Macroeconomics

Discussion Outline
• Introduction
• Course Description
• Course Objectives
• Learning Outcomes
• Course Requirements
• Grading System
• Other Matters
 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 Requirement
• Classroom activities:
– Recitation
– Group Reporting
• Assignment / Project
• Quizzes
• 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
 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?
MICROECONOMICS MACROECONOMICS
❖ 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?
 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
 Why learn macroeconomics?
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
 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 specific functional form shows
A list of the
the precise quantitative relationship.
variables
– Example:
that affect Q d
D (P,Y ) = 60 – 10P + 2Y
 THE MARKET FOR CARS: DEMAND

demand equation: P
Price
d
Q = 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
s
Q = S (P , Ps ) 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 Q 1 Q2
Quantity
equilibrium price and
of cars
quantity.
 The effects of a steel price increase
supply equation: P
s
S2
Q = S (P , Ps ) 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 1 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
 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
 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
Economic
Development
Factors With some measure of control External
or influence
 The goal of every economy is to attain
economic growth and 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.
 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.

l The short-run fluctuation framework

focuses on demand.
l 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
Asian Financial
Crisis World Financial
Crisis

Martial Law
years
POST war Era EDSA People
Power
 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.

u This average annual growth rate is

called the secular trend growth
rate.
 Growth
• Another measure of growth is change in per
capita real output.

u Per capita real output is real

output divided by the total
population.
 ECONOMIC Measures
Key Indicators Measuring Economic Activity and
Growth
 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

 Summary
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
 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
 The Economy As A Household
❖ 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 (M) + Exports (X)
Total Output = Total Income = Total Expenditure
What About Savings?
 The Economy As A Household
❖ Income = Expenditure
PS + T + M = I + G + X
❖ Rearranging by policy areas,

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

a b c

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

a b c
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
 The Economy As A Household
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
ECONOMIC Measures and
Indicators
 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
• When economists examine a country’s
economy, GDP is probably the first thing they
look at — and for good rea-son. It provides a
convenient snapshot of the total amount of
economic activity taking place in a country.
More precisely, it reveals the value of
everything an economy produces in one year.
 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
 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.
 Key Indicators Measuring
Economic Activity and Growth
Review of National Income
Accounting (NIA)
Review of National Income 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
 Review of National Income
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
– GNP is now GNI (Gross National Income)
 Key Macroeconomic Indicators
GNI 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
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
2000s 4.4 UPWARD MOMENTUM

-0.10
2010s 6.1

BEFORE 2010s WE ARE IN A GROWTH MOMENTUM WHEREIN 5 IS A NO BRAINER

-0.15

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

Review of National Income 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
 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.
Intermediate goods - unfinished items that go into the
production of other items
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
Value added approach
Production/Value-added 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
 Production/Value-added 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%
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
Key Macroeconomic Indicators
ASEAN Foreign Direct Investment net inflows
Key Macroeconomic Indicators
Foreign Direct Investments
Key Macroeconomic Indicators
Savings vs. Investments (as of GDP)
Key Macroeconomic Indicators
Comparative Asian Savings Rate, (Gross Savings as of GDP)
Key Macroeconomic Indicators
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

Key Macroeconomic Indicators
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)
(GNP – GDP) as a percentage of GDP
selected countries, 2001
Key Macroeconomic Indicators
OFW Remittances continue to increase
35

CAGR 2000-2019: 8.8 percent 30.22

30

25
IN BILLION PESOS

20

15

10

6.05

0
04

11
89
90
91
92
93
94
95
96
97
98
99

01
02
03

05
06
07
08
09
10

12
13
14
15
16
17
18
19
2000
Key Macroeconomic Indicators
GDP vs GNI (GNP), and Net Primary Income
(or Net Additional Income from Abroad)
Review of National Income
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
 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.
 Key Indicators Measuring
Economic Activity and Growth
The Philippines
Experience
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
7,000 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

Actual % Growth Expon. (Actual)

 Key Macroeconomic Indicators
Real GDP Growth Momentum, (1950-2018)
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)

 Key Macroeconomic Indicators
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%
06

