ECONOMICS

Prepared by:

Princess Pearl T. Castaño, MAEd

 What is Economics?

 The word “economics” comes from a Greek word oikonomia,

meaning “management of the house”.

 The study of how societies choose to use scarce productive

resources that have alternative uses, to produce commodities of
various kinds, and to distribute them among different groups.
(Samuelson)

 Deals with the study of the choices made by people who are
faced with scarcity.
Economics is the study of SCARCITY and CHOICE.

Every economic issue involves individual choice—

decisions by individuals about what to do and what
not to do.
 Individual Choice

People have
unlimited wants People must
and limited make choices
resources to
meet those
wants
Is there a difference between wants and needs?

 Wants: limitless and varied

Ex. Luxury bags, Luxury Jewelries, Designer clothing, Travel

 Needs: the essentials needed for survival (a subset of wants)

Ex. Clean air, clean water, food, clothing, and shelter
GOODS
SERVICES
 Goods and Services
Economics resources or inputs of production are primarily used to produce a final output.
These outputs are the goods and services that result from the production process, which
are either consumed by people or employed in further production by businesses.
A good is a tangible commodity that is used to satisfy human wants, which can be
purchased and consumed. A t-shirt that is bought by a consumer that yields satisfaction to
him is an example of a good. In economics literature, goods have a plethora of categories.
They include: Economic Good and Free Good, Durable Good and Non-durable Good,
Intermediate Good and Final Good, and Consumer Good and Capital Good

On the other hand, service is an intangible equivalent of a good that also brings
satisfaction to human wants.
Services are activities or tasks that people provide for others’ demands. The works
performed by doctors, engineers, tourists, and sales clerks are examples of service.
 A complementary good is an item used in conjunction
with another good.
the complementary good has little to no value when
consumed alone, but when combined with another good
or service, it adds to the overall value of the offering.
Substitute Goods
a product or service that consumers see as
essentially the same or similar-enough to
another product.
 Inferior Goods
Inferior goods are goods whose demand
decreases as income increases.
Ex. A man who had a recent hike in salary
pay less on cheap dress.
Normal/Superior Goods
Superior goods are goods whose
demand increases as income increases
 Capital Goods
can be used to produce consumer
goods or producer goods themselves.
These are bought for producing other
goods.
 Consumer Goods
 are products bought for consumption by the
average consumer. Also called final goods,
consumer goods are the end result of
production and manufacturing.
 SUBSTITUTE GOODS or
COMPLEMENTARY GOODS
Substitute Goods
Substitute Goods
Complementary Goods
Complementary Goods
Substitute Goods
Complementary Goods
Complementary Goods
 Scarcity: The Central Problem of Economics

 Scarcity- refers to condition wherein most things that people

want are available only in limited supply. These things, called
economic goods are generally scarce and must somehow be
rationed, whether by price or by some other means.

 Scarcity refers to the finite nature and availability of resources

while choice refers to people’s decisions about sharing and
using those resources. The problem of scarcity and choice
lies at the very heart of economics, which is the study of how
individuals and society choose to allocate scarce resources.
 Nature, Methods, and Tools of Economics
Nature of Economics

1. It is a social science
2. It is related to the other sciences and cannot be divorced from them.
3. It is an inexact science.
• There are no universal laws and universal truths in Economics, there can only
be tendencies.
• Laws in Economics are relative to time, places and circumstances.
• Economic problems are not purely economics in nature; they are also created
by non-economic factors.
 Thus, it is not advisable to solve an economic problem with economic solutions
alone.
 To qualify the validity of economic laws, economists make used of an assumption –
CETERIS PARIBUS, which means “All other things being constant.”
 Methods of Economics

Positive Economics- attempts to understand the behavior and

the operation of the economic system without making judgments
whether the outcomes are good or bad. (William J. Baumol and
Alan S. Blinder, 2000)
 Statements of “what is” or “what will be”

Normative economics- looks at the outcomes of economic

behavior and asks whether they are good or bad and whether
they can be made better. In other words, normative economics
involves judgment and prescription of courses of action. (William
J. Baumol and Alan S. Blinder, 2000)
 Statements of “what should be”
 Three Tools in Economics
1. Graphical – a graph is a diagram that shows relationships
between numbers. Graphs arrange numerical information into a
picture from which it is often possible to see overall patterns or
trends in the information.

