; stable rate of employment;
and a stable level of prices without dramatic
inflation or deflation. Most nations with
economic freedom allow for some
unemployment and inflation.
Economic Stability
Full Employment
❖ Full employment does not mean that no one is jobless in a
country; rather full employment refers to the situation
when there is no voluntary unemployment in the country.
❖ There is always a certain level of unemployment in the
country due to economic instabilities and imperfections.
Such level of unemployment is called the natural rate of
unemployment.
❖ But the government tries its best to reduce the level of
unemployment in a country as much as it can. It is one of
the most important responsibilities of the government of a
country to create job opportunities for its people.
Economic Stability
Price Stability
❖ Inflation means a general increase in price level. Increase in
price level results in an unequal and unfavorable
distribution of wealth in an economy.
❖ Due to inflation the growth rate also decreases. It reduces
purchasing power and it also causes a deficit in the balance
of payment which effects the international repute of the
country.
❖ Therefore, the government of a country takes a serious and
effective step to overcome inflation and to keep the prices of
commodities stable.
Economic Stability
The balance of payment
❖ A balance of payment is the statistical record of economic
transactions with the rest of the world.
❖ Economic transactions refer to international trade that includes
the import and export of goods and services. Where imports
increase the exports the balance of payment becomes
unfavorable.
❖ If the value of imports is greater than the value of exports, then
the balance of payment is in deficit.
❖ On contrary, if the value of export is greater than the value of
imports than the balance of payment is in surplus.
❖ A balance of payment deficit in disadvantageous to the country.
It affects the credibility, repute, and ranking of the country.
❖ In order to keep the balance of payment favorable, the
government imposed duties on imports and provides subsidies
on exports.
Economic Growth
❖ Economic growth is the sustained increase in the
production of goods and services. It is measured
by Gross Domestic Product (the total value of all
final goods and services produced in a nation in a
year).
❖ A nation's standard of living can only improve if
GDP increases.
❖ To achieve economic growth a country must
invest in education, technology and capital goods.
This goal is closely related to a country's long
term ability to use resources to achieve the other
goals.
Economic Growth
Mathematical Formulation
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
𝐴𝐺𝑅 = - 1 x 100
𝐿𝑎𝑠𝑡 𝑌𝑒𝑎𝑟 ′ 𝑠 𝑉𝑎𝑙𝑢𝑒
1
𝐸𝑛𝑑𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒 𝑛−1
𝐶𝐴𝐺𝑅 = -1 x 100
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑉𝑎𝑙𝑢𝑒
Central Problems of
Macroeconomics
• Macroeconomics is the study of the
aggregate moods of the economy.
• The four central issues of
macroeconomics are growth, business
cycles, unemployment, and inflation.
Two Timeframes: The Long Run
and the Short Run
• Issues of growth are considered in a
long-run framework.
• Long-run growth focuses on supply (also
called supply-side economics).
• Supply is so important in the long run,
policies that affect production - such as
incentives that promote work, capital,
and technological change - are key.
Two Timeframes: The Long Run
and the Short Run
• Business cycles are generally
considered in a short-run framework.
⚫ The short-run fluctuation framework

focuses on demand.
⚫ Much of the policy discussion of short-run
fluctuations focuses on ways to increase or
decrease components of aggregate
expenditures.
Business cycles
In Macroeconomic Analysis we will attempt to have a holistic

understanding of:
1. Where are we now?
2. Where are we heading?
Growth
Crisis
12,000
30.0
Martial Law
years
10,000POST war Era
EDSA People 20.0
Power
PERCENT CHANGE
IN BILLION PESOS
8,000
10.0
6,000
0.0
4,000
-10.0
2,000
0 -20.0
Growth
• Generally the Philippine economy is

growing or expanding.
• The primary measurement of growth
is change in real gross domestic
product (GDP).
Growth
• Real gross domestic product (real

GDP) – the market value of final goods
and services stated in the prices of a
given period.
Growth
• Philippine economy has grown at an

annual rate of 5 percent per year over
the last 50 years., but more recently it
has been growing at about 6.0 percent
a year.
◆ This average annual growth rate is

called the secular trend growth
rate.
Growth
• Another measure of growth is change

in per capita real output.
◆ Per capita real output is real

output divided by the total
population.
Review of Basic
Macroeconomic Concepts
How the Economy will behave?
productivity,
employment, equity,
stability
Goal Competitiveness Sustained Economic
Development
Factors With some measure of control External
or influence
How the economy will behave?
Movie Factory Household
Macroeconomics involves the study of aggregate

factors such as employment, inflation, and gross
domestic product, and evaluating how they influence
the economy as a whole.
Who are the main characters?
Government Banks Workers/Families
Traders Investors Business Firms
Who are the main characters?
Income (Rent, Wage and Interest)
Resources (Land, Labor and Capital)
How do the Main

Characters Interact?
HOUSEHOLDS BUSINESS FIRMS
Output of Consumer Goods and Services
Consumer Spending
Circular Flow and Policy Areas
P. Savings Taxes Imports
HOUSEHOLDS Banks Government World

