CHAPTER 2 (DOWLING) East Asian Countries

China
World War I Hong Kong
- also known as the Great War Japan
-1914 to 1918, 4 Years Macau
-conflict between Central Powers Mongolia
(Germany, North Korea
- 1939 to 1945, 6 years South Koera
- conflict between Axis Powers (Germany, Taiwan
Italy, Japan) and Allied Powers (France,
Britain, the U. S, the Soviet Union, and China) Japan
The Japanese growth in the postwar period
was often called “miracle”
Economic Development in Postwar East
Asia JAPAN opened its economy to increase
East Asia trade and investment
- provides fertile ground for economists
to study and address a wide variety of It was led by manufacturing; starting with
economic development issues textiles and clothing moving to high-
-stands out because of the dynamic technology, especially automobiles,
economic growth and development -it has electronics and computers
achieved throughout the postwar period (East
Asian Miracle) Development process started in Japan and
- opened economy to increase trade and spread to South Korea, Singapore, Taiwan,
investment and Hong Kong (Asian Tigers)

The region’s economic growth history has

been marked by an “economic miracle” that Asian Tigers
spanned seven decades followed by a Rapid industrialization that followed quickly
severe financial ad economic crisis. spread to the neighboring economies of
South Korea, Singapore, Taiwan, and
Problems of widespread poverty and Hong Kong
economic inequality remain despite
significant economic progress Economic growth in this newly industrialized
economies (NIEs), sometimes called Asian
Addressing these issues, as well as the tigers, average 8 percent a year in the 3
impact of developments in the world decades prior to the Asian financial crisis in
economy is a challenge the region’s 1997
governments, international organizations,
and the economic profession face as whole The growth continued despite of; -
2 Oil crisis in the 1970’s
-Sluggish world economy in 1980’s
Rising protectionism and currency
appreciation in the latter half of the eighties
Protectionism -an economic system where the
-policy of protecting domestic industries government invest in certain sectors of the
against foreign competition by means of tariffs, economy in order to stimulate the growth of
subsidies, import quotas, or other restrictions or new industries in the private sectors
handicaps placed on the imports of foreign -recent studies have used this model to
competitors characterized the growth and development in
the neighboring ASEAN economies and china
Oil Crisis
The oil crisis of 1970’s was brought about by Main Characteristics of East Asian Model
two specific events occurring in the Middle- 1. Corporatist Development
east: 2. Export-led Economice Development Strategy
1. Yom-Kippur War of 1973 3. State policy and intervention
2. Iranian Revolution of 1979
Developments in other Countries
Both events resulted in disruptions of oil Inspired by the success of Japan and the
supplies from the region which created NIEs, Indonesia, Malaysia, Thailand, and
difficulties for the nations that relied on the Philippines developed strategies the
energy exports from the region promoted:
a.) inflow of foreign capital
All four economies have been fueled by b.) encouraged exports
exports and rapid industrialization, and have
achieved high levels of economic growth 1980’s – outward oriented economic
since 1960’s. policies fueled rapid growth
China’s economic growth has likewise
The Asian Tigers share common accelerated since the late 1970’s when its
characteristics: government shifted to an open-door
a sharp focus on exports policy that promoted foreign investment
an educated populace and export
high savings rate
ASEAN (Southeast Asian Nations)
The Asian Tigers or Asian Dragons are the -established on August 8, 1967 in
first newly highly industrialized countries after Bangkok, Thailand, with the signing of the
the postwar period ASEAN Declaration (Bangkok Declaration) by
the Founding Fathers of ASEAN, namely
The industrialization experience of Japan Indonesia, Malaysia, Philippines, Singapore,
and these Asian Tigers formed the basis of and, Thailand
the “East Asian Development Model” ,
which has now become an accepted part of Membership 2019 (10 States)
economic development literature Brunei Darussalam
Cambodia
Indonesia
East Asian Model Laos
-known as state-sponsored capitalism Malaysia
Myanmar
 Philippines International Monetary Fund (IMF)
Singapore Although most of the governments of Asia had
Thailand seemingly sound fiscal policies, the
Vietnam International Monetary Fund (IMF) stepped in
East Timor or Timor Leste – in SEA to initiate a $40 billion program to stabilize
the currencies of South Korea, Thailand, and
July 1997 – Collapsed of Thai Baht Indonesia, economies particularly hard hit by
On July 2, 1997, due to speculative attacks, the Asian financial crisis
Thailand was forced to float their currency
the Thai Baht Asian financial crisis - multifaceted
• The significance of the Asian financial crisis is
This caused a rapid revolution, which multifaceted.
triggered a loss throughout the Asian • Though the crisis is generally characterized
economies. Soon, other countries were as a financial crisis or economic crisis, what
forced to devalue as investors wanted to get happened in 1997 and 1998 can also be seen
out of Asian currencies as a crisis of governance at all major levels of
politics: national, global, and regional.
Float- allowing the value of the Baht to be
set by the currency market • In particular, the Asian financial crisis
revealed the state to be most inadequate at
The economic collapsed forced the performing its historical regulatory functions
reappraisal of policies ranging from corporate and unable to regulate the forces of
governance to exchange rate management globalization or the pressures from international
actors
It forced a rethink of the prescriptive policies
imposed on the ailing economies by The uncertainty associated with an unstable
international development institutions such political environment may reduce investment
as International Monetary Fund (IMF) and and the pace of economic development
World Bank
After a sharp economic contraction in 1998,
Asian Financial Crisis the region rebounded rapidly:
- also called the “Asian Contagion”
- a sequence of currency devaluatons and South Korea – year on year production and
other events that began in the summer of 1997 gross domestic product increased
and spread through many Asian markets dramatically in 1999