2. Mathematical – its application to economic analysis are found in

the field of arithmetic and geometry which are useful tools in
explaining phenomena.

3. Statistical – provides the economists dependable estimators of

the magnitude measuring the relationships among economic
variables as well as in making predictions. Also used to determine
the validity of economic hypotheses.
 Divisions of Economics
1. Microeconomics
 deals with the economic behavior of individual units such as the
consumers, firms and the owners of the factors of production.
 that branch of economics concerned with individual decision units –
firms and households – and the way in which their decisions interact to
determine relative prices of goods and factors of production and how
much of these will be bought and sold.

2. Macroeconomics
 deals with the economic behavior of the whole economy or its aggregates
such as government, business and household.
 that branch of economics which considers the relationships among broad
economic aggregates such as national income, total volumes of saving,
investment, consumption expenditure, employment, money supply etc.
 Macro vs. Micro Questions

 Should I go to college or get a job after high school?

 How many people are employed in the economy as a whole
this year?
 What determines the overall level of prices in the economy as
a whole?
 What determines the cost to a high school of offering a new
course?
 The Methodology of Economics

 Model – is a theory. It is composed of a number of assumptions from

which conclusions or predictions are deduced.
1. To be useful, a model must simplify the real situation.
2. The purpose of the model is to make predictions about the real world; and
in many respects the most important test of a model is how well it predicts.
3. A person who wants to predict the outcome of a particular event will be
forced to use the model that predicts best even if the model does not predict
very well.
 Economics being a science is a systematic body of knowledge. It uses
scientific methods in gathering data, analyzing the data and making
conclusions.
1. Gathering of facts (sometimes called Descriptive or Empirical Economics as it
is based on observable and verifiable behavior). Data are obtained through
observation and interviews.
2. Formulation of economic principles/theories – generalization about economic
behavior. Data are properly organized for analysis – requiring a careful study
of the cause-and-effect relationships of the various data. Out of this economic
analysis, economic principles and theories are formulated or derived.
 Generalizations are created through the following methods:
a. Inductive Method – the process of reasoning from the particular to the
general. (Economists gather, systematically arranged and generalized on facts)
b. Deductive Method – the process of reasoning from the general to the
particular. (Entails the development of hypotheses which are then tested against
facts)
3. Policies are formulated
Importance of Studying Economics

1. Informs decisions
 Economists provide information and forecasting to inform
decisions within companies and governments. This
knowledge of economics – or economic intelligence – is
based on data and modelling.

2. Influences everything
 Economic issues influence our daily lives. This includes
issues such as tax and inflation, interest rates and wealth,
inequality and emerging markets, and energy and the
environment.
3. Impacts industries
 Firms of all sizes and industries have to rely on economics, whether
that’s for product research and development, pricing strategies or
how to advertise.

4. Inspires business success

 Understanding how consumers behave is vital for a business to
succeed. Economists use theories and models to predict behaviour
and inform business strategies.

5. International perspective
 Economics affects the world we live in. Understanding domestic and
international perspectives – historic and current – can provide a
useful insight into how different cultures and societies interact.
1. To form the habit of accurate observation and correct
interpretation of present economic trends and development.
2. To understand our country’s agricultural, industrial and
commercial problems as they affect our economic life and
progress
3. To gain knowledge of how to conserve our individual and
national wealth
4. To know how our government raises, controls and utilizes
public money
5. To know what should be done to help make an independent
Philippine economy sound.
 The Four Basic Economic Questions

1. What to produce?
What should be produced in a world with limited resources?
Ex: Using limited resources, should a local government build a
new school or improve roads? Using limited resources, should a
farmer grow wheat, cotton, or corn?

2. How Much to Produce?

 After identifying what goods to produce, how much to produce is
another problem to be considered. Business firms, regardless of
its type, should determine the volume of goods to produce
based on its comparative advantage that people would desire.
3. How to produce?
What resources should be used?
Ex: How should we obtain oil? How much pollution should be
allowed? How should we produce steel – using union or
nonunion workers? Using recycled steel or iron ore?