FIRMS
Income
Prodn
Factors
Consumer
Goods
Purchases Investments Gov’t Exports

Spending
Summary of the Movie’s Plot
At the core: OUTFLOWS:
❖ Savings
Interdependent economic
❖ Taxes
activities….. ❖ Imports
HOUSEHOLDS
FIRMS
Income
Prodn Factors
Consumer Goods
Purchases
INFLOWS:
… That can be
❖ Investments
❖ Gov’t Spending influenced by the
❖ Exports balance between
inflows and outflows
Summary of the Movie’s Plot
If Inflows are greater than OUTFLOWS:
❖ Savings
outflows
❖ Taxes
.. Then income increases ❖ Imports
HOUSEHOLDS
FIRMS
Income
Prodn Factors
Consumer Goods
Purchases
INFLOWS: Question:
❖ Investments
❖ Gov’t Spending
Should inflows be
❖ Exports always greater than
outflows?
The Economy As A Factory
❖ Production has a rated
capacity subject to
technological constraints as
well as the scarcest
resource/input
❖ Overproduction is possible but
only for limited period as costs
eventually increase (Why?)
❖ The scarcest resource for
developed countries is labor
❖ The sign that the economy is
overheating is a low
unemployment rate below the
4-6 natural rate
Relationship of Unemployment Rate to Inflation in US
(1980-2014)
16.00
A one percentage drop in UR leads to 1.5 percentage point increase in
14.00 inflation
12.00
y = -0.1491x + 6.1472
10.00 R² = 0.3834
Unemployment Rate
8.00
6.00
4.00
2.00
0.00
(2.00)
0 5 10 15 20 25 30 35 40
Unemployment Rate Inflation rate Linear (Inflation rate)
Relationship of Unemployment Rate to Inflation in the
PHILS (1990-2014)
25.00
A one percentage drop in UR leads to 4.0 percentage point increase in
inflation
20.00
y = -0.3525x + 11.046
Unemployment Rate
15.00 R² = 0.487
10.00
5.00
0.00
0 5 10 15 20 25 30
Unemployment Rate Inflation rate Linear (Inflation rate)
Relationship of P-Php Rate to Inflation in the PHILS
(1990-2014)
60.00
50.00
40.00
Unemployment Rate
30.00
y = 1.0239x + 27.146
R² = 0.4982
20.00
A one peso drop in P-Php leads to 10 percentage point increase in

inflation
10.00
0.00
0 5 10 15 20 25 30
Unemployment Rate Php=1USD Linear (Php=1USD)
The Economy As A Household
o Traditional farm-
based HH produces
output for itself and
possibly other HH as
exports
o Excess output of
other HH is
exchanged or bought
as imports

FIRMS
Income
Prodn
Factors
Consumer
Goods
Purchases Investments Gov’t Exports

Spending
❖ Farm-based HH produces
output for itself and possibly
other HH as exports. Excess
output of other HH is
exchanged or bought as
imports
❖ HH can only live within its
means
HH Income goes to = Expenditure on goods sold =
+ Consumption + Consumption
+ Private Savings + Investments
+ Taxes + Government Spending
+ Imports + Exports
Total Output = Total Income = Total Expenditure
What About Savings?

FIRMS
Income
Prodn Factors
Consumer Goods
Purchases Investments Gov’t Spending Exports
❖ Income = Expenditure
PS + T + M = I + G + X
❖ Rearranging by policy areas,
(PS-I) + (T-G) = (X-M)
(PS-I) (T-G) (X-M)

Savings PS > I T>G X>M
Surplus PS > I T>G X>M
Deficit PS < I T<G X<M
Policy Monetary Fiscal Trade
Agency BSP DOF / DBM BSP / DTI /
DFA
SUMMARY
o Output serves domestic market
o Also open to external trade
o Value of goods = Money

Transacted
o Output = Income = Expenditure
o Deficit in goods = Deficit in

Funds or savings
o BOP or trade deficit is finances
by the External Savings with
interest to be paid in future
SUMMARY
The Economy ❖ Role of Key Actors
as a Movie ❖ Interdependence of economic activities
The Economy ❖ Capacity Limits

as a Factory ❖ Operating beyond limits causes
overheating
The Economy ❖ Availability of foreign currencies as the
as a Household limit
❖ Need to keep watch of dollar
transactions, i.e.
o Cash position
o Income-spending balance
o Access to other people’ money
HOMEWORK
❖ How relevant is macroeconomic
performance in Presidential Elections in the
Philippines (1986-2016)?
❖ Label the annual data for period as either
Pro-Opposition (O) or Pro- Incumbent
Administration (A) using annual data on:
o Real GDP growth (if > than previous)
o Inflation (if < than previous)
o Unemployment rate (if < than previous)
o P-Php rate (if < than previous)
ECONOMIC TRENDS AND
STRUCTURES ON A
NATIONAL LEVEL
Key Indicators Measuring
Economic Activity and Growth
Learning objectives
In this lecture, you will learn about the

measures of:
❖ How much economic activities are taking place
❖ How much of a nation’s capacity is being utilized
❖ State of the market as reflected in movements of
prices of goods, funds, foreign currencies and labor
Learning objectives
In this chapter, you will learn about the

meaning and measurement of the most
important macroeconomic statistics on:
❖ Output: Gross Domestic Product (GDP)
❖ Inflation: Consumer Price Index (CPI)
❖ Job: Unemployment Rate
❖ Forex Flows: Balance of Payments (BOP)
Gross Domestic Product
Two definitions:
1. Total expenditure on domestically-
produced final goods and services
2. Total income earned by domestically-
located factors of production
Why expenditure = income
In every transaction,
the buyer’s expenditure
becomes the seller’s income.
Thus, the sum of all
expenditure equals
the sum of all income.
The Circular Flow
Income($)
Labor
Households Firms
Goods(bread)
Expenditure
($)
The Circular Flow
GDP in Circular Flow
GDP in Circular Flow
Final goods, value added, and
GDP
• GDP = value of final goods produced
= sum of value added at all stages
of production
• The value of the final goods already
includes the value of the intermediate
goods, so including intermediate goods in
GDP would be double-counting.
PHI Gross National Income, in billions pesos at 2000 constant prices
Crisis
12,000
30.0
Martial Law
years
10,000POST war Era
EDSA People 20.0
Power
PERCENT CHANGE
IN BILLION PESOS
8,000
10.0
6,000
0.0
4,000
-10.0
2,000
0 -20.0
Real GDP Growth Momentum, (1950-2019)
0.20 Asian Financial
POST war Era Martial Law Crisis World Financial
years Crisis
EDSA People
0.15 Power
Years AAGR
1948-2014 4.6
0.10
50s 7.0
60s 5.1
Growth
0.05
70s 6.0
80s 1.5
0.00 90s 2.7
2000s 4.4 UPWARD MOMENTUM
(0.05) 2010s 6.1

BEFORE 2010s WE ARE IN A GROWTH MOMENTUM WHEREIN 5 IS A NO BRAINER
(0.10)
% Growth Expon. (% Growth) Poly. (% Growth)

