FDNECON

MIDTERM REVIEWER
Topics: - Sacrificing one good or service to
☐ General Economic Principles purchase another
☐ How Economists Think Opportunity Costs
☐ Case Study - The Great Depression - The value of the next best alternative
☐ Key Macroeconomic Variables given up for the alternative that was
☐ Role of the Government in the Economy chosen
or The Economics of Public Sector - The loss of potential gain from other
alternatives when one alternative is
MODULE 1: GENERAL ECONOMIC chosen
PRINCIPLES - The value of the best alternative
forgone where, given limited resources,
Intro to the Study of Economics a choice needs to be made between
1. Definition of Economics several mutually exclusive alternatives
2. Branches of and fields of study in - The value of the next-highest-valued
Economics alternative use of that resource
3. Ten Economic Principles - The potential benefits that an
4. Four Fundamental Economic Questions individual, investor, or business misses
out on when choosing one alternative
Economics over another
- a social science that studies the - “The one that got away”
optimal/efficient allocation and
distribution of scarce resources to Branches of Economics
satisfy unlimited human wants and
needs Microeconomics
- Oikonomos (Greek): one who manages - The field of economics that looks at the
a household economic behaviors of individuals,
households, and
Key Terms companies/businesses
Scarcity - Examples: individual demand,
- The demand for a good or service is individual supply, the theory of the firm,
greater than the availability of the good opportunity cost, and consumer theory
or service Macroeconomics
- The state of being scarce or in short - The economies on a much larger
supply or shortage scale—regional, national, continental,
- The gap between limited resources and or even global
theoretically limitless wants - Examples: aggregate demand,
Trade-offs aggregate supply, efficiency,
- Exchange something of value, investment, unemployment and
especially as part of a compromise inflation
- Involves a sacrifice that must be made
to get a certain product or experience
- Often expressed as an opportunity cost
- A situation in which gaining one benefit
requires sacrificing another

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 FDNECON
MIDTERM REVIEWER
Fields of Study in Economics 1. Economist as a Scientist
- Economists try to address their
subject with a scientist’s objectivity.
They approach the study of the
economy by devising theories,
collecting data, then analyzing these
data to verify or refute their theories.
“social scientists” economy is a
social science
a. Scientific Method: Observation,
Theory, and More Observation -
Although economists use theory and
observation like other scientists, they
10 Economic Principles
face an obstacle that makes their
task especially challenging: In
How People Make Decisions
economics, conducting experiments
1. People Face Trade-offs.
is often impractical. By contrast,
2. The Cost of Something is What You
economists studying inflation are not
Give Up to Get It.
allowed to manipulate a nation’s
3. Rational People Think at the Margin.
monetary policy simply to generate
4. People Respond to Incentives
useful data. Economists usually
have to make do with whatever data
How People Interact
the world gives them and they pay
5. Trade Can Make Everyone Better Off.
close attention to the natural
6. Markets are Usually a Good Way to
experiments offered by history.
Optimize Economic Activity.
b. Role of Assumptions: Economists
7. Governments Can Sometimes Improve
make assumptions for the same
Market Outcomes
reason: Assumptions can simplify
the complex world and make it
How the Economy Works as a Whole
easier to understand. Economists
8. A Country’s Standard of Living
use different assumptions to answer
Depends on Its Ability to Produce
different questions and to study the
Goods and Services.
short-run and long-run effects of a
9. Prices Rise When the Government
change in the quantity of money.
Prints Too Much Money
c. Economic Models: Economists also
10. Society Faces a Short- Run Trade-off
use models to learn about the world
between Inflation and Unemployment.
mostly consisting of diagrams and
equations. Economic models omit
4 Fundamental Economic Questions
many details to allow us to see what
1. What to produce?
is truly important. An economist’s
2. How much to produce?
model does not include every
3. How to produce?
feature of the economy.
4. For whom to produce?

MODULE 2: HOW ECONOMISTS THINK

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 FDNECON
MIDTERM REVIEWER
The Circular Flow Diagram Consumption Function
- a visual model of the economy that - illustrates the positive relationship
shows how dollars flow through between income and consumption
markets among households and firms.

2. Economist as Policy Adviser

a. Positive vs. Normative Analysis:
Production Possibilities Frontier
Positive statements - descriptive;
- a graph that shows the combinations of
claims that attempt to describe the
output that the economy can possibly
world as it is
produce given the available factors of
Normative statements - prescriptive;
production and the available production
claims that attempt to prescribe how
technology that firms use to turn these
the world should be
factors into output.
b. For Malacañang Palace, Batasang
Pambansa
c. Economic Policy is a Messy Affair

John Maynnard Keynes

- founder of Keynesian theory which
promotes government spending on
infrastructure, unemployment
benefits, and education to increase
consumer demand. It also argues
that government spending is
necessary to maintain full
employment
- The ideas of economists and
political philosophers, both when
they are right and when they are
wrong, are more powerful than is
commonly understood. Indeed, the
world is ruled by little else. Practical
men, who believe themselves to be
quite exempt from intellectual