4. For whom to produce?

Who acquires the product? How is it distributed?
Ex: Who gets a flu vaccine? Who should clothes be produced
for (what demographic group / generation)?
The Basic Decision Problems
 Resources, as we have learned are limited unlike our needs and wants
which are unlimited and multifarious. Since resources are not freely
available, economics comes into play to assist individuals and societies in
making proper choice and in making decisions. For proper management
of resources, society must consider basic decision problems; namely:

1. Production
 refers to the creation of more utilities. Any activities that creates or
makes things for man’s satisfaction is production.
 Land- all natural resources (water, farming, mining, forestry, coal, oil,
etc.)
 Labor- refers to exertion of human effort to get income.
 Capital- manmade product utilized to produce more goods and services
to satisfy human wants.
Ex. Money, buildings, machines, computers, knowledge/skills.
 Entrepreneur- a person with the drive to combine land, labor, and capital
resources to produce goods and/ or offer services
2. Exchange
 is chiefly devoted with the consideration of value and price.
For every exchange to take place, there should always be
goods or services, for which an amount will be given.

3. Consumption
 refers to the final utilization of goods and services.

4. Distribution
 an economic activity, it refers to apportionment of the national
income among the factors of production.
Types of Economic Systems

 Economic System - a set of economic institutions that dominate a

given economy with the aim of solving the basic economic
problems.

Types of Economic System

1. Traditional economy – an economy where production methods,
exchange and distribution of income are made according to customs
and traditions. The traditional mode of social organizations in
responding to the problems of production and distribution of economic
goods is based on ways, procedures and systems which have been
handed down from generation to the next.
2. Capitalism - a system where the means of production are privately
owned. It is also known by similar names as a Market Economy/Free
Enterprise Economy/Laissez-Faire Economy.
 Laissez-Faire - connotes “let alone”

Features:
 The means of production are privately owned
 Minimum government interference
 Profit motive
 Economic freedom/consumer sovereignty
 Free competition
 Institution of private property
 Price mechanism determines prices
3. Communism - a system where the means of production and
resources are owned, managed and controlled by the state. It is
also called a Command Economy.

Characteristics:
 presence of central planning
 no economic freedom
 private property is not allowed
 no profit motive as the interests of the state/people are
promoted competition does not exist as the government is the
only seller
4. Socialist economy - a system based on the belief that
democratic means should be used to distribute wealth evenly
throughout a society.

 Characteristics:
 Some form of private enterprises exist but the state owns
major resources.
 Government ownership of productive resources (major/key
industries) and all other activities are left to individuals.
 Planning
 Redistribution of income
5. Mixed Economy – a blend of market system and some form
of government regulation and control.

 Characteristics:
 No absolute free enterprise
 Guided free enterprise
 Private ownership of resources exists side by side with
substantial public ownership of resources and government
participation in economic activities
 Economic Resources
 Society has scarce economic resources. This includes all the natural, human, and capital
resources that are used in the production of goods and services.
Economics resources have four broad categories. These are:

1. Land. This is the physical space or area on which production takes place. It also includes all the
economy’s natural resources such as land, water, and minerals used in the production process.
Lot, farmland, trees, forests, river, mineral, and oil deposits are examples of land resources.
2. Labor. It refers to the time, physical and mental skills that people contribute in producing goods
and services. For example, a nurse working in a hospital is considered to be a labor resource. The
services rendered by a teacher and an economist are also examples of labor resources.
3. Capital. This covers the tools and other productive equipment utilized in producing consumer
goods and services. The assembly plant, factory building, distribution facilities, computers as well
as human and financial capital fall in this resource category.
4. Entrepreneurship. This is the human resource responsible for combining or organizing the
land, labor, and capital resources into a good or service. The entrepreneurs are skilled at making
strategic business decisions. They are creative, innovative, and future-oriented.
Agriculture Sector
Industrial Sector
Service Sector
 Sectors of the Economy
The production of goods and services in the economy is going on at different levels. An
economy may be analyzed in terms of its parts, referred to as economic sectors to
determine who are engaged in different activities. The three sectors of the economy are:

1. Primary Sector. The agricultural sector of the economy that is concerned with the
production of raw materials and includes activities directly related to agriculture and the
use of natural resources. Farming, fishing, forestry, mining, oil extraction, and raw
processing are activities that lie within this sector.
2. Secondary Sector. The industrial sector of the economy which covers the production
of finished goods, including the processing of materials produced by the primary sector.
Manufacturing, fast-moving consumer goods, energy utilities, construction, and heavy
industries are the activities associated with this sector.
3. Tertiary Sector. The service sector that covers the production and provision of
intangible commodities to consumers and businesses. Activities under this sector
include transportation, distribution, retail, banking and finance, information technology,
tourism, education, healthcare, etc.
Areas of Labor
Problem
52

Refers to a situation in which the workers who are

capable of working and willing to work do not get
employment.

