Lecture 11 Notes

Microeconomics vs Macroeconomics: An Overview

 Economics is divided into two different categories: microeconomics and

macroeconomics. Microeconomics is the study of individuals and business decisions,
while macroeconomics looks at the decisions of countries and governments.

Microeconomics

 is the study of decisions made by people and businesses regarding the allocation of
resources and prices of goods and services. It also takes into account taxes, regulations,
and government legislation.

Microeconomics involves several key principles including (but not limited to):

 Demand, Supply, and Equilibrium

 Production Theory
 Costs of Production
 Labor Economics

Macroeconomics

 on the other hand, studies the behavior of a country and how its policies affect the
economy as a whole.
 Macroeconomics examines economy-wide phenomena such as gross domestic product
(GDP) and how it is affected by changes in unemployment, national income, rate of
growth, and price levels.
What is Gross Domestic Product (GDP)

https://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm

Gross Domestic Product (GDP)

 Gross domestic product (GDP) is the total monetary or market value of all the finished
goods and services produced within a country's borders in a specific time period. As a
broad measure of overall domestic production, it functions as a comprehensive
scorecard of a given country’s economic health.
 GDP can be calculated in three ways, using expenditures, production, or income. It can
be adjusted for inflation and population to provide deeper insights.

Understanding Gross Domestic Product (GDP)

 The calculation of a country's GDP encompasses all private and public consumption,
government outlays, investments, additions to private inventories, paid-in construction
costs, and the foreign balance trade. (Exports are added to the value and imports are
subtracted).

 The GDP of a country tends to increase when the total value of goods and services that
domestic producers sell to foreign countries exceeds the total value of foreign goods
and services that domestic consumers buy, this is trade surplus.

 If the opposite situation occurs–if the amount that domestic consumers spend on
foreign products is greater than the total sum of what domestic producers are able to
sell to foreign consumers–it is called a trade deficit.

Several types of GDP measurements:

 Nominal GDP: GDP evaluated at current market prices

 Real GDP: Real GDP is an inflation-adjusted measure that reflects both the value and the
quantity of goods and services produced by an economy in a given year.
 GDP Growth Rate: The GDP growth rate compares one quarter of a country's GDP to
the previous quarter in order to measure how fast an economy is growing.
 GDP Per Capita: GDP per capita is a measurement of the GDP per person in a country's
population; it is a useful way to compare GDP data between various countries.

Economists use a process that adjusts for inflation to arrive at an economy’s real GDP. By
adjusting the output in any given year for the price level that prevailed in a reference year,
called the base year, economists can adjust for inflation's impact. This way, it is possible to
compare a country’s GDP from one year to another and see if there is any real growth.

 Real GDP is calculated using a GDP price deflator , which is the difference in prices
between the current year and the base year.
 Nominal GDP is used when comparing different quarters of output within the same
year. When comparing the GDP of two or more years, real GDP is used. This is because,
in effect, the removal of the influence of inflation allows the comparison of the different
years to focus solely on volume.
 Overall, real GDP is a better method for expressing long-term national economic
performance.

The Philippine Gross Domestic Product (GDP) posted a growth of 7.1 percent in the third
quarter of 2021. The main contributors to the growth, with their corresponding increases,
were: Wholesale and retail trade; repair of motor vehicles and motorcycles, 6.4
percent; Manufacturing, 6.3 percent; and Construction, 16.8 percent.

Among the major economic sectors, Industry and Services posted positive growths of 7.9
percent and 8.2 percent, respectively. Meanwhile, Agriculture, forestry, and fishing posted a
contraction of -1.7 percent in the third quarter of 2021.

On the demand side, Household Final Consumption Expenditure (HFCE) grew by 7.1 percent in
the third quarter of 2021. The following items also recorded growths: Gross Capital Formation
(GCF), 22.0 percent; Government Final Consumption Expenditure (GFCE), 13.6
percent; Exports, 9.0 percent; and Imports, 13.2 percent.

Net Primary Income (NPl) from the Rest of the World declined by -52.3 percent. Meanwhile, the
Gross National lncome (GNl) posted a growth of 2.8 percent during the period.
Types of Gross Domestic Product (GDP) Calculations

GDP can be determined via three primary methods. All three methods should yield the same
figure when correctly calculated.
These three approaches are often termed the expenditure approach, the output (or
production) approach, and the income approach.

The Expenditure Approach

 The expenditure approach, also known as the spending approach, calculates spending
by the different groups that participate in the economy.
 The GDP is primarily measured based on the expenditure approach. This approach can
be calculated using the following formula:
 GDP = C + G + I + NX
where C = consumption
G = government spending
I = Investment; and
NX= net exports (exports – imports)
 All these activities contribute to the GDP of a country.

The Production (Output) Approach

 The production approach is essentially the reverse of the expenditure approach.

 Instead of measuring the input costs that contribute to economic activity, the
production approach estimates the total value of economic output and deducts the cost
of intermediate goods that are consumed in the process (like those of materials and
services).
 By summing the value of sales of goods and adjusting (subtracting) for the purchase of
intermediate goods to produce the goods sold.

Formula for Production (Output) Approach

 GDP (as per output method) =

= Real GDP (GDP at constant prices) –
Taxes + Subsidies.
 In order to avoid a distorted measure of GDP due to price level changes, GDP at
constant prices or Real GDP is computed.

The Income Approach

  The income approach represents a kind of middle ground between the two other
approaches to calculating GDP.
 The income approach calculates the income earned by all the factors of production in an
economy, including the wages paid to labor, the rent earned by land, the return on
capital in the form of interest, and corporate profits. 
 The income approach factors in some adjustments for those items that are not
considered a payments made to factors of production.

Formula for Income Approach

 TNI = Sales Taxes + Depreciation + NFFI

where TNI = Total National Income
NFFI = Net Foreign Factor Income
 Total national income is equal to the sum of all wages plus rents plus interest and
profits.

Why is GDP important?

 GDP provides information to policymakers and central banks from which to judge
whether the economy is contracting or expanding, whether it needs a boost or restraint,
and if a threat such as a recession or inflation looms on the horizon.

END OF LECTURE