Review of National Income
Accounting (NIA)
Accounting (NIA)
• 3 Approaches to GDP
• Expenditure (Demand) Approach
• GDP = C + I + G + (X – M)
• Production (Value-Added) Approach
• GDP = A + I + S
• Income Approach
• GDP = Compensation + Rent + Operating
Surplus
Accounting
• What equality do they represent?
• GDP
• Most reliable – Production (Value-Added
Approach)
• Statistical Discrepancy in Demand
• Difference between GDP & GNP
• GNP = GDP + NFIA
• Net Factor Income from Abroad (NFIA)
• Now: Net Primary Income
• + part = OFW remittances
• - part = interest, dividends, royalties paid abroad
• OFW now ~19 of GDP
• GNP is now GNI (Gross National Income)
GNI Growth Momentum, (1950-2019)
years Crisis
EDSA People
0.15
Power
Years AAGR
0.10 1948-2014 4.6
50s 7.0
0.05
60s 5.1
Growth
70s 6.0
0.00
80s 1.5
90s 2.7
(0.05)
(0.10)
2010s 6.1

(0.15)
GDP GNI Expon. (GDP) Poly. (GDP)

Accounting - Demand
• What is not counted?
• Illegal goods & services
• Non-market activities (e.g.,household chores)
• How are rice and fish added to obtain total
production?
• Use common year peso values
• How are these valued in order to see the changes in
total production over time?
• Convert current prices to constant prices
• Value = Price x Quantity
• Difficult to obtain and add up Quantities, so
• Obtain current Market Values
• Compute Price Index
• Q = V/ P
• Market values with the price effects removed, or (in constant
prices) or real GDP/GNP
Value added
definition:
A firm’s value added is the value of its
output minus the value of the
intermediate goods the firm used to
produce that output.
Production/Value-added
Approach
Price = P2
Value added by
raw material producing
STAGE 1 firm
P2
Value output of the Value added by
raw material producing intermediate good- Price = P6
STAGE 2 firm producing firm
P4
Value added by
Value output of the intermediate good- final good-
producing firm producing firm
P3
STAGE 3 VALUE OF FINAL OUTPUT

Price = P9
Approach
Activity Cost of Price of Value
inputs Output Added
Growing of oranges 0 100 100
Making Orange Juice 100 150 50
Distributing to Stores 150 225 75
(Wholesale)
Selling Juice to Consume (Retail) 225 350 125
Gross Domestic Product 350
Exercise:
• A farmer grows coffee and sells it to a miller
for P20.
• The miller processes the coffee beans,
packages it and sells it to a coffee shop for
P50.
• The coffee shop adds flavors to taste and
sells it to a coffee addict for P100.
• Compute
• value added at each stage of production
• GDP
Approach
Growth
Gross Value Added (In Million pesos CAGR
(2019 to GDP
Industry at 2000 constant prices) (2000-
vs
19)
2000 2018 2019 2018) 2000 2018 2019
AGRI., HUNTING, 500,111 745,781 756,960 1.5 2.2 14.0 8.1 7.8
FORESTRY AND
FISHING
INDUSTRY SECTOR 1,233,773 3,142,846 3,295,786 4.9 5.3 34.5 34.1 33.8
SERVICE SECTOR 1,846,830 5,318,262 5,697,852 7.1 6.1 51.6 57.8 58.4
GROSS DOMESTIC 3,580,714 9,206,889 9,750,598 5.9 5.4 100.0 100.0 100.0
PRODUCT
Net Primary Income 616,146 1,803,363 1,866,384 3.5 6.0 17.2 19.6 19.1
from the rest of the
world
GROSS NATIONAL 4,196,861 11,010,252 11,616,982 5.5 5.5 117.2 119.6 119.1
INCOME
Source: NSCB *Net Primary Income