12
90
91
92
93
94
95
96
97
98
99

01
02
03
04
05

07
08
09
10
11

13
14
15
16
17
18
2000

20 Fcst
21 Fcst
22 Fcst
23 Fcst
19 est
GDP % Growth
Key Macroeconomic Indicators
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)
Key Macroeconomic Indicators
Global Risk Scenarios
Key Macroeconomic Indicators
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
CAGR
Key Macroeconomic Indicators
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
CAGR
Macroeconomic Goals
Proving that income flow is numerically equivalent to the
expenditure flow and the value of output flow
How rich is a nation?
• A nation’s economic well-being depends on
carefully defining these goals and choosing
the best economic policies for achieving them.
How do economic growth, full employment, price stability,
and inflation indicate a nation’s economic health?
 Striving for Economic Growth

• Perhaps the most important way to judge a nation’s

economic health is to look at its production of goods
and services. The more the nation produces, the higher
its standard of living. An increase in a nation’s output
of goods and services is economic growth.
• The most basic measure of economic growth is
the gross domestic product (GDP). GDP is the total
market value of all final goods and services produced
within a nation’s borders each year. The Bureau of
Labor Statistics publishes quarterly GDP figures that
can be used to compare trends in national output.
When GDP rises, the economy is growing.
• One country that continues to grow more
rapidly than most is China, whose GDP has
been growing at 6 to 7 percent per year. Today
few things in the global marketplace are not
or cannot be made in China. The primary
contributor to China’s rapid growth has been
technology. For example, most tablets and
laptops are manufactured in China.
• The level of economic activity is constantly changing.
• These upward and downward changes are
called business cycles.
• Business cycles vary in length, in how high or low the
economy moves, and in how much the economy is
affected. Changes in GDP trace the patterns as
economic activity expands and contracts. An increase
in business activity results in rising output, income,
employment, and prices. Eventually, these all peak, and
output, income, and employment decline. A decline in
GDP that lasts for two consecutive quarters (each a
three-month period) is called a recession. It is followed
by a recovery period when economic activity once
again increases.
The Business Cycle

The fluctuation in the level of

economic activity alternating between
periods of depression and boom
conditions
 The Four Phases of the
Business Cycle

Each business cycle is divided into four

phases: Peak or Boom, Recession,
Trough and Recovery
Investment and the Business Cycle

What really causes the economy to

fluctuate?
volatility of fixed investment
inventory investment expenditures
(called the investment cycle), which are
themselves a function of businesses’
expectations about future demand
The Costs of Business Cycles
When the economy goes down into a
recession or depression (just like what happened
in 2008 in the US economy), the production of
goods and services falls, causing living standards
to fall.
It may seem that these reductions in living
standards are only temporary and that rapid
increase in production during the recovery stage
of the business cycle will counteract them.
 An economic downturn usually results in
unemployment of economic resources of all
types, meaning that it is not only the labor
resource that becomes unemployed but even
capital resources become idle.

Production that is lost because of idle

resources is production that is foregone
forever.
The second way in which business cycles reduce living
standards is by depleting the capital stock.

During an economic recession or depression, existing

capital continues to depreciate, which lowers the
capital stock. In a normal business environment,
business firms have an incentive to replace and even
add to the depreciating plant and equipment. In a
recession, firms are less likely to replace depreciating
capital.
Five causes of the business cycles
 So what can be done to prevent
the economy from getting into a
recession or depression?
 Government may step in to prevent
the economy to go into a slump and down
to a recession or depression.

In particular, the government may step

in to prevent the stock of human capital
from declining.
The GDP of the Philippines

Economic growth is generally defined

as an expansion of the national output
usually measured by the annual
percentage increase in a national real GDP.
Chapter VI: Economic Fluctuations, The Business Cycle
Chapter VI: Economic Fluctuations, The Business Cycle
• Businesses must monitor and react to the
changing phases of business cycles. When the
economy is growing, companies often have a
difficult time hiring good employees and
finding scarce supplies and raw materials.
• When a recession hits, many firms find they have more
capacity than the demand for their goods and services
requires. During recession, many businesses operated
at substantially lower than capacity.
– Why so?

• When plants use only part of their capacity, they

operate inefficiently and have higher costs per unit
produced. Let’s say that Mars Corp. has a huge plant
that can produce one million Milky Way candy bars a
day, but because of a recession Mars can sell only half
a million candy bars a day. The plant uses large,
expensive machines. Producing Milky Ways at 50
percent capacity does not efficiently utilize Mars’s
investment in its plant and equipment.
Full Employment
• Another macroeconomic goal is full employment,
or having jobs for all who want to and can work.
Full employment doesn’t actually mean 100
percent employment.
• Some people choose not to work for personal
reasons (attending school, raising children) or are
temporarily unemployed while they wait to start
a new job. Thus, the government defines full
employment as the situation when about 94 to
96 percent of those available to work actually
• Maintaining low unemployment levels is of
concern not just to the United States but also to
countries around the world. For example, high
youth unemployment rates (for workers 25 years
of age and younger) in Spain, Italy, and Greece
continue to cause protests in these European
countries as elected officials struggle with how to
turn around their respective economies and put
more people, particularly young people, back to
work.
Unemployment
The unemployed labor resource, which is
measured by the unemployment rate during a
particular period of time