 According to the International labor Organization (ILO),

unemployed workers are those who are currently not working
but are willing and able to work for pay, currently available to
work and have actively searched for work.
 Unemployment

• Unemployment occurs when workers

who want to work are unable to find
jobs.

• It also refers to an involuntary idleness

on the part of those who have failed
to find employment or who have lost
their latest jobs, but are able to work,
and are looking for work (Miranda,
2001)
54
Underemployment/Full employment
Who are underemployed?
They are the skilled workers in low-paying jobs, the skilled workers in low-skill jobs, and part-
time workers preferring full-time hours.
Ex. A man with PhD works as a clerk in an office

Underemployment refers to a Full employment does not

situation in which workers are necessarily mean that all members
employed below their education or of the labor force (100%) are
skill level, or their ability. This employed. What it does mean is
situation manifests the the lowest rate of unemployment
underutilization of the productive compatible with price stability;
capacity of the employed variously estimated at between 4-
population. 6% unemployment.
 It has to be pointed out that the employed or unemployed or even the
underemployed population is sourced from the labor force; hence, it is
necessary to define “labor force.”
 55
Labor Force

 Labor force consists of individuals who

belong to the age bracket of 15-65
and capable of productive work. For
those whose age bracket falls below
15 and above 65, they are referred to
as economic dependency burden.
 It must be stressed that there are
sectors who are exempted as
members of the labor force, viz:
housewives, students,
retirees/pensioners, and the
physically/mentally handicapped
individuals.
 56 Types of Unemployment

1. Demand Deficient /Cyclical Unemployment

 This type of unemployment occurs in

a recession or period of very low
growth. This happens when the
demand for workers is less than the
supply as a result of the fall of
business activities in the economy.

Ex: Depression in trade, thousands of

people are thrown at work.
57
2. Frictional Unemployment

 This occurs due to the normal turnover

in the labor market and the time it
takes for workers to find new jobs.
When workers left their jobs and are
looking for new ones, they belong to
this category of unemployment.

 It is caused by changes in industrial

structure
58

3. Structural Unemployment

 This occurs because of an absence of

demand for a certain type of worker.
This typically happens when there are
mismatches between the skills
employers want and the skills workers
have. This becomes the case when
there are available and willing workers
but their skills and training are not
those required by the business firms.
59
4. Seasonal Unemployment

 This occurs because certain industries

only produce or distribute their products
at certain times of the year. Seasonal
unemployment results from workers
being unable to find continuous
employment in industries where, due to
seasonal conditions, there are distinct
production periods.
Ex: Agricultural sector and certain
manufacturing units like sugar and ice
factories
60

5. Technological Unemployment

 This type of unemployment is due

to technological changes;
inventions of new and better
machines are responsible for
throwing men out of
employment.

Ex: Reduction of man power to

produce finished products
61
The Costs of Unemployment

The cost of unemployment is not measured in lost

wages alone but also impairs health, social
relationships and productivity. Among the costs of
unemployment include the following:

1. Loss of income. Loss of income for individuals could mean a

decrease in their purchasing power.

2. Negative Multiplier Effects. Due to decreased purchasing

power of the population, demand for goods and services will
decrease and may cause industries to lay off some workers or
to shut down.

3. Loss of National Output. Unemployment causes the scarce

resource labor to be underemployed since part of the
workforce is not being used. Hence production is not at its
maximum and thus underemployment of resources would
lead to a loss in potential national output.
62 The Costs of Unemployment

4. Fiscal Costs. Fall in revenue from income tax and taxes

on consumer spending; fall in profits – reduction in revenue
from corporation tax.

5. Social Costs. An increase in unemployment leads to

social deprivation. Social issues such as poverty,
overpopulation, increased crime rates, and lower life
expectancy are all related to unemployment.

The social costs of unemployment are also substantial.