GDP by Industrial Origin
Gross Value Added (In Million Growth
CAGR % to GDP
Industry pesos at 2000 constant prices) (2019 vs
(2000-19)
2000 2018 2019 2018) 2000 2018 2019
1. AGRI., HUNTING, FORESTRY AND 500,111 745,781 756,960 1.5 2.2 14.0 8.1 7.8
FISHING
a. Agriculture and forestry 415,878 623,765 631,870 1.3 2.2 11.6 6.8 6.5
b. Fishing 84,233 122,016 125,090 2.5 2.1 2.4 1.3 1.3
2. INDUSTRY SECTOR 1,233,773 3,142,846 3,295,786 4.9 5.3 34.5 34.1 33.8
a. Mining & Quarrying 22,518 85,864 90,941 5.9 7.6 0.6 0.9 0.9
b. Manufacturing 876,107 2,145,011 2,226,003 3.8 5.0 24.5 23.3 22.8
c. Construction 203,932 618,294 666,168 7.7 6.4 5.7 6.7 6.8
d. Electricity, Gas and Water Supply 131,216 293,677 312,674 6.5 4.7 3.7 3.2 3.2
3. SERVICE SECTOR 1,846,830 5,318,262 5,697,852 7.1 6.1 51.6 57.8 58.4
a. Transport, Storage & Communication 219,235 670,803 715,854 6.7 6.4 6.1 7.3 7.3
b. Trade and Repair of Motor Vehicles, 565,481 1,554,868 1,679,977 8.0 5.9 15.8 16.9 17.2
Motorcycles, Personal and
Household Goods
c. Financial Intermediation 187,139 681,005 751,626 10.4 7.6 5.2 7.4 7.7
d. R. Estate, Renting & Business Activities 333,727 1,046,693 1,085,570 3.7 6.4 9.3 11.4 11.1
e. Public Administration & Defense; 184,539 398,859 439,952 10.3 4.7 5.2 4.3 4.5
Compulsory Social Security
f. Other Services 356,709 966,034 1,024,873 6.1 5.7 10.0 10.5 10.5
GROSS DOMESTIC PRODUCT 3,580,714 9,206,889 9,750,598 5.9 5.4 100.0 100.0 100.0
Net Primary Income from the rest of the 616,146 1,803,363 1,866,384 3.5 6.0 17.2 19.6 19.1
world
GROSS NATIONAL INCOME 4,196,861 11,010,252 11,616,982 5.5 5.5 117.2 119.6 119.1
Structure of Output
( of GDP at current market prices)
Industry PH ID MY TH VN SG CH JP
Agriculture 9.3 13.3 7.6 8.1 16.3 0.0 7.2 1.2
Industrial 30.8 41.4 38.8 32.4 38.0 26.6 40.7 29.3
Services 59.9 45.2 53.6 59.5 45.7 73.3 52.2 69.5
Final goods, value added, and
GDP
• GDP = value of final goods produced
= sum of value added at all stages
of production
• The value of the final goods already
includes the value of the intermediate
goods, so including intermediate goods in
GDP would be double-counting.
The expenditure components of
GDP
❖ Consumption
❖ Investment
❖ Government spending
❖ Net exports
GDP by Expenditure Approach
Gross Value Added (In Million pesos at
Growth CAGR to GDP
2000 constant prices)
Expenditure Type (2019 (2000-
vs 19)
2000 2018 2019 2000 2018 2019
2018)
Household Final 2,585,276 6,306,635 6,670,295 5.8 5.1 46.5 68.5 68.7
Consumption (C)
Government Final 409,049 1,025,691 1,133,103 10.5 5.5 7.4 11.1 11.7
Consumption (G)
Capital Formation (I) 657,691 2,835,865 2,817,452 -0.6 8.0 11.8 30.8 29.0
Exports of goods & 1,839,388 5,599,149 5,777,792 3.2 6.2 33.1 60.8 59.5
services (X)
Imports of goods & 1,910,689 6,560,451 6,695,455 2.1 6.8 34.3 71.3 69.0
services (M)
Statistical 0.0 0.0 0.0
Discrepancy
GROSS DOMESTIC 5,562,705 9,206,889 9,703,187 5.4 3.0 100.0 100.0 100.0
PRODUCT
Net Primary Income 616,146 1,803,363 1,866,384 3.5 6.0 11.1 19.6 19.2
from the rest of the
world
GROSS NATIONAL
Source: NSCB *Net 6,178,852
Primary 11,010,252
Income 11,569,571 5.1 3.4 111.1 119.6 119.2
INCOME
Consumption (C)
def: the value of all goods • durable goods
and services bought by last a long time
households. Includes: ex: cars, home
appliances
• non-durable goods
last a short time
ex: food, clothing
• services
work done for
consumers
ex: dry cleaning,
air travel
PHIL Consumption, 2019
Growth
Gross Value Added (In Million pesos at CAGR
(2019 to GDP
Expenditure Type 2000 constant prices) (2000-
vs
19)
2000 2018 2019 2018) 2000 2018 2019
Household Final 2,585,276 6,306,635 6,670,295 5.8 5.1 100.0 100.0 100.0
Consumption (C)
1. Food and Non-alcoholic 1,084,393 2,573,307 2,701,396 5.0 4.9 41.9 40.8 40.5
beverages
2. Alcoholic beverages, 45,033 71,453 69,468 -2.8 2.3 1.7 1.1 1.0
Tobacco
3. Clothing and Footwear 56,633 76,732 79,648 3.8 1.8 2.2 1.2 1.2
4. Housing, water, electricity, 315,119 705,780 749,052 6.1 4.7 12.2 11.2 11.2
gas and other fuels
5. Furnishings, household 154,283 313,182 327,431 4.5 4.0 6.0 5.0 4.9
equipment and routine
household maintenance
6. Health 54,980 161,739 171,100 5.8 6.2 2.1 2.6 2.6
7. Transport 243,085 554,302 581,660 4.9 4.7 9.4 8.8 8.7
8. Communication 67,341 317,378 338,793 6.7 8.9 2.6 5.0 5.1
9. Recreation and culture 54,915 141,731 151,529 6.9 5.5 2.1 2.2 2.3
10. Education 88,545 211,071 227,770 7.9 5.1 3.4 3.3 3.4
11. Restaurants and hotels 99,665 292,967 312,126 6.5 6.2 3.9 4.6 4.7
12. Miscellaneous goods and 321,284 886,993 960,322 8.3 5.9 12.4 14.1 14.4
services
PHIL Consumption, 2019
100% Alcoholic beverages, Tobacco, 1.7% Alcoholic beverages, Tobacco, 1.0%
Clothing and Footwear, 1.2%
Clothing and Footwear, 2.3% Recreation and culture, 2.3%
Recreation and culture, 2.1%
Health, 2.1% Health, 2.6%
90% Education, 3.6% Education, 3.4%
Restaurants and hotels, 3.7% Restaurants and hotels, 4.7%
80% Household maintenance, 5.8% Household maintenance, 4.9%
Communication, 2.2% Communication, 5.1%
70%
Transport, 9.4%
Transport, 8.7%
60%
Housing, water, electricity, Housing, water, electricity,
gas and other fuels, 12.5% gas and other fuels, 11.2%
50%
40%
30%
Food and Non- Food and Non-
alcoholic beverages, alcoholic beverages,
20% 42.2% 40.5%
10%
0%
Department of Economics 2000 2019
Investment (I)
Def. 1: spending on [the factor of production] capital
Def. 2: spending on goods bought for future use
Includes:
▪ business fixed investment
spending on plant and equipment that firms will
use to produce other goods & services
▪ residential fixed investment
spending on housing units by consumers and
landlords
▪ inventory investment
the change in the value of all firms’ inventories
PHIL Investment, 2018
Growth
Gross Value Added (In Million pesos CAGR
(2019 to GDP
Expenditure Type at 2000 constant prices) (2000-
vs
19)
2000 2018 2019 2018) 2000 2018 2019
3. Capital Formation 657,691 2,835,865 2,817,452 -0.6 8.0 100.0 100.0 100.0
(FC+CI)
A. Fixed Capital 791,339 2,804,813 2,847,159 1.5 7.0 120.3 98.9 101.1
(FC)
1. Construction 350,830 953,219 1,043,288 9.4 5.9 53.3 33.6 37.0
2. Durable 326,966 1,609,080 1,524,857 -5.2 8.4 49.7 56.7 54.1
Equipment
3. Breeding
Stock &
Orchard Dev't 94,499 111,286 115,310 3.6 1.1 14.4 3.9 4.1
4. Intellectual 19,043 131,228 163,704 24.7 12.0 2.9 4.6 5.8
Property Products
B. Changes in -133,647 31,051 -29,707 -195.7 -7.6 -20.3 1.1 -1.1
Inventories (CI)
Investment vs. Capital
• Capital is one of the factors of

production.
• At any given moment, the economy

has a certain overall stock of capital.
• Investment is spending on new

capital.
Investment vs. capital
Example (assumes no depreciation):