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 FDNECON
MIDTERM REVIEWER
influences, are usually the slaves of Government (Centrally-Planned​​)
some defunct economist. Madmen in - A government-run economy is one that
authority, who hear voices in the air, is centrally planned. The government
are distilling their frenzy from some determines the economy's needs and
academic scribbler of a few years ensures that those demands are
back. satisfied. They select what and how
much to produce. They set pricing and
3. Why Economists Disagree make rules to ensure that the economy
Economists may disagree about the validity runs smoothly.
of alternative positive theories of how the Government-Private (Mixed Economy)
world works. Economists may also have - A mixed economic system is a system
different values and therefore different that has elements of both capitalism
normative views about what government and socialism. A mixed economic
policy should aim to accomplish. system protects private property and
allows a level of economic freedom in
a. Difference in Scientific Judgements: the use of capital, but it also permits
Economists tend to disagree because governments to intervene in economic
they have differing beliefs about the activity to achieve social objectives.
validity of alternative theories. They can Private (Laissez-Faire)
disagree because they have differing - In economics, the concept of
opinions on the magnitude of the laissez-faire is a cornerstone of
parameters that measure how free-market capitalism. According to
economic factors are related. the argument, an economy is strongest
b. Difference in Values: Policies cannot be when the government remains
judged on scientific grounds alone. completely out of the economy,
Sometimes, economists give conflicting allowing market forces to operate
advice because they have different spontaneously.
values or political philosophies.
c. Perception vs. Reality: Because of Adam Smith
differences in scientific judgments and - was one of the most influential
differences in values, some philosophers of his time to make the
disagreement among economists is argument that money is generated
inevitable. Yet one should not overstate through productive effort and that
the amount of disagreement. self-interest encourages individuals to
Economists agree with one another maximize the use of their resources.
more often than is sometimes He said that profits derived from capital
understood. investments, and that money is
directed to where it can make the most
Economic Systems profit.
- Adam Smith's economic theory holds
that markets operate best when the
government stays out of them. He
argued that rational people would
naturally choose the best way to make

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 FDNECON
MIDTERM REVIEWER
use of the country's resources — He In 1932, Franklin D. Roosevelt, a
viewed government regulation as Democrat, assumed the presidency of the
possibly harmful to economic growth. United States. Faced with the daunting
task of addressing the nation's economic
MODULE 3: CASE STUDY – THE GREAT turmoil, he wasted no time in taking
DEPRESSION decisive action.

The Great Depression 1933:

- An economic calamity that happened in - GDP bounced back (9% per year)
the early 1930s. One of the two - Franklin D. Roosevelt 1933-1945: the
fluctuations that stood out as especially transformative U.S. president during
large over the course of the U.S. the Great Depression and World War II
economic history. 1937:
- Sharp Recession
Key Terms: 1941:
Depression - WWII begins: Pearl Harbor Attack
- a significant and prolonged decline in
economic activity, characterized by a To summarize the Great Depression:
steep drop in economic growth, - Worst economic crisis in 20th century
employment, and production. 1929-1933:
- A drastic decline in GDP - Output in the US declined by ⅓
(gross domestic product) that lasts for - Unemployment rate increased by
several years 25%
Recession - Inflation rate declined by 2%-5%
- decline of real GDP for at least two - Stock market lost 80%
Consecutive quarters - 7,000 banks failed
- Absence of regulatory institutions
Timeline: The Great Depression
(1929-1939) Causes of Great Depression
- 1920s: Sum of Excesses
1920s: Roaring 20s - 1929 stock market crash
- Lower production - Misguided government policies
- Higher unemployment - Consumers’ pessimism
- Lower wages - Smoot-Hawley Tariff of 1930
- Higher consumer debt - Collapse of banking system
- Struggling agriculture sector due to - Contraction of money stock
drought and falling food prices
- Excess large unliquidated loans by the Vicious Cycle during the Great Depression
bank
1929:
- Black Thursday, Black Tuesday
- 10 million jobless
- Dust Bowl migration
- Herbert Hoover 1929-1933

