The Components of The Macroeconomy: The Three Market Arenas

The Components of the Macroeconomy
The Three Market Arenas

1. Goods-and-services market
- Firms supply to the goods-and-services market. Households, the government and
firms demand from this market.
2. Labor market
- In this, households supply labor and firms and the government demand labor.
3. Money market
- Households supply funds to this market in the expectation of earning income in the
form of dividends on stocks, and interests on bonds.
- Firms, the government and the rest of the world also engage in borrowing and
lending which is coordinated by financial institutions.
a. Treasury bonds, notes and bills – Promissory notes issued by the government when it
borrows money.
b. Corporate bonds – Promissory notes issued by firms when they borrow money.
c. Shares of stock – financial instruments that give to the holder a share in the firm’s
ownership, and therefore the right to share in the firm’s profits.
d. Dividends (di daw to kasama sa exam share nya lang daw kasi bida bida sya) – the
portion of a firm’s profits that the firm pays out each period to its shareholder.
The Role of the Government in the Macroeconomy

• Fiscal Policy – government policies concerning taxes and spending.
• Monetary Policy – the tools used by the government to control the quantity of money, which in
turn affects interest rates.
BSP Monetary Policy

- To manage the supply and cost of money and credit.
- To influence overall demand for goods and services.
- To attaint price stability.
• Contractionary – When there is “too much money” in the economy supporting overall demand
for goods and services which, in turn increases inflationary pressures, the BSP “tightens” the
faucet to reduce the money supply. This action dampens demand which could lead to lower
inflation. (The following is as it pertains: higher interest rates, less lending/borrowing, more
savings, and less spending.)
• Expansionary – When there is “too little money” in the economy which dampens overall
demand for goods and services, the BSP “loosens” the faucet to expand money supply. (Lower
interest rates, more lending/borrowing, less savings, and more spending.)
A Brief History of Macroeconomics
• The Great Depression (1929 – 1930s) – the period of severe economic contraption and high
unemployment rate.
• Fine-tuning – the phrase used by Walter Heller to refer to the government’s role in regulating
inflation and unemployment.
• Stagflation – a situation of both high inflation and high unemployment.
Gross Domestic Product

GDP – the total market value of all final goods services produced within a given period by factors of
production located within a country.
- Basta yung general price of goods ang commodities ng isang bansa na bet ng
general public (gp) periodt.
- Like dito sa ph iba yung price ng starbucks sa us, sokor and south America,
regardless of money conversion.
• Final Goods and Services – goods and services produced for final use.
• Intermediate goods – produced by one firm for use in further processing by another firm.
• Value added – the difference between the value of goods as they leave a stage of production
and the cost of the goods as they enter that stage.
Exclusion of Used Goods and Paper Transactions

- GDP is concerned only with new or current production. Old output is not counted in
current GDP because it was already counted when it was produced.
Exclusion of Output Produced Abroad by Domestically Owned Factors of Production
- Gross National Product (GNP) – the total market value of all final goods and services
produced within a given period by factors of production owned by a country’s
citizens, regardless of where the output is produced.
Calculating GDP
• Expenditure Approach – a method of computing GDP that measures the total amount spent on
all final goods and services during a given period.
a. Personal (C)onsumption expenditures – household spending on consumers goods.
Also, these are the expenditures by consumers on goods and services.
➢ Durable Goods – goods that last a relatively long time, such as cars and
household appliances.
➢ Nondurable Goods – used up fairly quickly such as food and clothing.
➢ Services – the things we buy do not involve the production of physical things
such as legal and medical services and education.
b. Gross Private (I)nvestment – spending by firms and households on new capital, that
is, plant, equipment, inventory, and new residential structures. It is also the total
investment in capital. Thats it is the purchase of new housing, plants, equipment,
and inventory by the private (or nongovernmental) sector.
➢ Nonresidential Investment – expenditures by firms for machines, tools, plants
and so on.
➢ Residential Investments – expenditures by households and firms on new
houses and apartment buildings.
▪ Change in Business inventories – the amount by which firms’ inventories

change during a period. Inventories are the goods that firms produce now
but intend to sell later.
▪ Gross Investment vs Net Investment
o Depreciation – the amount by which an asset’s value falls in a given
period. Pag obsolete, mas mababa yung value na, minsan nga wala
ng value.
o Gross Investment – the total of all newly produced capital goods
(plant, equipment, housing, and inventory) produced in a given
period.
o Net Investment – Gross investment minus depreciation.
Formula:
capital (end of period) = capital (beg. Period) + net investment
c. (G)overnment consumption and Gross Investment – expenditures by government

for final goods and services.
d. Net (Ex)ports (-IM)ports – net spending by the rest of the world, or exports (ex)
minus (imports).
➢ The difference between exports (sales to foreigners of PH-produced goods and
services) and imports (PH purchases of goods and services from abroad). The
figure can be positive or negative.
Formula <3
GDP = C + I + G + (EX – IM)
• Income Approach – a method computing GDP that measures the income (composes of: wages,
rents, interests, and profits) received by all factors of production in producing final goods and
services. (again!!! Di to kasama sa exam eme lang)
a. National Income – the total income earned by the factors of production owned by a
country’s citizens.
b. Compensation of Employees – includes wages, salaries, and various supplements—