▪ 1/1/2019:
economy has Php500b worth of capital
▪ during 2019:
investment = Php37b
▪ 1/1/2020:
economy will have Php537b worth of
capital
Stocks vs. Flows
A stock is a quantity Flow Stock
measured at a point
in time.
We might say
“the U.S. capital stock
was Php25.4 trillion as
of December 6, 2020.”
A flow is a quantity measured per unit time.
“U.S. investment was Php1.6 trillion in
2017.”
FYI: “Flow” means the same thing as “rate.”
Stocks vs. Flows--examples
Flow Stock
stock flow
a person’s wealth a person’s saving
# of people with # of new college
college degrees graduates
the govt. debt the govt. budget deficit
ASEAN Foreign Direct Investment net inflows
Foreign Direct Investments
Savings vs. Investments (as of GDP)
Comparative Asian Savings Rate, (Gross Savings as of GDP)
Comparative Asian Investment Rate, (Gross Investment as of GDP)
Now you try:
Stock or flow?
The balance on your credit card statement
How much you study economics outside of class
The size of your compact disc collection
The inflation rate
The unemployment rate
Government spending (G)
• G includes all government spending on
goods and services.
• G excludes transfer payments
(e.g, unemployment insurance payments),
because they do not represent spending
on goods and services.
Government spending, 2018
Percent to GDP 11.0

Fiscal Policies Government Revenues vs Expenditures
Net exports (NX = EX - IM)
def: the value of total exports (EX) minus the value of total imports (IM)
8,000 200.00
Exports Imports Net Exports
6,000
0.00
4,000
(200.00)
2,000
(400.00)
(600.00)
(2,000)
(800.00)
(4,000)
(1,000.00)
(6,000)
(8,000) (1,200.00)
98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
An important identity
Y = C + I + G + NX
where
Y = GDP = the value of total output
C + I + G + NX = aggregate
expenditure
A question for you:
Suppose a firm
• produces Php10 million worth of final
goods
• but only sells Php9 million worth.
Does this violate the

expenditure = output identity?
Why output = expenditure
o Unsold output goes into inventory, and is

counted as “inventory investment”…
whether the inventory buildup was
intentional or not.
o In effect, we are assuming that firms
purchase their unsold output.
GDP:
An important and versatile concept
We have now seen that GDP measures
▪ total income
▪ total output
▪ total expenditure
▪ the sum of value-added at all stages
in the production of final goods.
GNP vs. GDP
• Gross National Product (GNP):
total income earned by the nation’s factors of
production, regardless of where located
• Gross Domestic Product (GDP):

total income earned by domestically-located factors
of production, regardless of nationality
(GNP – GDP) = (factor payments from abroad)

– (factor payments to abroad)
Discussion Question:
In your country,
which would you want
to be bigger, GDP or GNP?
Why?
(GNP – GDP) as a percentage of GDP
selected countries, 2001
OFW Remittances continue to increase
35
CAGR 2000-2019: 8.8 percent 30.22

30
25
IN BILLION PESOS
20
15
10
6.05
5
0
02
13
89
90
91
92
93
94
95
96
97
98
99
01
03
04
05
06
07
08
09
10
11
12
14
15
16
17
18
19
2000
GDP vs GNI (GNP), and Net Primary Income
(or Net Additional Income from Abroad)
GDP vs GNI (GNP), and Net Primary Income
(or Net Additional Income from Abroad)
Current Account and Overall BOP Position
OFW Remittances
Poverty incidence on a decline (1991 to 2015)
2015 Regional Poverty incidence on a decline
Self-rated Poverty: Families who are Mahirap
Accounting (NIA)
Real vs. Nominal GDP
Real vs. Nominal GDP
• GDP is the value of all final goods and

services produced.
• Nominal GDP measures these values
using current prices.
• Real GDP measure these values using
the prices of a base year.
Real GDP controls for inflation
Changes in nominal GDP can be due to:
▪ changes in prices
▪ changes in quantities of output
produced
Changes in real GDP can only be due to
changes in quantities, because real GDP is
constructed using constant base-year
prices.
Real vs. nominal GDP growth
Real vs. nominal GDP growth
How to convert current GDP into real GDP?
Divide current GDP by GDP Deflator Index

to cancel out price effects into real GDP
Practice problem, part 1
2019 2020 2021
P Q P Q P Q
good A Php30 900 Php31 1,000 Php36 1,050
good B Php100 192 Php102 200 Php100 205
• Compute nominal GDP in each year

• Compute real GDP in each year using
2019 as the base year.
Answers to practice problem, part 1
Nominal GDP multiply Ps & Qs from same year

2019: Php46, 200 = Php30  900 + Php100  192
2020: Php51, 400
2021: Php58, 300
Real GDP multiply each year’s Qs by 2002 Ps

2019: Php46, 200
2020: Php50, 000
2021: Php52, 000 = Php30  1050 + Php100  205
20,000 250.00
18,000
16,000 200.00
14,000
12,000 150.00
In Billion Pesos
10,000
8,000 100.00
6,000
4,000 50.00
2,000
0 0.00
63
73
07
49
51
53
55
57
59
61
65
67
69
71
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
09
11
13
15
17
19
1947
Real Current Deflator

GDP Deflator
• The inflation rate is the percentage

increase in the overall level of prices.
• One measure of the price level is
the GDP Deflator, defined as
Nominal GDP
GDP deflator = 100 
Real GDP
Practice problem, part 2
GDP inflation
Nom. GDP Real GDP
deflator rate
2017 Php46,200 Php46,200 n.a.
2018 51,400 50,000
2019 58,300 52,000
• Use your previous answers to compute

the GDP deflator in each year.
• Use GDP deflator to compute the inflation
rate from 2017 to 2018, and from 2018 to
2019.
Answers to practice problem,
part 2
GDP Inflation
Nom. GDP Real GDP
deflator rate
2017 Php46,200 Php46,200 100.0 n.a.
2018 51,400 50,000 102.8 2.8
2019 58,300 52,000 112.1 9.1
Two arithmetic tricks for
working with percentage changes
USEFUL TRICK #1 For any variables X and Y,
the percentage change in (X  Y )
 the percentage change in X
+ the percentage change in Y
EX: If your hourly wage rises 5 and you

work 7 more hours, then your wage income
rises approximately 12.
Two arithmetic tricks for
working with percentage changes
USEFUL TRICK #2
the percentage change in (X/Y )
 the percentage change in X
− the percentage change in Y
EX: GDP deflator = 100  NGDP/RGDP.