The currency markets failed in Thailand as Stock market values doubled in Thailand and
the result of the government’s decision to no Malaysia
longer peg the local currency to the U.S
dollar (USD) Primary equity market indexes in Seoul and
Currency declines spread rapidly throughout Singapore returned to their pre-crisis level
East Asia, in turn causing stock market
declines, reduced import revenues, and
government upheaval
Development Economics Some Aspects of Development Economics
- a branch of economics that focuses on determining to what extent rapid population
improving fiscal, economic, and social growth helps or hiders development
conditions in developing countries the structural transformation of economies,
- considers factors such as health, and
education, working conditions, domestic and the role of education and health care in
international policies, and market condition with development
a focus on improving conditions the world’s they also include international trade and
poorest countries globalization,
- examines both macroeconomics and sustainable development
microeconomics actors relating to the structure the effect of epidemics such as HIV and
of developing economies, and domestic and AIDS
international economic growth the impact of catastrophes on economic and
- studies the transformation of emerging human development
nations into more prosperous nations
- a branch of economies that deals with Economic Growth and Economic
economic aspects of development process in Development
low-income countries Economic Economic
Growth Development
In today’s classroom, economic development meaning the increase in therelated to an
concentrates on economies that have low market value of increase in output
per-capita income the good coupled with
produced by an improvement in the
These economies are set apart from the economy over social and political
industrial economies of Europe, North time welfare of people
America, Japan, and Australia/New Zealand within the country
scope -narrow -broad
Strategies for transforming a developing -considered as a -a multidimensional
economy tend to be unique because the single dimensionalphenomenon
social and political background of countries in nature -it focuses on the
can vary dramatically -it only focuses on income of people
the income of and on the
people of the improvement of the
Macroeconomics country living standards of
- refers to broadly influencing factors the people of
such as interest rates, country
concept -narrow -broader
Microeconomics - economic
- relates to individual influences development=
economic growth +
standard of living
(increase/Improve
ment)
measure -quantitative - both qualitative
ment and terms: increase in and quantitative
terms: human
effects GDP development Economic Growth
-brings a index(hdi), gender- It is a narrower concept than economic
quantitative related index, development.
impact on the human poverty • It is an increase in a country's real level of
economy (effect index, infant national output or in another way an increase in
on per capita mortality rate, the value of goods and services produced by
income literary rate, etc. every sector of the economy.
can be measured by an
-qualitative and
increase in a country's GDP(gross domestic
quantitative impact
product).
on the economy
-improvement in life
Economic Development
expectancy rate,
literacy rate, Development looks at a wider range of
poverty rate, statistics than just GDP per capita.
mortality rate Development is concerned with how people
term short term long-term process are actually affected.
process, in a It looks at their actual living standards.
certain period Measures of economic Development will look
indicators -indicated by -improvement in life at:
increase in GDP expectancy, human Real income per head – GDP per capita
or GNP development, infant Levels of literacy and education standards
-growth related to mortality rate, Levels of health care e.g. number of doctors
gradual increase literacy rate and per 1000 population
in one of the poverty rate Quality and availability of housing
components of -development Levels of environmental standards
gross domestic relates to growth of
product: human capital Economic Development in Asia
consumption, indexes, a • East Asian miracle, a showcase of
government decrease in
development up until the Asian crisis.
spending, and net inequality of
• Asian crisis created a number of questions
exports income and wealth
about the continued viability of a rapid growth
and structural
profile forthe region.
changes that
Social impact of the crisis has been
improve the quality
of life of people substantial.
possible economic growth economic Future development will depend upon many
is possible without development is not factors, including public policy and
economic possible without developments in industrial countries.
development economic growth This course looks at both the history and the
future outlook for the region.
 Difference between Development Chapter 1 (Cabudol)
Economics and Other branches of The World Bank coined the term “East
Economics Asian Miracle”
It looks at all of the other branches of Outward Oriented is a strategy that aims to
economics within the context of economic extensively reorganize an economy for the
development. purose of manufacturing
Telecommunications is an example of a
It uses the tools developed in other branches labor-extensive manufactueirng product
of economics to analyze the problems and Rapid transformation ahve continued since
challenges of economic development such 2000, reflecting the riise of China
as growth theory, macroeconomics and Footwear is an examle of low-extensive,
microeconomics, labor, industrial olow-technology manufacturing product
organization, international trade and fiscal Manufactured products became the principal
and monetary policies epxorts of East and South East Asia
According to UNIDO, manufacturing is the
They apply these tools of analysis to the engine of growth fro deveoloping countries
problems and challenges of developing Industral Policy is an itervention that
countries attempts to improve the business
environment
Governance is one of the two important
Making Comparisons Between factors in the East Asian development
Countries strategies
1. Exchange rate method – it used the
exchange rate between the local currency and Economic Growth
