MACROECONOMICS

REVIEW
MR. REMIGIO G. TIAMBENG
MACROECONOMICS  the study economic
aggregates and an overview of the economy.
FOCUS:
• Economic Growth and GDP
• Unemployment, Inflation, and the Government
• The Circular Flow Model
• National Income Accounting
• Business Cycles
• Keynesian (Fiscal) Economics
 THE CIRCULAR FLOW MODEL
Also called as:
The circular flow of goods and services
The circular flow of economic activity
“What comes around goes around”
Example:
Juan spends (purchased) a final good
P10,000 the market value is P10,000
the income to the factors is P10,000.
 FISCAL AND MONETARY POLICIES
Monetary policy and Fiscal policy refer to the two most
widely recognized "tools" used to influence a nation's
economic activity.

Monetary policy is primarily concerned with the

management of interest rates and the total supply of
money in circulation and is generally carried out by central
banks such as the Bangko Sentral ng Pilipinas.

Fiscal policy is the collective term for the taxing and

spending actions of governments. Here in the Philippines,
the national fiscal policy is determined by the Executive
and Legislative Branches.
 Types of Fiscal Policy
1. Expansionary Fiscal Policy -> involves decreasing
taxes, increasing government expenditures or both
in order to fight recessionary pressures. A decrease
in taxes means that households have more disposal
income to spend. Higher disposal income increases
consumption which increases GDP.
2. Contractionary Fiscal Policy -> involves increasing
taxes, decreasing government expenditures or both
in order to fight inflationary pressures. Due to an
increase in taxes, households have less disposal
income to spend. Lower disposal income decreases
consumption.
Purpose EFP:
• The purpose of expansionary fiscal policy is to
boost growth to a healthy economic level.
• This is needed during the contractionary phase
of the business cycle. The government wants to
reduce unemployment, increase consumer
demand and avoid a recession. If a recession
has already occurred, then it seeks to end the
recession and prevent a depression.
How It Works:
• Expansionary fiscal policy expands the amount of
money in an economy. It puts more money into
consumers' hands to give them more purchasing
power. It uses subsidies, transfers payments
including welfare programs, and income tax cuts. It
reduces unemployment by contracting public works
or hiring new government workers. All these
measures increase demand. That spurs consumer
spending, which drives almost seventy percent of
the economy. The other three components of gross
domestic product are government spending, net
exports and business investment.
• Corporate tax cuts put more money into
businesses' hands. They use it for new investment
and employees.
Contractionary fiscal policy is a form of fiscal
policy that involves increasing taxes, decreasing
government expenditures or both in order to
fight inflationary pressures. Due to an increase
in taxes, households have less disposal income
to spend. Lower disposal income decreases
consumption.
Purpose
• The purpose of contractionary fiscal policy is to slow growth to
a healthy economic level. That's between 2 percent to 3 percent a
year. An economy that grows more than 3 percent creates four
negative consequences.
• It creates inflation. That's when prices rise too fast in clothing, food
and other necessities. Higher prices quickly gobble up savings and
destroy the standard of living.
• It drives up prices in investments. That's called an asset bubble. It's
happened in stocks, gold and oil. An example of its devastating
effects is the 2006 housing bubble. By 2005, the cost of housing
became unaffordable for most families. Banks lowered their terms
to entice subprime borrowers, creating a crisis in 2008.
• It's unsustainable. Growth at 4 percent or more leads to a recession.
That especially occurs with asset bubbles. For more, see Business
Cycle.
• It lowers unemployment to below the natural rate of
unemployment. Employers struggle to find enough workers to meet
market demand. That slows growth from the production side.
How It Works
• When governments cut spending or increase
taxes, it takes money out of consumers' hands.
• That also happens when the government
cuts subsidies, transfer payments
including welfare programs, contracts for public
works or the number of government
employees.
• Shrinking the money supply decreases demand.
It gives consumers less purchasing power. That
reduces business profit, forcing companies to
cut employment.
 BUSINESS CYCLE
The upward and downward movements of levels of
GDP (gross domestic product) and refers to the
period of expansions and contractions in the level
of economic activities (business fluctuations)
around a long-term growth trend .
BUSINESS/ECONOMIC CYCLE
 PHASES OF BUSINESS CYCLE
1. In the expansion phase, there is an increase in various economic
factors, such as production, employment, output, wages, profits,
demand and supply of products, and sales.
2. In peak phase, the economic factors, such as production, profit,
sales, and employment, are higher, but do not increase further.
3. In recession phase, all the economic factors, such as production,
prices, saving and investment, starts decreasing.
4. During the trough phase, the economic activities of a country
decline below the normal level. In this phase, the growth rate of
an economy becomes negative. In addition, in trough phase,
there is a rapid decline in national income and expenditure.
5. In recovery phase, consumers increase their rate of
consumption, as they assume that there would be no further
reduction in the prices of products. As a result, the demand for
consumer products increases.
The business cycle goes through 4 phases:
Economic Expansion: Real GDP is increasing
Economic Contraction: Real GDP is declining
Peak: The economy reverses from expansion to
contraction
Trough: The economy reverses from contraction to
expansion
Economic Recession: When the economy is in a
downturn for at least six months. Growth rate is
negative, unemployment increases, and price level is
most likely to rise.
Economic Depression: A prolonged recession declared
when the unemployment rate is 12% or more.
 NATIONAL INCOME ACCOUNTING
• National income accounting is a bookkeeping system
that a national government uses to measure the level of
the country's economic activity in a given time period.
National income accounting provides the statistics to
determine if the economy is encountering difficulties.
• GROSS NATIONAL PRODUCT. The gross national
product is the sum total of all final goods and services
produced by the people of one country in one year.
• Gross domestic product (GDP) is the total value of
output in an economy and is used to measure change in
economic activity. GDP includes the output of foreign
owned businesses that are located in a country following
foreign direct investment.
 Three Approaches to Measuring GDP
EXPENDITURE APPROACH = PRODUCT APPROACH = INCOME APPROACH
1. EXPENDITURE APPROACH -> It measures the
total amount spent on the goods produced by
a country in a year.
GDP = C + I + G + (X-M)
• C= Private Consumption Expenditures
• I= Investment Expenditures
• G= Government Consumption Expenditures
and Investments
• X= Value of Exports
• M= Value of Imports
2. INCOME APPROACH
It measures the total incomes earned by households in a nation
in a year.