Unemployment rate is the percentage of people

in the labor force who are without jobs but
are actively seeking one
 Chapter VII: Unemployment

Unemployment Computation:

Unemployment Rate = No. of Unemployed

Labor Force
Types of Unemployment

1. Frictional unemployment
2. Structural unemployment
3. Cyclical unemployment
4. Seasonal unemployment
5. Underemployment
 Chapter VII: Unemployment
Controlling or Reducing Unemployment
Demand side solution
The main objective of this program is to
ease short-term adversity and, more
importantly, to allow workers more time to
search for a job. A direct demand-side solution
to unemployment is government-funded
employment of the able-bodied poor.
 Chapter VII: Unemployment

Supply side solution

Advocates of supply-side policies believe
those policies can solve this by making the
labor market more susceptible to flexibility.
These include the dismantling of minimum
wage and decrease the power of unions
 Chapter VII: Unemployment

Phillips Curve

The Phillips Curve, which is based on the work

of the British economist A.W. Phillips, depicts an
empirical observation of the relationship
between the level of unemployment and the rate
of change of money wages, and by inference, the
rate of change of prices (inflation).
Chapter VII: Unemployment
The Philippines’ Unemployment Situation
The probable cause of unemployment in the
country is the unavailability of jobs provider.
This means that the numbers of investors
and businesses that will hire workers are
tremendously low.
Price Stability:
• Another macroeconomic goal is to keep
overall prices for goods and services fairly
steady.
– The situation in which the average of all prices of
goods and services is rising is called inflation.

Why do we need to keep prices steady?

• Inflation’s higher prices reduce purchasing
power, the value of what money can buy.
Purchasing power is a function of two things:
inflation and income. If incomes rise at the
same rate as inflation, there is no change in
purchasing power. If prices go up but income
doesn’t rise or rises at a slower rate, a given
amount of income buys less, and purchasing
power falls.
• For example, if the price of a basket of
groceries rises from P30 to P40 but your salary
remains the same, you can buy only 75
percent as many groceries (30 ÷ 40) for 30.
Your purchasing power declines by 25 percent
(10 ÷ 40).
– What if the price increased from 40 to 70? Solve
how much the purchasing power declined ___
• If incomes rise at a rate faster than inflation, then
purchasing power increases. So you can, in fact, have
rising purchasing power even if inflation is increasing.
Typically, however, inflation rises faster than incomes,
leading to a decrease in purchasing power.
• Inflation affects both personal and business decisions.
When prices are rising, people tend to spend more—
before their purchasing power declines further.
Businesses that expect inflation often increase their
supplies, and people often speed up planned
purchases of cars and major appliances.
 Types of Inflation

• Demand-pull inflation occurs when the demand

for goods and services is greater than the supply.
Would-be buyers have more money to spend
than the amount needed to buy available goods
and services. Their demand, which exceeds the
supply, tends to pull prices up. This situation is
sometimes described as “too much money
chasing too few goods.” The higher prices lead to
greater supply, eventually creating a balance
between demand and supply.
• Cost-push inflation is triggered by increases in
production costs, such as expenses for
materials and wages. These increases push up
the prices of final goods and services.
 Impact of inflation
• Inflation has several negative effects on people
and businesses
• Inflation penalizes people who live on fixed
incomes.
– Let’s say that a couple receives P2,000 a month
retirement income beginning in 2018. If inflation is 10
percent in 2019, then the couple can buy only about
91 percent (100 ÷ 110) of what they could purchase in
2018.
– Similarly, inflation hurts savers. As prices rise, the real
value, or purchasing power, of a nest egg of savings
deteriorates.
 Async Activity 3

Discussion Questions_Research

1. How does business cycle affect the entire economy?

2. What phase of business cycle, where the economy achieves
almost all goals of macroeconomics?
3. What are the costs of business cycle?
4. What is the country’s status when it comes to
unemployment?
5. What are the government’s advocacies and activities to
lessen the growing unemployment rate in the country?
 Foundations of the Macroeconomy

Chapter Objectives

• To define and explain business cycles.