the US dollar to convert the currency into the -the percentage change in a nation’s per
US dollar equivalent. A country’s GDP and capita GDP
GDP per capita would them be valued -the key indicator of a country’s power
accordingly to US dollars. and accomplishment
-boost the national output, total money
2. Purchasing Power Parity (PPP) – develops value of all goods and services produced by
a cost index for comparable baskets of one country
consumption goods in the local currency and
then compares this with prices in the US for the Economic Development
same set of commodities -advancement of standard living
• A countries PPP is the number of units of (education, healthcare, innovation,
country’s currency required to buy the same environment)
amount of goods and service that a dollar
would buy in US. Standard of living
-level of consumption that people enjoy
-measured by the average income per
person (PSA)
Cost of living -healthier individuals are more
-amount of money it takes to buy goods productive
and services that a typical family consumes
-a rising of cost of living is inflation and • Property Rights and Political Stability
deflation as otherwise – property rights ensure the exercise of
rights over one’s property and these guarantee
Indicators of Economic Growth and more production of goods and services.
Development
• Saving and Investment – to produce more, When there is less uncertainty in government
invest more in capital assets, capital decisions and policies, there is an
investment would mean sacrifice to consume opportunity to improve production processes
more (thus, consume less)
• A stable political environment is considered
• Diminishing Returns and Catch-Up Effect to have efficient executive, legislative and
– as the stock of capital increases, the extra judiciary system, working together for the
output produced from an additional unit of countries' economic development
capital decreases.
-In the long-run, higher saving rate leads to a • Free Trade – a competitive economy that
greater level of productivity and income but not reduces or eliminates trade restrictions
greater growth. experiences economic growth after benefiting
from more products to be used as input to
• Investment From Abroad (foreign portfolio production.
investment) – an investment sponsored
with foreign money and operated domestically ) Outward-oriented polices give way to
use of foreign money would mean– more developing countries opportunity to interact
opportunities to produce where the money is with other countries and trade freely
capitalized
Ex of providers of funds – WB, IMF • Research and Development – generates
new ideas, goods and services.
• Education – Human capital theory attributes
differential investments in human capital to • Population Growth – 2 school of thoughts
inequalities in income. 1. A relatively large population means more
Ex: women vs men, and minorities vs whites. human resources, working and contributing to
the production of the country
-the theory emphasizes human capital as a set 2. Means more people to consume those
of economic assets. Education benefits human goods and services countries with few
capital. population and slow population growth –
Brain drain- the migration of most Germany, Singapore
highly educated workers to rich countries
Productivity
• Health and Nutrition - Healthy population - - the amount of goods and services produced
human capital are capable to produce more from each unit of labor. It is obvious to see that
goods and services – maximize employment. the key factor in defining the standard of living
are the advances in productivity.
 would be sufficient to help the economy
Factors of Production recover.
Physical capital – assets utilized to produce
goods and services Activist fiscal and monetary policy are the
-the more capital we used, the primary tools recommended by Keynesian
more production we have economists to manage the economy
Human Capital – comprises knowledge, and fight unemployment.
skills, and abilities
Natural Resources – abundance of natural
resources makes an economy produce more O-Ring Theory of Development
goods and services (trees, water, minerals, O-ring theory of economic development
metals, fruits, root crops, and oil) was proposed by economist Michael Kremer
Technology – closely related to research in1993 that explains a production is
and development composed of a set of tasks and each task
- refers to the output of innovation and must be carried out proficiently for each one
never-ending thrust to discover new of the tasks to have value.
things and new processes
- related to human capital This theory of development explains the
discrepancy of the developed and
Grown Theories underdeveloped countries in terms of the
Keynesian Theory/ Harrod Domar Model complexity of their production, product
Solow Model intricacies and the level of skilled workers
Power Balance Theory thatthey have.
Structuralist Approaches
New Growth Theory The key feature of this model is positive
assortative matching, whereby people with
Keynesian Economics was developed by similar skills work together
the British economist John Maynard Keynes
during the 1930s in an attempt to understand The name comes from the 1986 Challenger
the Great Depression. shuttle disaster, a catastrophe caused by
failure of a single O-ring
Keynes advocated for increased government
expenditures and lower taxes to stimulate Kremer thinks that the O-ring development
demand and pull the theory explains why countries produce more
global economy out of the depression. complicated products , have larger firms and
Keynesian Economics focuses on using much higher worker productivity than poor
active government policy to manage countries
aggregate demand in order to address or
prevent economic recessions. Michael Robert Kremer is an American
development economist who is Gates
Keynes developed his theories in response Professor of Developing Societies in Harvard
to the Great Depression, and was highly University.
critical of classical economic arguments In 2019, he was jointly awarded the Nobel
that natural economic forces and incentives Memorial Prize in Economics together with
 Esther Duflo and Abhijit Banerjee, “for their until such a point when investment become
experimental approach to alleviating global less than depreciation. The capital is
poverty” shrinking – we call this point the steady
state