Crime rates, family breakup, health problems, poverty,
drug and alcohol abuse all tend to increase during period
of high unemployment. Many unemployed persons also
suffer individually through lower self-esteem, frustration,
stress and a sense of insecurity.
63 do we measure Unemployment Rate?
How

Unemployment rate is a measure of the

prevalence of unemployment in a given area.
The work/ labor force is made up of those people
who want to work. The rate of unemployment
can be calculated using the formula below.

Unemployment = Unemployed workers X 100

Rate Total labor force
64
Sample Computation
 Law of Demand

 Demand can be a relationship between the price of the good and the quantity of that
good. The Law of Demand, considered the most popular principle in economics,
explains this relationship, and describes how people react to changes in price.
 The law of demand indicates the inverse relationship between price and quantity
demanded. Price is the amount of money a consumer pays for a good while quantity
demanded is the amount of good that a consumer is willing and able to buy at a
specific price. It states that as the price goes up, the quantity demanded goes down,
and as price goes down, the quantity demanded goes up, ceteris paribus.
 In other words, people will buy more of a good if the price is lower while fewer people
will buy less of a good if the price is higher.
 For example, if the price of airline tickets drop, people are encouraged to travel more.
However, if the price of movie tickets rises, fewer people want to watch a movie
 Non-Price Determinants of Supply
Apart from price, there are other factors that can affect demand. These factors that can
increase or decrease the level of demand are referred to as non-price determinants of
demand. The determinants include the income of consumers, prices of related goods, number
of buyers, tastes or preferences, and expectations.

1. Income. The income of consumers is a key determinant of demand. As people’s income

changes, they may buy more or less of a particular good. When considering the influence of a
change in income on demand, there are two goods involved—normal goods and inferior
goods.
A normal good is a product in which demand varies directly with income. A rise in income
causes an increase in demand, and a fall in income leads to a decrease in demand. Most of
the products are normal goods, including restaurant meals, branded t-shirts, and electronic
devices.
An inferior good is a product in which demand varies inversely with income. The demand for
inferior goods rises as income decreases, and demand falls when income increases. Common
examples of inferior goods include canteen meals, generic drugs, and surplus goods.
2. Price of related goods. The demand for a good is also affected by the price and availability
of related products. The two categories of related goods are called substitutes and
complements.
3. Tastes and preferences. The demand for any good depends on tastes and preferences
which define what people like and wish to choose. Several factors that may influence how
consumers like and prefer goods include trends, seasonality, health hazards, advertisement,
culture, and religion.
4. Number of buyers. Population and market size determines the number of consumers
buying a good or service. The population clearly affects the demand for any good. A higher
population or greater market size results in higher demand, while a lower population or market
size takes the reverse situation.
5. Expectations. Expectations refer to the anticipation of consumers concerning future events,
which can affect the demand for a good at present. These expectations comprise price and
buyer’s income. Consumers who expect the price of a good to increase in the future may
prompt them to buy today, thus increasing the current demand for the good. Conversely, those
who expect the price of a good to fall in the future may cause them to buy the good later, thus
decreasing the current demand for the good.
 Law of Supply