• To understand how total spending drives the economy’s levels of employment and production, and
influences prices.

• To examine the spending behavior of households, businesses, government units, and the foreign sector.

• To identify the macroeconomy’s “leakages” and “injections” and show how they affect economic activity.

• To introduce the multiplier effect.

• To discuss how expectations affect the economy’s output and price levels.

• To identify the role of total spending in macroeconomic policies.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-2
 Macroeconomic Activity Changes

Total Spending & Activity

Household Sector

Business Sector

Government Sector

Foreign Sector

Summary of Aggregate Spending, Leakages, and Injections

Multiplier Effect

Macroeconomic Policies

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-3
 Macroeconomic Activity Changes

• Business Cycles:
– Recurring periods of growth and decline in an economy’s real
output, or real GDP.
– Composed of four phases:
• Recovery
– Expansionary phase during which real GDP increases.
• Peak
– Where maximum output occurs.
• Recession
– Phase during which GDP falls.
• Trough
– Where GDP reaches its minimum.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-4
Macroeconomic Activity Changes

Cyclical Business Cycles

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-5
 Total Spending & Activity

• Total Spending:
– Also called aggregate spending.
– Total combined spending of all units in the economy for new goods and services.
• Includes households, businesses, government, and foreign.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-7
 Total Spending & Activity
Household Sector
• Personal Consumption Expenditures:
– Household spending on new goods and services.

• Household Sector & the Circular Flow:

– Income-Determined Spending:
• Household spending on new goods and services that comes from income earned
from providing resources to producers.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-8
 Total Spending & Activity
Household Sector

• Household Sector & the Circular Flow (cont.):

– Transfer Payments:
• Money from the government for which no direct work is
performed in return.
– Non-income-Determined Spending:
• Spending that is generated from sources other than household
earned income.
– Injections into the Spending Stream:
• Spending that comes from a source other than household
earned income; non-income determined spending.
– Leakages from the Spending Stream:
• Uses for earned income other than spending, such as paying
taxes and saving.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-9
Total Spending & Activity
Household Sector

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-10
 Total Spending & Activity
Business Sector

• Investment Spending:
– Also considered non-income-determined spending.
– Business spending on new goods, such as machinery,
equipment, buildings, and inventories.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-11
 Total Spending & Activity
Business Sector

• Business Sector & the Circular Flow:

– Retained Earnings:
• The portion of a business’s accumulated profits that
has been retained for investment or other purposes.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-12
 Total Spending & Activity
Business Sector

• Business Sector & the Circular Flow:

– Saving-Borrowing Relationship:
• The relationship between the amount saved by households and
businesses and the amount returned to the spending stream
through business and household borrowing.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-13
 Total Spending & Activity
Government Sector

• Government Purchases of Goods & Services:

– Also considered non-income-determined spending.
– Government spending on new goods and services.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-14
Total Spending & Activity
Government Sector

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-15
 Total Spending & Activity
Foreign Sector

• Exports:
– Goods and services that are sold abroad.

• Imports:
– Goods and services purchased from abroad.

• Net Exports:
– Exports minus imports – is positive when
exports exceed imports and negative when
imports exceed exports.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-16
Total Spending & Activity
Foreign Sector

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-17
 Summary of Aggregate Spending, Leakages, and Injections

• Total Spending:
– Drives the economy’s production, employment, and income levels.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-18
 Multiplier Effect

• Multiplier Effect:
– Change in total output and income generated by a change
in non-income-determined spending is larger than, or a
multiple of, the spending change itself.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-19
 Multiplier Effect
• Calculating the Multiplier Effect:
– Initial change in non-income-determined spending
divided by the percentage of additional income not spent
will yield the total change in output and income.
• $2,000,000 (what was not spent) / $10,000,000 = 0.20
• $10,000,000 / 0.20 = $50,000,000

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-20
 Macroeconomic Policies

• Expectations:
– Anticipations of future events; can affect current actions by
households and businesses and the likelihood that the future events
will occur.

• Fiscal Policy:
– Influencing the levels of aggregate output and employment or
prices through changes in federal government purchases, transfer
payments, and/or taxes.

• Monetary Policy:
– Influencing levels of aggregate output and employment or prices
through changes in interest rates and the money supply.

Economics: Theory & Practice 9th Edition – Welch & Welch

John Wiley & Sons, Inc. 2010 All Rights Reserved 5-21