employer contributions to social insurance and pension funds, for example—paid to
households by firms and by the government.
c. Proprietors’ Income – the income of unincorporated businesses. (Dapat registered sa
DTI kahit sole prop lang:::>)
d. Rental Income – the income received by property owners in the form of rent.
e. Corporate Profits – income ng corporations !!!!
f. Net interest – interest paid by business.
g. Indirect taxes minus subsidies – taxes such as sales taxes, customs duties and license
fees less subsidies that the government pays for which it receives no goods or services
for which it receives no goods or services in return. (Properties obtained by the
government from private entities is sold and yung nakukuha nila don can be used din
like how collecting taxes work.)
h. Net Business Transfer payments – Net transfer payments by businesses to others.
i. Surplus of government enterprises – income of government enterprises.
j. Net National Product (NNP) – gross national product minus depreciation; a nation’s
total product minus what is required to maintain the value of its capital stock.
k. Statistical discrepancy – data measured error
l. Personal Income – the total income of households.
m. Disposable personal income or after-tax income – personal income minus personal
income taxes. The amount that households have to spend or save. (Income tax yung
dine-deduct sa mga employees in their pay slips.
n. Personal saving – the amount of disposable income that is left after total personal
spending in a given period.
o. Personal saving rate – the percentage of disposable personal income that is saved. If
the personal saving rate is low, households are spending a large amount relative to their
incomes; if it is high, households are spending cautiously.
Nominal GDP vs. Real GDP

• Current Peso – the current prices that we pay for goods and services.
• Nominal GDP – GDP measured in current dollars/pesos.
• Weight – the importance attached to an item within a group of items.
Calculating Real GDP

a. Base Year – the year chosen for the weights in a fixed-weight procedure
b. Fixed-weight procedure – a procedure that uses weights from a given base year.
The Problems of Fixed Weights
The use of fixed-price weights to estimate real GDP leads to problems because it ignores:
- Structural changes in the economy.

- Supply shifts, which cause large decreases in price and large increases in quantity
supplies.
- The substitution effect of price increases.
• Real GDP – a macroeconomic statistic that measures the value of the goods and services
produced by an economy in a specific period, adjusted for inflation. (Basta ano,,,yung real gdp
laging ina-adjusted yun for inflation kasi if wala yun, nominal gdp lang sya, OKAY? ok.)
Real GDP Calculation

Calculating real GDP is a complex process typically best provided by the Bureau of Economic
Analysis (BEA). In general, calculating real GDP is done by dividing nominal GDP by the GDP
deflator (R)
Formula:
Real GDP = Nominal GDP/R
Limitations of the GDP Concept

• GDP and Social Welfare
- Society is better off when crime decreases; however, a decrease in crime is not
reflected in GDP.
- An increase in leisure is an increase in social welfare, but not counted in GDP.
- Most nonmarket and domestic activities, such as housework and childcare, are not
counted in GDP even though they amount to real production.
• Gross National Income per Capita
- Gross National Income (GNI) – GNP converted into peso using an average of
currency exchange rates over several years adjusted for rates of inflation.
• The Underground Economy – the part of the economy in which transactions take place and in
which income is generated that is unreported and therefore not counted in GDP. (walang taxes
na collected here whomp)
Pa video ni Jonard:
GDP - is the market value of all finished goods and services produced within a country in a year.
• Only finished goods are counted in GDP not the intermediate goods (raw materials that are
ought to be sold again eg: eggs and flour to make and sell a cake)
• Capital Goods - goods that are used to make other goods but are still considered finished goods
and is therefore recorded in the GDP. These goods are used only to make another finished or
intermediate goods but will not be part of that produce.
• Only goods and services produced within the year will be recorded in the GDP. Goods that are
sold within this year but is produced in the last previous year/s are not counted in this year's
GDP.
• Only goods and services produced within the country will be counted in that country's GDP.
Imported and exported goods will be counted toward the manufacturing country's GDP.
• If the good is not bought and sold in the market such as, home production, charitable work, free
goods and services, it will not be recorded in the GDP.

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The Components of The Macroeconomy: The Three Market Arenas

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The Components of the Macroeconomy

The Three Market Arenas

The Role of the Government in the Macroeconomy

BSP Monetary Policy

Gross Domestic Product

Exclusion of Used Goods and Paper Transactions

▪ Change in Business inventories – the amount by which firms’ inventories

c. (G)overnment consumption and Gross Investment – expenditures by government

b. Compensation of Employees – includes wages, salaries, and various supplements—

Nominal GDP vs. Real GDP

Calculating Real GDP

The Problems of Fixed Weights

- Structural changes in the economy.

Real GDP Calculation

Limitations of the GDP Concept

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