GDP = W + R + I + BP + IBT + SA + d + F

• W= Wages, Salaries, Benefits, Pensions, and SSS

Contributions
• R= Rental Income
• I= Interest Income
• BP= Business Profits (of business owners) – P, P, C
• IBT= Indirect Business Taxes (sales tax, business
property tax, license fees)
• d= Depreciation (this is the decrease in value of goods)
• F= Foreign Income(To calculate this, take the total payments
received by domestic citizens from foreign entities and subtract
the total payments sent to foreign entities for domestic
production.)
3. PRODUCTION APPROACH
It sums up the market value of the total production
of all the major economic sectors of the country.

GDP = AS + IS + SS

• AS= Agricultural Sector (fishery, forestry, piggery,

poultry, etc.)
• IS= Industrial Sector (manufacturing and
production)
• SS = Service Sector
 UNEMPLOYMENT
Represents the number of people in the labor force who want to work but
do not have a job. It is generally stated as a percentage and calculated by
dividing the number of people who are unemployed by the total work
force.

The formula for calculating the labor force participation rate is pretty
straightforward:
LFPR = LF / P
where:
• P = total eligible population (both the economically inactive and active
populations)
• LF = labor force

The labor force is made up of those people who want to work; it excludes
people who are retired, disabled, and able to work but not currently
looking for a position; for instance, they may be taking care of children or
going to college.
Causes of Unemployment
• The government defines those who want to work as people who
have actively looked for work within the past four weeks and
determines the number of people currently unemployed through
a monthly survey called the Current Population Survey.
• People can be unemployed for many reasons:
• They quit their position and are looking for a new one.
• They were laid off due to lack of work and haven't yet been
rehired.
• Their company reduced the work force, and they are seeking a
new position. This can be due to a local condition, when the
company closes a plant or division, or a national condition, when
the economy slows and many companies reduce their work force.
• They have recently returned to the work force - perhaps from
pregnancy or attending school - and haven't yet located a
position.
• The need for their skill set has gone down, and there are limited
positions available, which may lead to unemployment until they
train for a new position.
• Technology has reduced the need for their type of position.
 Three Types of Unemployment
1. Cyclical Unemployment -> a factor of overall
unemployment that relates to the cyclical trends in growth
and production that occur within the business cycle. When
business cycles are at their peak, cyclical unemployment will
be low because total economic output is being maximized.
2. Structural Unemployment -> caused by a mismatch
between the skills that workers in the economy can offer, and
the skills demanded of workers by employers (also known as
the skills gap). It is often brought about by technological
changes that make the job skills of many of today's workers
obsolete.
3. Frictional Unemployment -> exists in any economy due to
people being in the process of moving from one job to
another.
 INFLATION
The rate at which the general level of prices for
goods and services is rising and, consequently, the
purchasing power of currency is falling.