Supply can be a relationship between the price of the good and the quantity of that
good. This relationship is called the law of supply which explains how firms react to
changes in price.
According to the law of supply, quantity supplied is positively related to price. In this
case, price is the amount of money a seller charges for a good while quantity supplied
is the amount of good or service that a firm is willing and able to sell at a specific
price. The law of supply states that as the price of a good or service increases, the
quantity supplied rises, and as the price of a good or service decreases, ceteris
paribus. In other words, firms are more willing to sell more at a higher price than sell at
a lower price.
For example, if the price of mangoes in the market increases, farmers are encouraged
to produce more.
However, if the price of MP3 players falls, manufacturers are not encouraged to sell
more
 Non-Price Determinants of Supply
Like demand, supply is not only influenced by price. There are other factors that can
increase or decrease the level of supply which are referred to as non-price determinants of
supply. The determinants of supply are input costs, technology, number of producers,
expectations, government actions, and weather.
1. Input Costs. Firms incur costs when they produce goods and services including the
prices of raw materials, rents, wages of workers, interests and others inputs of production.
Input costs are a key factor that determines supply. If the input costs become more
expensive, the supply decreases. Consider for example, a rise in the wages among
workers will increase the production costs of a firm and will lower its supply. A substantial
fall in the price of gasoline will likely decrease the costs of production, therefore, increase
supply.
2. Technology. Advances in technology may change the level of supply. Technology
improves the productivity of workers and increases the efficiency of the production
process. An improvement in technology leads to an increase in supply. For example, the
application of technology like the use of industrial robots causes an increase in supply of
many consumer electronics products such as smartphones. Also, modern technology in
agriculture helps farmers to plant and produce more crops like corn, rice and the like.
3. Number of producers. Market supply also depends on the number of producers in the market or
industry. An increase in the number of producers may lead to an increase in supply of goods and services.
For example, if a new restaurant opens and offers lunch meals in a city, supply of meals will likely increase.
4. Price expectation. Like buyers, firms expect the price of their goods to increase or decrease in the
future, which may affect their current supply. If price is expected to rise in the future, current supply
decreases, and if it’s expected to fall, supply increases. Take for instance, a manufacturer anticipates the
price of shoes to go higher in the future so it cuts the quantity it will sell, thereby decreasing supply. On the
other hand, a farmer expects the price of rice to decrease next year, so he decides to produce and sell
more rice this year, thus, increasing supply.
5. Government actions. Government actions through the implementation of policies may cause supply to
change. These government actions involve granting subsidies or raising various taxes. A subsidy is an
incentive provided to firms by the government that can improve the supply of a certain good. Subsidies tend
to increase market supply. Tax is an enforced contribution imposed by the government to firms. Taxes tend
to cut supply as it raises the costs of production. For example, the implementation of TRAIN law in the
Philippines increases the excise tax on sweetened beverages, therefore, decreases the supply of these
products.
6. Unpredictable events. Unpredictable events happened in a firm, caused by nature, the economy, and
other unforeseen circumstances may change the level of supply. These include labor and industrial
disputes, machine failure, bad weather due to typhoons and floods, agricultural pests affecting crops,
shortage of imported commodities due to global recession, among others. The COVID-19 pandemic is one
straightforward example as it disrupts the global supply chain of commodities where exports and imports
have declined to all regions across the world affecting the supply of many commodities
Economic Growth and Development as
Goals in Economics
Economic Growth
 refers to the steady process of
increasing productive capacity of the
economy, thus increasing the national
income.
 an increase in real national income /
national output.
 Economic growth measures an increase
in Real GDP (real output). GDP is a
measure of the national income / national
output and national expenditure. It
basically measures the total volume of
goods and services produced in an
economy.

Economic Growth in UK
Economic Development
 refers to the upward movement of the entire social system.
 Refers , not only to the steady increase in productive
capacities of one economy but, more specifically to a series of
progressive or qualitative changes that occur such as capital
accumulation and technology advancement that leads to
sustainable improvement of both physical and human
resources.
 Economic development is defined as a sustained
improvement in material well being of society. Economic
development is a wider concept than economic growth.
 Measurement of Growth and Development
GROWTH DEVELOPMENT

GDP (Gross Domestic Product) HDI (Human Development Index)

• Is the summary indicator of how much • Focuses on three measurable dimensions

output was produced by the economy. It is of human development: living a long and
measured in terms of money value of final healthy life, having education and having a
goods. decent standard of living. It could be
• The total market value of all final goods summarized into measures of life
and services produced, within the territories expectancy, school enrolment, literacy and
of a country, in one year. income, allowing a broader view of a
country’s development.

HPI (Human Poverty Index)

• focuses on the proportion of people below
a threshold level in basic dimensions of
human development. HPI measures human
poverty in developing countries.
 Economic Growth Economic Development
Meaning Economic growth refers to an increase in Economic development implies changes in
the real output of goods and services in income, savings and investment along with
the country. progressive changes in socioeconomic structure
of country (institution and technological changes).
Factors Growth relates to a gradual increase in Development relates to growth of human capital,
one of the components of Gross decrease in inequality figures, and structural
Domestic Product: consumption, changes that improve the quality of life of the
government spending, investment, net population.
exports.
Measurement Economic Growth is measured by The qualitative measures such as HDI (Human
quantitative factors such as increase in Development Index), gender- related index,
real GDP or per capita income. Human poverty index (HPI), infant mortality,
literacy rate etc. are used to measure economic
development.
Effect Economic growth brings quantitative Economic Development leads to qualitative as
changes in the economy. well as quantitative changes in the economy.