Solow Model/ Solow Growth Model Economic Development in the Philippines

-was developed by Robert Solow, an The Philippines ranks 132nd out of estimated
American economist and a Nobel Prize Winner 211 countries or states in terms of per capita
in Economic Sciences (Nobel Prize, 1987) and GDP. –(World Fact Book 2020) of the CIA of
in 1956 wherein, gross domestic product per the USA
worker, capital per worker, depreciation rate,
savings and investment rates are factored in Inflation
the analyzing growth. -quantitative measure of the price rate
increase of goods and services over a period of
- refers to exogenous neoclassical time
economic model
-it represent economic growth - Inflation of the country increased from 4% in
enhanced capital accumulation, technological July, 2021 to 4.9% in August,
progress, and increased labor 2021 (PSA, 2021).
-helps to show economic convergence
-forms the foundation of the latest Power breakdowns limit the room for
economic theories development.
- one of the most popular model that are
used to understand long-term growth Leftists and separatists, like the New
People’s Army (NPA) and the Moro
We can use the Solow model on the National Liberation Front (MNLF), Moro
following assumptions: that we are analyzing Islamic Liberation Front (MILF), and
with a closed economy in mind, where of course, the Abu Sayyaf
savings is equal to investment. The COVID-19 pandemic greatly affected the
tourism industry, although this
Labor, L and capital, k, are sustainable for is true not only in the country.
each other, capital depreciates at a fixed Build Build Build Program by President
rate, as well as the population, it grows on a Rodrigo Duterte – aims to significantly
constant rate, there is full employment of expand infrastructure and boost employment
labor there are diminishing return to an growth in the country
individual output and the most notable is that
there is no technological progress going on. Economic Growth and the World
The United Nations Department of
Depreciation is proportional to capital. When Economic and Social Affairs (UN-DESA)
k increases, d increases, and vice versa. released the 17 Sustainable Development
Goals (SDG) adoptedby all member
What we save is normally what we use to countries of the UN, one of them, SDG 8,
invest. Initially, investment is greater than “promote sustained, inclusive and
depreciation. It means that capital is growing sustainable economic growth, full and
 productive employment and decent work for Industrial revolution – created a great deal
all.” of inequality between countries and was
believed to even intensify the gap between
Rule of 70 the rich and poor nations
The power of approximation to determine
how fast a variable can double compounded Poverty
without really compounding. - is relative to the standard of living in
one country.
This technique may be used in the fast -a threshold is set to determine who are
computation of savings, investments, below this line and may be considered
GDP per capita, population and so on. impoverished or extremely impoverished.