If NGDP rises 9 and RGDP rises 4,
then the inflation rate is approximately 5.
Chain-weighted Real GDP
• Over time, relative prices change, so the base year
should be updated periodically.
• In essence, “chain-weighted Real GDP” updates the
base year every year.
• This makes chain-weighted GDP more accurate
than constant-price GDP.
• But the two measures are highly correlated, and
constant-price real GDP is easier to compute…
• …so we’ll usually use constant-price real GDP.
The Philippines
Experience
9,000 Crisis
40.0
8,000 Martial Law
years
7,000 POST war Era EDSA People
30.0
Power
6,000
Percent Change
In Billion Pesos
5,000 20.0
4,000
10.0
3,000
2,000
0.0
1,000
0 -10.0

Real GDP Growth Momentum, (1950-2018)
years Crisis
EDSA People
0.15 Power
Years AAGR
1948-2014 4.6
0.10
50s 7.0
60s 5.1
Growth
0.05
70s 6.0
80s 1.5
0.00 90s 2.7
(0.05) 2010s 6.1

(0.10)
% Growth Expon. (% Growth) Poly. (% Growth)

Real GDP (In Bn pesos) Long Term Growth
14,000.00 9%
8%
12,000.00
7%
10,000.00 6%
5%
8,000.00
4%
6,000.00
3%
4,000.00 2%
1%
2,000.00
0%
0.00 -1%
14
16
18
90
91
92
93
94
95
96
97
98
99
01
02
03
04
05
06
07
08
09
10
11
12
13
15
17
20 Fcst
21 Fcst
22 Fcst
23 Fcst
2000
19 est
GDP % Growth
Real GDP Average Growth Rates of Past Presidents
7.0%
6.5%
6.1%
6.0%
5.0%
5.0%
4.0% 3.7% 3.6%

3.3% 3.5%
Growth
3.0%
2.0%
1.0%
0.0%
Marcos (1966-86) Aquino C (1986- Ramos (1992-98) Estrada (1998-01) Arroyo (2001-10) Aquino B (2010- Duterte (2016-
92) 16) present)
Global Risk Scenarios
Average Economic Growth (2000-2017), PH vs Asia
10.0
CHN, 9.3
MMR, 8.9
9.0
KHM, 7.9
8.0
LAO, 7.3
7.0 VNM, 6.7
BGD, 5.9
6.0 PHL, 5.4
IDN, 5.3
MYS, 4.9
5.0 SGP, 4.6
4.0 THA, 3.8KOR, 3.7 TPE, 3.3

HKG, 3.4
3.0
2.0
BRN, 1.5
1.0
0.0
Department of Economics CAGR
Average Economic Growth (2010-2017), PH vs Asia
9.0
CHN, 7.9
8.0 LAO, 7.7
KHM, 7.5
7.0 MMR, 6.6

PHL, 6.4 BGD, 6.0
VNM, 6.1
6.0
IDN, 5.6 MYS, 5.5
5.0 SGP, 4.8
4.0
THA, 3.5 TPE, 3.4
KOR, 3.4HKG, 3.0
3.0
2.0 BRN, 1.7
1.0
0.0
Department of Economics CAGR
ECONOMIC STRUCTURE
DEMAND SIDE
Economic Structure of the Philippines
12,000
EXPENDITURES Contribution CAGR
ITEM 2010-
1980 1990 2000 2010 2017 2019
10,000 18
HFCE 59.2 65.5 72.2 69.2 68.9 68.7 6.0
GOVERNMENT 13.7 12.8 11.4 10.0 10.5 11.7 7.6
8,000
SPENDING
CAPITAL 27.3 24.3 18.4 20.8 28.9 29.0 11.5
FORMATION
6,000
NET EXPORTS -0.2 -2.6 -2.0 0.0 -8.4 -8.4
4,000
2,000
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
HFCE Govt Investment Net Exports
Trends in Components of Private Consumption
HFCE ITEM Contribution CAGR
2000 2005 2010 2015 2017 2019 2010-
19
Food and Non-alcoholic 41.9 41.9 41.9 41.3 41.1 40.5 4.9
beverages
Alcoholic beverages, Tobacco 1.7 1.6 1.5 1.4 1.3 1.0 2.3
Clothing and Footwear 2.2 1.9 1.8 1.5 1.3 1.2 1.8
Housing, water, electricity, 12.2 11.6 11.3 10.8 10.9 11.2 4.7
gas and other fuels
Furnishings, household 6.0 6.0 5.7 5.1 5.0 4.9 4.0
equipment and routine
household maintenance
Health 2.1 2.2 2.2 2.5 2.6 2.6 6.2
Transport 9.4 8.6 8.5 9.0 9.2 8.7 4.7
Communication 2.6 5.0 5.3 5.4 5.1 5.1 8.9
Recreation and culture 2.1 2.1 2.3 2.4 2.3 2.3 5.5
Education 3.4 3.1 3.2 3.0 3.1 3.4 5.1
Restaurants and hotels 3.9 3.8 4.0 4.4 4.6 4.7 6.2
Miscellaneous goods and 12.4 12.2 12.4 13.4 13.7 14.4 5.9
services
ECONOMIC STRUCTURE
SUPPLY SIDE
12,000,000
SECTOR Contribution CAGR