Relevance Economic growth reflects the growth of Economic development reflects progress in the
national or per capita income. quality of life in a
country.
 Growth of Gross National Product

Gross National Product (GNP)

• The total market value of all final goods and services produced by the
citizens of a country in a given year.
• Is the sum total of all production of one’s economy in a given year.
• It is used as the basis in determining the national income.
 National Income Accounting

National Income is a measure of the money value of the total flow

of goods and services produced in an economy over a specified
period of time. It consists of the following:

1. Wage or salary – those generated by labor

2. Interest – those generated by lenders of funds
3. Rent – those generated by owners of real estate
4. Profit – those generated by the entrepreneurs
5. Net factor – income from abroad
Approaches to National Income Estimation
1. Industrial Origin Approach (or Value Added Approach). It measures the national
income by determining the sum of the market value of the total production of all the
major industries comprising the economy. The major industries consist of the
following:
a. agriculture, fisheries and forestry
b. industrial sector
c. service sector
2. Product Approach (or Expenditure approach). It involves calculating the sum of all
expenditures on final goods. These are the expenditures of the end-users of the output
produced in a given year. The end-users are the households, business firms, the government
and the rest of the population. This can be summarized as follows:
GNP = C + I + G + (X – M) where:
GNP = Gross National Product
C = Personal Consumption Expenditure
I = Gross Domestic Capital Formation
G = Government Consumption Expenditure
X = Exports
M = Imports
3. Factor Income Approach. An approach where the total amount of earnings of the
owners of economic resources (land, labor, capital, entrepreneur) are aggregated into
a single amount with the objective of determining the national income.
 Gross National Product (GNP) Accounting:
Meaning, Purpose and Limitations
Gross National Product (GNP) refers to the market value of all the final goods and
services produced by nationals or citizens of a country in one year. This includes
production within and outside of the country under consideration. Gross Domestic
Product (GDP) on the other hand refers to the total market value of all final goods
and services produced within the territories of a country in one year.
A clearer distinction between the two is illustrated Table 1.

Table 1 - GNP vs. GDP

GNP Production within the Production within the Philippines

Philippines by Philippine by Foreign Nationals
Nationals
GDP Production within the Production outside the Philippines
Philippines by Philippine by Philippine Nationals
Nationals
Functions of GNP

Gross National Product has the following functions, namely:

1. GNP reflects the value of the economy’s production.
2. GNP figures show the structure of production according to end use and
factor contribution.
3. GNP accounting serves as a barometer of aggregate activities in the
economy.

The main use of GNP measurement is that it affords a quantitative

measure of economic performance. It serves as indicator of the overall
performance of the economy.
 Table 3 shows the value of Real GNP using the above formulas.

Table 3 - Real GNP (or Adjusted GNP)

(Year 3 = Base Year)
Year Quantity Price Price Index GNP Real GNP

1 100 P10 33.33 P1,000 P3,000

2 100 P20 66.67 P2,000 P3,000

3 100 P30 100 P3,000 P3,000.00

4 100 P40 133.33 P4,000 P3,000

5 100 P50 166.67 P5,000 P3,000

Price Index for Year 2 = P20 x 100 = 66%

P30
 Quality of Life

Quality of life
• is a highly subjective measure of happiness that is an essential component
of many financial decisions. Factors that play a role in the quality of life vary
according to personal preferences, but they often include financial security,
job satisfaction, family life, health, and safety.

• standard indicators of the quality of life include wealth, employment, the

environment, physical and mental health, education, recreation and leisure
time, social belonging, religious beliefs, safety, security and freedom.
 Sustainable Development

Sustainable development was described by the 1987 Bruntland Commission

Report as “development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.”

• Sustainable development includes the protection of future economic growth and

future development.

The sustainable development thus requires:

• Preservation of Ecological Resources and greater use of renewable resources.