Extreme poverty
Chapter 2 -is characterized as those
Poverty disadvantaged to basic living conditions, like
-a complex multifaceted world that food, clean water, sanitation, housing, good
requires a clear analysis in all of its many health, and even to information.
dimensions (geographical, biological,a nd
social factors) Due to the global pandemic of 2020, the
poverty eradication aim was off-tracked,
manifesting the first increase in global
poverty in decades, more than 71 million are
Two main assets that the poor derive their pushed into extreme poverty during this year.
income from:
1. Own labor A lot of developed countries lead the way on
2. Agriculture land spreading awareness of the condition of a lot
of countries that are suffering from poverty
Natural disaster and even child abuse.
-a catastrophe to economic resources
Measuring Poverty
Absolute poverty Poverty rate – most common measure of
-incidence as those level of incomes poverty
and expenditures falls below a level, popularly - relative to poverty line
known as the “poverty line,” nominal value of In most countries, poverty line is set by the
which is adjusted to hold fixed value of its government as the threshold to which the
purchasing power 1.9 2.15 absolute value of income and expenses are
compared to consider a family to be in
Relative poverty poverty.
- sometimes called inequality, The proportion of the population that is below
- is the comparison of the incomes and the poverty line is the poverty rate.
expenditures of the poor with reference to the
rich or of some other groups (Fritzell et al., Subsistence Incidence
2013).
-the part below the poverty line suffering
from extreme hunger
Inequality Poverty Trap
-oftentimes associated with poverty The existence of the poverty trap is seen to
wealth inequality – uneven distribution of be inevitable where there is a system of
accumulated asset after deducting the means-tested social security benefits, the
liabilities situation where a slight increase earnings
income inequality – income distributed in leads to an individual or family being worse
an uneven manner off overall as a consequence of losing
entitlement to other benefits (Poverty Trap,
Expenditure-based measure of poverty 2006).
- considered to be more in line with
economic theory that is more relative to In 2019 report of the PSA , other measure
household well-being such as income gap, poverty gap, and
- indonesia, vietnam, cambodia, and laos use severity rate are used as metrics to
this measure poverty in the country

Income-based measure of poverty While governments and NGOs are working

- per individual and per household, and hand-in-hand in solving this issue, programs
consider gender and age distribution in place are deemed ineffective at reducing
- used by thailand, malaysia, and philippines poverty at its very core.

Poverty incidence (PI) Poverty Reduction

- is the percentage of families or The government plays an important role in
individuals with per capita income or reducing poverty
expenditure less than the per capita poverty Cash Transfer – conditional cash transfer
threshold to the total number of families or program to aid families who are considered
individuals, hence, =Τ 100. poor
Pantawid Pamilyang Pilipino
Lorenz Curve Prograam (4P’s) – resemble the cash
-is a curve showing the relationship of transfer that aimed to help the poorest
the population in percentile ranking to the of the poor
national income. In-kind transfer – directly provide goods and
-was developed by American Economist services as social safety nets through
Max O. Lorenz in 1905, in his undergraduate specialized welfare program such as social
essay and doctoral paper in Economic Theory pension, supplementary feeding program,
of Railroad Rates. temporary shelter and free medicine

Gini Coeffecient/ Gini Index Work Incentives – commonly happen when

-a scalar metric of enequality that was disaster occurs, and those who are displaced
introduced by Corrado Gini – an italian in their workplace are given an incentive to
statistician and demographer, who further work and help rebuild teh place of adversity
enhanced lorenz curve
 in exchange for reasonable wage to bring Chapter 3
home and spend on those affected Adam Smith
- father of economics
Minimum Wage law – act of congress in teh - published a paper in 1997, titled “An Inquiry
senate that imposes a minimun payment of into the Nature and Causes of the Wealth of
wage to workers in a specific loaction , Nations” known as “The Wealth of Nations” -
duration of the work, and nature of industry tackled the foundation of a lot of economic
concepts such as laissez-faire, minimizing
Adjust Tax code – intended not to collect government intervention, free markets, work of
any form of tax from individuals who earn a inviisble hands that guide the supplya and
specific amount or less in one year deamnd and creation of wealth not only from
- to collect more taxes from those land but also from the asembly lines, and the
who are earning more market system, and capitalism

Gross Domestic Product (GDP)