2010-
10,000,000 1980 1990 2000 2010 2015 2017 2019
19
AFF 16.4 15.4 14.0 12.5 9.5 8.5 7.8 1.3
8,000,000 INDUSTRY 41.6 35.9 34.5 35.1 33.5 34.0 33.8 6.0
SERVICES 42.0 48.7 51.6 52.4 57.0 57.5 58.4 5.9
6,000,000
4,000,000
2,000,000
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
AFF Industry Services
SECTOR Contribution (% to GDP)
12,000.0
1998 2000 2005 2010 2015 2017 2019
AFF 13.3 14.0 13.3 11.6 9.5 8.5 7.8

Agriculture and forestry
10,000.0 10.8 11.6 10.8 9.2 7.8 7.1 6.5
Fishing 2.5 2.4 2.5 2.4 1.7 1.4 1.3
INDUSTRY 35.3 34.5 32.7 32.6 33.5 34.0 33.8
8,000.0
Mining 0.7 0.6 1.0 1.2 1.1 1.0 0.9
Manufacturing 24.5 24.5 23.7 22.2 23.2 23.6 22.8
Construction
6,000.0 6.5 5.7 4.4 5.7 6.0 6.2 6.8
EGWS 3.6 3.7 3.6 3.6 3.2 3.2 3.2
SERVICES 51.4 51.6 54.0 55.8 57.0 57.5 58.4
4,000.0
TSC 5.8 6.1 8.1 7.5 7.6 7.3 7.3
Trade 14.6 15.8 16.5 16.6 16.7 16.9 17.2
2,000.0
Finance 5.3 5.2 5.7 6.6 7.2 7.3 7.7
Real Estate 9.9 9.3 9.4 10.3 11.2 11.5 11.1
Public Admin
0.0 5.6 5.2 4.7 4.5 3.9 4.0 4.5
98 99 00 01 02 03 04 05
Other Services 10.206 07
10.008 09
9.610 11 12
10.2 13 14
10.3 15 16
10.3 17 18
10.5 19
AFF Mining MFG CONS EGWS TSC Trade Finance Real Estate Public Admin Other Services
Manufacturing Resurgence
GROWTH IN MANUFACTURING LEADS TO

JOB CREATIONS
REGIONAL
ECONOMY
Gross Regional Domestic Product
A I S
100% 3,000
NCR 0.2 18.8 81.0
90% CAR 10.3 50.9 38.9
I 23.8 26.0 50.2 2,500
80% II 38.4 13.0 48.6
70%
III 17.2 43.3 39.5
IVA 5.7 62.1 32.2 2,000
60% IVB 22.9 35.0 42.0
V 23.7 19.8 56.6
50% 1,500
VI 21.9 20.5 57.6
40% VII 6.0 39.4 54.6
VIII 18.0 41.4 40.7 1,000
30%
IX 20.8 36.3 42.9
20% X 23.4 34.6 42.0
XI 14.4 33.3 52.2 500
10% XII 27.9 34.3 37.7
XIII 19.6 34.7 45.7
0% 0
ARMM
NCR CAR I II58.8 III IVA 6.6IVB V 34.6
VI VII VIII IX X XI XII XIII ARMM
AFF Industry Services GRDP
Price Stability Indicator:
Consumer Price Index (CPI)
Consumer Price Index (CPI)
• A measure of the overall level of prices
• Published by the Philippine Statistical
Authority (PSA)
• Used to
• track changes in the typical household’s
cost of living
• adjust many contracts for inflation
(i.e.,“COLAs”)
• allow comparisons of dollar figures from
different years
How the PSA constructs the CPI
1. Surveys consumers to determine
composition of the typical consumer’s
“basket” of goods.
2. Every month, collects data on prices of all
items in the basket; compute cost of
basket
3. CPI in any month equals
Cost of basket in that month
100 
Cost of basket in base period
Exercise: Compute the CPI
The basket contains 20 pizzas and

10 compact discs.
prices: For each year, compute

pizza CDs ▪ the cost of the basket
2012 Php10 Php15 ▪ the CPI (use 2002 as
2013 Php11 Php15 the base year)
2014 Php12 Php16 ▪ the inflation rate from
the preceding year
2015 Php13 Php15
answers:
cost of inflation
basket CPI rate
2012 Php350 100.0 n.a.
2013 370 105.7 5.7
2014 400 114.3 8.1
2015 410 117.1 2.5
The composition of the CPI’s
“basket”
Food and bev.
5.8% 5.9%
Housing 17.6%
2.8%
Apparel 2.5%
4.5% 4.8%
Transportation
Medical care
Recreation
16.2%
Education
Communication
40.0%
Other goods and
services
Reasons why
the CPI may overstate inflation
• Substitution bias: The CPI uses fixed weights,
so it cannot reflect consumers’ ability to substitute
toward goods whose relative prices have fallen.
• Introduction of new goods: The introduction of
new goods makes consumers better off and, in
effect, increases the real value of the dollar. But it
does not reduce the CPI, because the CPI uses fixed
weights.
• Unmeasured changes in quality:
Quality improvements increase the value of the
dollar, but are often not fully measured.
CPI vs. GDP deflator
prices of capital goods
• included in GDP deflator (if produced domestically)
• excluded from CPI
prices of imported consumer goods

• included in CPI
• excluded from GDP deflator
the basket of goods

• CPI: fixed
• GDP deflator: changes every year
Two measures of inflation
250 60%
50%
200
40%
150
30%
Index
20%
100
10%
50
0%
0 -10%
04
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
02
06
08
10
12
14
16
18
CPI GDP Deflator CPI Inflation 2000
GDP Inflation
CPI and Purchasing Power
CPI and Adjusting for Inflation
YEAR PRICE of CPI Adjusted CPI (Base
DIESEL Price of 2016)
Diesel
2010 43.5 120.5
2011 53.4 126.1
2012 53.4 100.0
2013 51.1 102.6
2014 51.5 106.3
2015 41.1 107.0
2016 40.1 108.4
2017 46.0 111.5
2018 54.2 117.3
Price Stability
Indicators
Two measures of inflation vs GDP Growth
25.0% 9.0%
PRICE INDICATORS 8.0%

20.0%
7.0%
6.0%
15.0%
5.0%
10.0% 4.0%
3.0%
5.0%
2.0%
1.0%
0.0%
0.0%
-5.0% -1.0%
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
GDP Growth GDP Inflation Inflation