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 FDNECON
MIDTERM REVIEWER
Response: - unemployment insurance, old-age
1. Four-day Nationwide Bank Holiday assistance, aid to dependent children,
- Shut down banking system grants to the state to provide various
- Restored consumer confidence to forms of medical care
banks
- Emergency Banking Act of 1933 Relevance to the Philippines
- Federal Reserve created de facto - 23 March 2020: Congress ratified
100% deposit insurance Republic Act 11469 otherwise known
- Reestablished integrity of US banking as Bayanihan to Heal as One Act
system (Bayanihan 1) that empowered
2. New Deal (1933-1939) President Duterte to “reallocate,
- Three Rs: Relief (for unemployed and realign, and reprogram” Php275 billion
poor), Recovery (of the economy), and to avert the COVID-19 crisis
Reform (of financial system) - 11 September 2020: Congress
- New Deal Coalition: labor unions, blue approved RA 11494 otherwise known
collar workers, minorities as Bayanihan to Recover as One Act
- Tennessee Valley Authority (Bayanihan 2) that allocated a total
- Works Progress Administration budget of Php165.5 billion to facilitate
3. Federal Deposit Insurance Corporation economic recovery amid the pandemic
- Created in response to the thousands and enable the economic growth to be
of bank failures that occurred in 1920s more sustainable and resilient
and early 1930s
Mission: Social Security Act of 1954
- Insures deposits Mission
- Examines and supervises financial - To manage a financially stable social
institutions security system which shall promote
- Works to make large and complex social justice through savings and
financial institutions resolvable provide meaningful protection and
- Manage receiverships exemplary service to members and
4. Securities and Exchange Commission their families
- enforce laws against market Vision
manipulation - A viable social security institution
- strive to promote a market environment providing universal and equitable social
that is worthy of public’s trust protection through world-class service
Mission
- protect investors MODULE 4: KEY MACROECONOMIC
- maintain fair, orderly, and efficient VARIABLES
markets
- facilitate capital formation 3 Key Macroeconomic Variables:
5. Social Security Act of 1935 1. Economic Output: GDP Growth Rate
- created a social insurance program 2. Overall Prices: Inflation Rate
designed to pay retired workers age 65 3. Labor: Unemployment Rate
or older a continuing income after
retirement

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 FDNECON
MIDTERM REVIEWER
Gross Domestic Product Gross National Income
- Product: total market value of all final - Formerly, Gross National Product
goods and services produced within an (GNP)
economy in a given period of time
- Expenditure: total expenditure on
domestically-produced final goods and
services
- Income: total income earned by
domestically-located factors of
production
- Philippine Statistics Authority: GDP is
the aggregate of gross value added Base Year
(GVA) of all resident producer units in - “The choice of a base year as shown in
the country many literatures is that the base year
should represent a "normal year" for
Value-added the economy - with no influences due
- a firm’s value added is the value of its to economic and financial crisis,
output minus the value of the disaster, typhoons, calamities and/or
intermediate goods the firm used to other related events that brings
produce that output negative impact to the economy.” (PSA,
2022)
Example:
1. A farmer grows a bushel of wheat and Nominal GDP
sells it to a miller for $1.00. - Measures these values using current
2. The miller turns the wheat into flour and prices
sells it to a baker for $3.00. Real GDP
3. The baker uses the flour to make a - Measure these values using the
loaf of bread and sells it to an engineer prices of a base year
for $6.00.
4. The engineer eats the bread. Calculating GDP: Expenditure Approach

Compute:
1. Value added at each stage of production
2. GDP

Stage 1: 1 Calculating GDP: Value-added Approach

Stage 2: 2
Stage 3: 3
GDP = $6

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 FDNECON
MIDTERM REVIEWER
MODULE 5: ROLE OF THE 2. Charities/foundations for a good cause
GOVERNMENT IN THE ECONOMY/ THE 3. Contract
ECONOMICS OF PUBLIC SECTOR
Negative Externalities: Pollution
Government and the Economy
- Promote inclusive, sustainable,
equitable economic growth
Provide goods Set standards Regulatory
and services framework

Maintain or Redistribute Address

enhance income externalities
competition

Principle #6: Markets are usually a good

way to optimize economic activity.
Principle #7: Government can sometimes Positive Externalities: Education
improve market outcomes.

Market Failure: not optimal distribution of

goods and services in the market
Externalities: the uncompensated impact of
one person’s actions on the well-being of a
bystander

Externalities and Government’s Response

Negative externalities lead markets to

produce a larger quantity than is socially
desirable.
Positive externalities lead markets to
produce a smaller quantity than is socially
desirable.
Government can internalize externalities by
imposing taxes on goods or services with
Government’s Response to Externalities negative externalities or subsidizing goods
1. Command-and-Control Policies:n or services with positive externalities.
Regulation
2. Market-based Policy 1: Corrective Coase Theorem: if private parties can
(Pigovian) Taxes and Subsidies bargain over the allocation of resources at
no cost, then the private market will always
Private Solutions to Externalities solve the problem of externalities and
1. Do unto others as you would have them allocate resources efficiently
do unto you.

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 FDNECON
MIDTERM REVIEWER
Consumer Price Index (CPI)
- Measures the changes in the prices of
goods and services consumed by
households

GDP Deflator vs CPI

Basis GDP Deflator Consumer

Price Index

Scope of All goods Bought a

measurement produced typical
consumer

Sources of Domestic Only Domestic and

goods and Foreign
services

Weights Changing Fixed

Computations for:

Basket of Goods Consumer Inflation

Price Index

(Quantity*price) CoB CPI - OCPI

+ —------ x100 —----------- x100
(Quantity*price) ByCoB OCPI

= Inflation Rate
= Cost of Basket = CPI

ByCoB = Base year Cost of Basket

CoB = Cost of Basket
CPI = Consumer Price Index
OCPI = Old Consumer Price Index

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