Poverty and the World The market is composed of buyers and
selllers who may be the government, firm, or
The UN Social Development Goals includes household and the intercations of the two
these priority actions to be taken as creattes income and expenses that may be
addressed in the Johannesburg Plan of used to measure the goods and services
Implementation in 2002, prioritizing poverty
as top global challenge that weare currently Gross Domestic Product
facing, specifically for developing - a major measurements of nation’s
countries: income, at a given time, at a given place or
-Improving access to sustainable livelihoods, region
entrepreneurial opportunities, and productive - is the peso value of all final goods and
resources services that are produced in one country in a
-Providing universal access to basic social year
services - include only domestically produced
-Progressively developing social protection goods and services
systems to support those who cannot - exludes financial transactions like
support themselves investments in bonds and stocks
-Empowering people living in poverty and
their organizations Components of Gross Domestic Product
-Addressing the disproportionate impact of Expenditure Approach:
poverty on women GDP= C + I + G (X-M)
-Working with interested donors and where:
recipients to allocate increased shares of C= total spending on consumption
ODA to poverty reduction gooda and services
Intensifying international cooperation for I= purchase of plnats, equipment,
poverty eradication building, etc
G=governmene spending on goods and
services
(X-M)= net exports or exports less input
 Real vs. Nominal GDP
Consumer spending In order to measure total spending that is
- is the peso value that households are minimally affected by the changes in the
spending for final goods and services in a year price of goods and services, economist have
come up with a measure they call real GDP
Government Spending that evaluates the current production using
- includes both national and local constant price
government units’ spending to acquire goods
and services that are used for public utilities Real GDP = Quantity (base price)
In nominal GDP, the current price are used to
Net Exports multiply the volume of production given in a
- the difference between the final goods period of time
and services derived from importations from Nominal GDP = Quantity (current price)
exportation
GDP Deflator
Income Approach: Implicit price deflator (GDP Deflator)
GDP = total nationla income + sales taxes + - metric used by economies to
depreciation + net foreign factor income understand the changes in price of products
where: that are produced in one country
Total income is the sum of all wages, rent, -economist believe that this
interest, and profits measurement is more reliable than Consumer
Sales taxes is the tax imposed on consumers Price Index (CPI)
for the sale of goods and services GDP Deflator = Nominal GDP
Depreciation is the cost allocated to capital Real GDP X 100
assets over an estimated useful life Consumer Price Index
Net Foregn Factor is the income that citizens measure of the average change in the
make while abroad prices paid over time by urban households for a
market basket of goods and services
With the use of GDP, we can compare the
economic performance on an annual basis Inflation rate yr 2 =GDP Deflator in year 2-
by determining the growth rate to help us GDP Deflator in year 1 X 100
understand where the economy stands GDP Deflator in year 1

Percentage Change Increase/Decrease in GDP per Capita

GDP: Inflation exist when there is a sustained
GDP Current – GDP Previous increase in the price level. The price level is
GDP Previous the average level of prices
With the use of GDP, we can assess the
efficiency and effectiveness of government Inflation rate:
policies CPI this year – CPI last year X 100
To compare the GDP with other countries CPI last year
A higher GDP growth means a better quality
of life and higher standard of living The labor force equal the sum of employed
plus unemployed workers
Unemployment rate: country overseas and domestically less
Number of people unemployed X 100 depreciation
Labor Force National Revenue
- part of the national budget of a country
that is composed of all revenue sources
Productivity function: to be used in national expenditures
Y = T f (L, K, H, N) Personal Revenue
where: - sum of an individual’s or citizen’s
L-quantity of labor earnings from salary, wages, and
K-quantity of physical capital investment during a period of time
H-quantity of human capital Disposable Personal Revenue
N-quantity of natural resources - sum of an individual’s or citizen’s
T-technological advances earnings from salary, wages, investment
during a period of time less current
individual taxes
There are economist who believe that GDP
per capita is the best way in measuring the Gross National Happiness
standard of living in one country The Kingdom of Bhutan is known for its
GDP of a country divided by the total application of a unique metric for the nation’s
population wealth and well-being – GNH
Bhutan believes that the GHN is a more
GDP alone says the final output produced in important tool to use than GDP
a given period of time They believe that happiness is living in
GDP per capita depicts the distribution of harmony with nature while serving the
wealth to its population, and a better people, including the inputs
measure than GDP
GDP per capita – is a metric used to There are nine domains, and out of these
measure overall production of goods and are around two to four indicators for each
services in a country translated to the value one, for a total of 33 indicators to measure
per person GHN
Economists agree that it is a better measure Domains of GHN
than the total GDP, whether real or Psychological well-being
nominal, as it can be comparable of other Health
countries and realistically understand the Education
standard of living of their respective citizen Time use
Cultural Diversity and Resilience
Other Measurements of a Nation’s Income Good Governance
Gross National Product Community Vitality
- the sum of all finished goods and Ecological Diversity and Resilience
services produced by the citizens of aapp Living Standard
country overseas and domestically
Net National Product
- the sum of all finished goods and
services produced by the citizens of a
 GHN Score Chart as per Indicator renewable resources, dependence on foreign
Unh aid, crime rate
appy: <50% of the indicators In GDP, capital is included once but in GPI, it
Narrowly happy: 50-65% of the indicators take into consideration the ongoing effect of
Extremely happy: 66-76% of the indicators the use of capital
Deeply happy: more than 77% of the Some economist argued that the GPI uses
indicators quite subjective data , as the value given by
respondents of the survey of GPI can be
Gross National Happiness (GHN) biased and may not represent the entire
- founded on the basis that happy economy
people live longer and thus will need less GPI is time consuming as compared to GDP
public-health funding
- reflects the normative values of culture
and traditions, it should be statistically sound, Chapter 4
reflecting happiness correctly, relevant action Inflation is the increase in prices in the
of the government, and understandable to the economy, thereby decreasing the purchasing
people as they are the ones doing a self- power of the money on our hands.
reflective survey
Not everyone is impressed with the GHN as Inflation may be categorized into:
a metric for the nation’s wealth. Some argue Demand-pull inflation - a general sustained
that the measurement is relative and that the increase in prices resulting from excessive
factors used are subjective demand for goods.