Headline inflation
Historical oil price shocks
Headline inflation
Headline vs Core Inflation
Headline Inflation
❖ the rate of change in the weighted average prices of
all goods and services in the CPI basket.
Core Inflation
❖ the CPI excludes products with volatile price
movements
❖ excludes rice, corn, fruits and vegetables, and fuel
items (gas, liquefied petroleum gas (LPG), kerosene,
gasoline and diesel) which together represent 18.4
percent of the CPI basket.
Headline vs Core Inflation
10.0% 9.0%
8.0%
8.0%
7.0%
6.0% 6.0%
5.0%
4.0%
4.0%
2.0% 3.0%
2.0%
0.0%
1.0%
-2.0% 0.0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
GDP Growth GDP Inflation Core Inflation Headline Inflation
Inflation, Interest Rates and Currency Value
Unemployment Rate
Categories of the population
• employed
working at a paid job
• unemployed
not employed but looking for a job
• labor force
the amount of labor available for producing
goods and services; all employed plus
unemployed persons
• not in the labor force
not employed, not looking for work.
Two important labor force
concepts
• unemployment rate
percentage of the labor force that is
unemployed
• labor force participation rate
the fraction of the adult population
that ‘participates’ in the labor force
Exercise: Compute labor force
statistics
U.S. adult population by group, May 2003
Number employed = 137.5 million
Number unemployed = 9.0 million
Adult population = 220.8 million
Use the above data to calculate

• the labor force
• the number of people not in the labor force
• the labor force participation rate
• the unemployment rate
Answers:
• data: E = 137.5, U = 9.0, POP = 220.8

• labor force
L = E +U = 137.5 + 9.0 = 146.5
• not in labor force
NILF = POP – L = 220.8 – 146.5 = 74.3
• unemployment rate
U/L = 9/146.5 = 0.061 or 6.1
• labor force participation rate
L/POP = 146.5/220.8 = 0.664 or 66.4
Exercise: Compute labor force
statistics
Philippine Unemployment Rate
(April 2005)
New Definitions of Unemployed
Okun’s Law
• Employed workers help produce GDP, while
unemployed workers do not.
So one would expect
a negative relationship between
unemployment and real GDP.
• This relationship is clear in the data…
Okun’s Law
Percentage change
in real GDP
10 Okun’s Law states that a
one-percent decrease in
8 unemployment is
1951 associated with two
6 1984 percentage points of
2000 additional growth in real
4 1999 GDP
2 1993
1975
0
-2 1982
-3 -2 -1 0 1 2 3 4
Change in
unemployment rate
Chapter Summary
1. Gross Domestic Product (GDP) measures both
total income and total expenditure on the
economy’s output of goods & services.
2. Nominal GDP values output at current prices;
real GDP values output at constant prices.
Changes in output affect both measures, but
changes in prices only affect nominal GDP.
3. GDP is the sum of consumption, investment,
government purchases, and net exports.
Chapter summary
4. The overall level of prices can be measured
by either
▪ the Consumer Price Index (CPI),
the price of a fixed basket of goods
purchased by the typical consumer
▪ the GDP deflator,
the ratio of nominal to real GDP
5. The unemployment rate is the fraction of the
labor force that is not employed.
When unemployment rises, the growth rate
of real GDP falls.
Inflation and Unemployment
25.0% 9.0%
PRICE INDICATORS 8.0%
20.0% 7.0%
6.0%
15.0% 5.0%
4.0%
10.0% 3.0%
2.0%
5.0% 1.0%
0.0%
0.0% -1.0%
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
GDP Growth Unemployment Rate Inflation

Introduction To
Development Economics
The Philippine Development Experience:
Key Indicators Measuring Economic
Activity and Growth

Final DevEcon Lecture 1 (As of 30-01-2020)

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San Beda University

College of Arts and Sciences

Assistant Prof. C. B. Mendoza, Jr.

Masters in Applied Business Economics

Has almost sixteen years of industry work

• Macroeconomics is a preparatory course

By the end of the semester, the students will

• Acquire a broad perspective in various

91 - 93 1.50 Very Good

This chapter introduces you to

❖ Economics of the nation ❖ Economics of the firm

Viewpoint Business Manager Govt Policymaker

What to produce? Needs of the customers Of buyers and sellers

How much? Max profit, utility, quality Max production,

For whom? Owners / shareholders Society at large

Goal Competitiveness Sustained Eco Devy

Factors With some measure of External

❖ Utility of Tools / Concepts ????

(e.g. Market structure, profit

MACROECONOMICS, the study of the

growth rate of inflation-adjusted hourly earnings

Unemployment Rate WAGE % Change Unemployment % Change Avg HH Income % Change

For a $150,000 30-year mortgage:

6/20/2020 5.21% $824 $9,888

…are simplified versions of a more

demand equation: Q d = D (P,Y )

• General functional notation

The demand curve

The supply curve shows

• No one model can address all the

• Macroeconomics is the study of the

• Economists use different models to examine

❖ Protecting consumers, producers, and

❖ This goal involves three aspects: sustained

⚫ The short-run fluctuation framework

In Macroeconomic Analysis we will attempt to have a holistic

Actual % Growth Expon. (Actual)

• Generally the Philippine economy is

• Real gross domestic product (real

• Philippine economy has grown at an

◆ This average annual growth rate is

• Another measure of growth is change

◆ Per capita real output is real

Movie Factory Household

Macroeconomics involves the study of aggregate

Government Banks Workers/Families

Traders Investors Business Firms

Resources (Land, Labor and Capital)

How do the Main

Output of Consumer Goods and Services

HOUSEHOLDS Banks Government World

Purchases Investments Gov’t Exports

Unemployment Rate Inflation rate Linear (Inflation rate)

Unemployment Rate Inflation rate Linear (Inflation rate)

A one peso drop in P-Php leads to 10 percentage point increase in

Unemployment Rate Php=1USD Linear (Php=1USD)

HOUSEHOLDS Banks Government World

Purchases Investments Gov’t Exports

HOUSEHOLDS Banks Government World

Purchases Investments Gov’t Spending Exports

(PS-I) + (T-G) = (X-M)

(PS-I) (T-G) (X-M)

o Value of goods = Money