• Encouragement to the use of environmentally-safe technologies for
development
purposes i.e. focus on reduction of all kinds of pollution involved in the
economic activities.
• Formulation and implementation of policy framework for people-security and
human justice, including ecological and economic security.
Millennium Development Goals
 Basic Concept of Economic Planning

Economic Planning
 means arrangement of resources which are scarce in relation to the needs
for their alternative uses in such a way that the satisfaction yielded by them
is maintained at an optimum level. It thus involves the element of choice
between scarce means of achieving a pre-determined end. It is a carefully
thought out rational arrangement of economic resources. (B.C. Tandon)

 Economic planning is the making of major economic decisions— by the

conscious decision of a determinate authority, on the basis of a
comprehensive survey of a country’s existing and potential resources and a
careful study of the needs of the people. (H. D. Dikinson)
Economic planning has some essential features:
a. There must be a centralized planning authority for preparing the plans and
suggesting the means for their implementation.
b. Before framing the plan, the planning authority should undertake an accurate
survey of the available resources (both existing and potential) and the
essential needs of the country.
c. An economic plan must have some definite aims and objectives.
d. The plan should lay down a series of targets on the different lines of
production such as agricultural, industrial, etc.
e. It should make a proper allocation of the proposed outlay into the different
heads of development.
f. An economic plan must have a definite time limit, usually 5 years (as in our
country).
g. There must be mutual consistency between the targets of the production of
the different sectors.
Conclusion:
 The main point about a plan is that it involves careful
computation of the macro-aggregates of GNP: balance of
saving and investment, proper allocation of resources
between public and private sectors, between one region and
another, between agriculture, industry and other sectors,
between rural and urban areas.
 Definition of Developed Countries
 Developed Countries are the countries which are developed in terms of economy
and industrialization. The Developed countries are also known as Advanced
countries or the first world countries, as they are self-sufficient nations.

 Human Development Index (HDI) statistics rank the countries on the basis of their
development. The country which is having a high standard of living, high GDP, high
child welfare, health care, excellent medical, transportation, communication and
educational facilities, better housing and living conditions, industrial, infrastructural
and technological advancement, higher per capita income, increase in life
expectancy etc. are known as Developed Country. These countries generate more
revenue from the industrial sector as compared to service sector as they are having a
post-industrial economy.
 The following are the names of some developed countries: Australia, Canada,
France, Germany, Italy, Japan, Norway, Sweden, Switzerland, United States.
 Definition of Developing Countries
 The countries which are going through the initial levels of industrial
development along with low per capita income are known as Developing
Countries. These countries come under the category of third world countries.
They are also known as lower developed countries.

 Developing Countries depend upon the Developed Countries, to support them

in establishing industries across the country. The country has a low Human
Development Index (HDI) i.e. the country have low Gross Domestic Product,
high illiteracy rate, educational, transportation, communication and medical
facilities are not very good, unsustainable government debt, unequal
distribution of income, high death rate and birth rate, malnutrition both to
mother and infant which case high infant mortality rate, high level of
unemployment and poverty.

 The following are the names of some developing countries: Colombia, India,
Kenya, Pakistan, Sri Lanka, Thailand, Turkey.
 Key Differences Between Developed
and Developing Countries

The following are the major differences between developed countries and developing
countries

1. The countries which are independent and prosperous are known as Developed
Countries. The countries which are facing the beginning of industrialization are
called Developing Countries.
2. Developed Countries have a high per capita income and GDP as compared to
Developing Countries.
3. In Developed Countries the literacy rate is high, but in Developing Countries
illiteracy rate is high.
4. Developed Countries have good infrastructure and a better environment in terms
of health and safety, which are absent in Developing Countries.
6. Developed Countries generate revenue from the industrial sector. Conversely,
Developing Countries generate revenue from the service sector.
7. In developed countries, the standard of living of people is high, which is moderate in
developing countries.
8. Resources are effectively and efficiently utilized in developed countries. On the other
hand, proper utilization of resources is not done in developing countries.
9. In developed countries, the birth rate and death rate are low, whereas in developing
countries both rates are high.

Conclusion
 There is a big difference between Developed Countries and Developing Countries as
the developed countries are self-contained flourished while the developing countries
are emerging as a developed country. Developing Countries are the one which
experience the phase of development for the first time. If we talk about developed
countries, they are post-industrial economies and due to this reason, the maximum part
of their revenue comes from the service sector.
 Developed Countries have a high Human Development Index as compared to
Developing Countries. The former has established itself in all fronts and made itself
sovereign by its efforts while the latter is still struggling to achieve the same.
Thank you and God bless! 

-PPTC-