Genuine Progress Indicator Cost-push inflation - increased pricing by

Some economist believe in the deficiency of sellers in the absence of increased demand.
GDP as a measure of the performance of the
economy, hence they suggest an alternative Monetary inflation – an expansion of the
metric called genuine progress indicator money supply.
GDP is a gross revenue
Prices of goods and services generally
GPI – founded on the index of sustainable increase over time but of course, at different
economic welfare and growth paces.
-net revenue when all negative impacts
of environmental and social externalities are Deflation – decrease in prices
considered
-uses the data that is derived from the Consumer Price Index – determining a basket
GDP, just adding the good and bad effects of goods and services on a yearly basis and
of then comparing it to a selected base year. It
production and consumption also allows adjusting the impact of inflation by
Both GDP and GPI are measured in terms of leveling the playing field.
monetary value -is a statistic used to measure the total
GPI include non-material aspect such as goods and services purchased and consumed
environmental damage, depletion of non- by a household compared to a base year.
 -It is also a measure of the average Economic crashes
change in the prices paid over time by urban -usually begin with the vicious cycle of
households for a market basket of goods and higher prices and the expectations of higher
services in 2017 (Encyclopedia of American prices that greatly affect the buying behavior of
Government and Civics). the people

Mainly for determining inflation and the Vicious cycle

purchasing power of the country's currency -is any situation in which an action tends
to allow adjustments to the economic policies to bring about a further reaction that offsets any
of the government. gain brought about by the initial action and
Inflation makes us more reactive to the exacerbates the initial problem.
buying behavior of the public and creates
laws to alleviate the standard of living of the When there is too much supply of money in
people. circulation, the people are somehow forced
The first step in computing the CPI is to to spend as quickly as possible rather than
collect price quotations under the categories decide to save their money or let circulate in
in the basket of goods and services. The financial institutions
Philippines uses the 1999 United Nations
Classification of the Individual Consumption Hyperinflation
According to Purpose (COICOP) and the -decline in personal wealth and savings
2015 Philippine Standard Geographic and limiting foreign investments and trade,
Classification Codes for the geographic money increases too fast that it pushes inflation
locations. to rise instantaneously and in great magnitude,
Next, we use the data collected and apply it which affects the velocity of money.
to the basket of goods and services at -It is the average number of times a
various periods of time. From the time currency is spent on purchasing goods and
periods identified, we choose the base year, services. When this happens, and the monthly
compute for the consumer price index, the inflation rate increases over 50% or around
price of the basket of goods and services in a 13,000% per year
given year divided by the price of the basket
in the base year. Great Depression - this was experienced by
the USA in 1930's that started in 1929.
Consumer Price Index: -this was due to the sustained decrease
Price of basket of goods and services in a yr. in the GDP.
Price of basket of goods and srevices in base Americans cut off a lot of their spending
yr.
behavior. There were more workers but
Another way of finding out the inflation per
fewer jobs, a lot of outputs but no buyers.
year; the use of the GDP deflator, is the After the Great Depression, the USA did not
consumer price index by comparing the CPI
want to recall that painful experience and
of the current year as opposed to the base
somehow changed the term to recession,
year.
although a consistent trend of downward
100
Inflation rate in year X: CPI in yr. X-1
CPI in yr. X-CP in yr. X-1 X
recession is what an economic
depression is
all about.
 According to the USA National Bureau of determining the market basket categories
Economic Research, recession is the three that are set and the pattern of behavior for
consecutive quarters of falling real GDP &, buying them.
while depression includes a 10% decrease in
per capita GDP and consumption and 10% Standard of living
unemployment that persist for at least 24 -the level of material well-being enjoyed
months. The depression was eventually by an individual or a group
reckoned with massive expansionary -generally measured by the collective
solution, left and right government spending cost of goods and services considered to be
until the economy finally stabilized. essential to all society members.

Stagflation Big Mac index- is a metric used that is based

-the condition when the production of on the concept of purchasing power parity
goods and services slows down or is put to a (PPP), currency exchange of equalizing prices
halt or simply stagnates while the prices are of products in various countries in the long run.
rising -is an idea of identical basket of goods
-a combination of a stagnant economy and services in different countries, based on
and inflation at the same time. PPP theory.
-useful in investing decisions.
The USA experienced a prolonged period of
stagflation in the 1970s and early 1980s. "Big Mac" burger of the popular food chain is
There was a combination of falling demand analogous to the basket of goods with all of
and rising prices. its ingredients that are exactly the same in
every country.
Cost of living allowance In practice, divide the price of a Big Mac in a
- is an adjustment applied to the income given country, by the price of a Big Mac in
received by the employees to sustain the another country using the local currency of
standard of living due to the inevitable rising each, hence be exchange rate, and then
prices or inflation. compare it to the official exchange rate
between these currencies realizing if there is
When the CPI increases, the COLA is then either undervaluation or overvaluation.
raised to adjust the market value of what is
received by the employees to maintain their GDP, such as volunteerism, child and eldery
standard of living. In other words, the COLA care, some house jobs, etc. High consumer
is used to counteract the effect of inflation. and government spending, investment, and
income from exports indicate that the
The cost of the goods and services incurred standard of living in that area is also high.
has a direct impact on the COLA, to balance
the economic inequality carried by the Gini Index- other measurements for the
prices.The cost of living allowance standard of living can be life expectancy,
fluctuates depending on the rise and fall of quality of education and the environment,
prices in the area. This is determined by a literacy rate, GNI per capita, and how income is
regular survey of the employees and the distributed to its population.
suppliers of goods and services, by
Gini coefficient toascertain which distribution represented by
-another aggregate mesure that uses the curves displays more inequality.
the Lorenz curve for its calculation. The Lorenz curve ignores income variation
-this relationship between the two over an individual’s lifecycle while
measures is a straight one. determining inequality

Gini coefficient is measured graphically by Gini Index

dividing the area between equality line and - a summary measure of income
Lorenz curve by the total area lying to the inequality. The Gini coefficient incorporates the
right of quality line. detailed shares data into a single statistic,
which summarizes the dispersion of income
Lorenz curve assists in understanding across the entire income distribution.
income or wealth distribution. At the same
time, the Gini coefficient estimates income -useful for analyzing economic
inequality. inequality but has limitations.
-relies on reliable GDP and income
Lorenz curve data, which can be difficult to obtain due to
-developed by American economist Max shadow economies and informal economic
Lorenz in 1905 activity.
-is a graphical representation of income -different income distributions can
inequality or wealth inequality. result in identical Gini co-efficients, as it
-the graph plots percentiles of the
distills a two-dimensional area down to a
population on the horizontal axis according to
single number.
income or wealth and plots cumulative income
or wealth on the vertical axis
The Lorenz curve can provide more
- is essential as it is helpful to
understand economic inequality. information, but it does not show
demographic variations among subgroups,
The unequal distribution level increases as such as income distribution across age,
the Lorenz curve moves from the baseline. race, or social groups. Understanding
demographics is crucial for interpreting Gini
It is essential to understand economic coefficients.
inequality for policy- making and decision South Africa, with a Gini co-efficient of 63.0,
with regard to proper distribution of income is currently recognized as the country with
and even distribution of allowances should the highest income inequality. The World
there be widespread going on.
Population Review attributes this
massive inequality to racial, gender, and
Lorenz Curve = L − X = 1 − L X (1 − F) geographic discrimination, with white males
and urban workers in South Africa earning
Disadvanatages of Lorenz Curve: much better salaries than everyone else
The equality measure shown may be
misleading.
When two Lorenz curves are being
compared and intersected, it is impossible
Chapter 5