Lecture Notes in Introductory

Macroeconomics

by Josefina B. Macarubbo
Course Description
This is a study on the fundamental economic ideas and the operation of the
economy on a national scale. It is an analysis of the economy as whole including
measurement and determination of aggregate demand, aggregate supply, inflation,
and employment. How monetary and fiscal policies work and the effects of
international trade on the balance of payment position are discussed.
Learning Objectives
After successful completion of this Module, the student should be able to:
1. Understand the scope and importance of the study of Macroeconomics;
2. Demonstrate firm knowledge of the interrelationships among consumers,
business, government and the rest of the world in the Philippine macroeconomy;
3. Explain key concepts in macroeconomics;
4. Identify how the nation’s output, level of employment, and price levels are
measured;
5. Explain the process of how fiscal policy is enacted and how it functions to stabilize
macroeconomy;
6. Analyze the roles played by the Bangko Sentral ng Filipinas and other financial
institutions in influencing levels of output, employment and prices;
7. Identifythe effects of foreign trade to the macroeconomy; and,
8. Apply tools of macroeconomic analysis to the understanding of other disciplines;
Chapter 1 - Introduction
A. The Study of Macroeconomics
1. Definition
2. Macroeconomics vs. Microeconomics
3. Purpose of the Study of Macroeconomics
B. The Circular Flow of National Income Model
C. Macroeconomic Goals
D. Macroeconomic Policies
The Study of Macroeconomics
Economics has two main branches; namely: Microeconomics and Macroeconomics.
Macroeconomics deals with the affairs “in the large.” it concerns the over-all
dimensions of economic life. .(Gardner Ackley)
Macroeconomics focuses on the behavior and policies that affect consumption and
investment, the dollar and trade balance, the determinants of changes in wages and
prices, monetary and fiscal policies, the money stock, the federal budget, interest
rates, and the national debt. In brief, macroeconomics deals with the major issues
and problems of the day. (Dornbush and Fischer)
Macroeconomics vs. Microeconomics
MACROECONOMICS MICROECONOMICS
Whole or entire economy Particular or individual market
Interrelationships of economic aggregates such as Consumer behavior, least-cost combinations of input
national output, employment and general price level used by the firm and its optimum output level, product
and factor pricing decisions
Inflation/Deflation Price of a particular product

Consumer Behavior Aggregate Demand

Productive Capacity of Economy Optimum Output Level/Supply of Goods
Importance of the Study of
Macroeconomics
Prof. J.K. Mehta feels that so long as men live in society, the economist cannot afford to neglect the study of
macro-economy. Accordingly, the following are the importance of the study of Macroeconomics:
1. Functioning of the Economy
2. Formulation of Economic Policies
3. Understanding Microeconomics
4. Understanding and Controlling Economic Fluctuations
5. Understanding the Effects of Inflation/Deflation
6. Study of National Income
7. Study of Economic Development
8. Performance of the Economy
9. Nature of Material Wealth
The Circular Flow of National Income
Model
The circular flow of national income model is an abstract way to illustrate how the
whole economy operates. There are four sectors in the economy; namely:

Sectors Basic Function

Household Sector (HS) Supplies the factors of production needed by the

business sector
Business Sector (BS) Produces goods and services for all sectors in the
economy
Government Sector (GS) Purchases goods and services to produce public
goods and services
Foreign or rest-of-the-world sector Sells local goods and services abroad
(FS) Buys foreign goods and services
The Circular Flow of National Income Model
There are different markets in the economy. These are:

Markets What to buy and sell

Goods Market Goods and services produced by the BS and sold to the
HS
Factor Market Factors of production (land, labor, capital and
entrepreneurship) supplied by the HS and sold to the
BS
Financial Market Financial institutions acts as intermediaries between
suppliers of funds (savings of HS) to users of funds
(investment of BS)
Foreign Market Local goods and services exported and foreign goods
and service are imported by the FS
The Circular Flow of National Income
Model
The State of Equilibrium
The economy is at state of equilibrium if:
Aggregate Supply (Y) = Aggregate Demand (AD) or
Total Leakages = Total Injections
where,
Y = is total income
AD = Consumption (C) + Investment (I) + Government Expenditures (G) + Exports
(X)
Total Leakages = Savings + Taxes + Imports
Total Injections = Investment (I) + Government Expenditures (G) + Exports (X)

For Illustration, pls access the link below

https://www.slideshare.net/amansingh884/circular-flow-of-income-81762537
Macroeconomic Goals
All economies has common macroeconomic goals to attain. These are:
1. Rapid Economic Growth – a sustained increase in the capacity of the nation to
produce diverse output for its population
2. Full-employment – suitable jobs are available to those who are looking for work.
3. Price stability – both inflation and deflation are avoided
4. Favorable Balance of Payment – a situation wherein a countries inflow of
revenues from abroad exceeds its payments to the rest of the world.
Attaining these goals is tantamount to solving macroeconomic problems like
recession, unemployment, inflation/deflation, and trade imbalances.
 Macroeconomic Policies
Policies are formulated to address macroeconomic problems. The policies and the
economic variables to impact aggregate demand and eventually output/employment
and price level are:

Macroeconomic Policies Macroeconomic Variables

Fiscal Policy Government Spending, Taxes,

Consumption and Saving

Monetary Policy Money Supply, Interest Rate, Investment

Trade Policy Imports, Exports

Fiscal and Monetary Policies at Work
Macroeconomi How it works?
c Policy
Recession/Unemployment Inflation
(Expansionary Policy) (Contractionary Policy)
Fiscal Policy Increase Government Spending Decrease Government Spending
Decrease Tax Increase Tax
Monetary Policy Increase Money Supply Decrease Money Supply
Chapter Assessment
Chapter II – Measuring the Economy’s
Performance
Chapter Outline
1. Definition of Gross Domestic Product and Gross National Product
2. Approaches in Estimating GDP/GNP
3. Nominal vs. Real GDP
4. Real Economic Growth
5. National Output and Employment
6. Consumer Price Index, Inflation Rate and Purchasing Power of the Peso
GNP/GDP Defined
How well the economy performed for the past period certainly matters to
everyone as a member of the society. The nation’s output is the very indicator of the
economy’s performance. Thus, a need to understand what is Gross National Product
(GNP) and Gross Domestic Product (GDP) is all about.
Gross National Product (GNP) is the total market value of final goods and
services produced by nationals locally and internationally in a year.
Gross Domestic Product (GDP) is also the total market value of final goods and
services produced by citizens and non-citizens within a territorial boundary of a
country.
GNP/GDP Defined continued. . .
Important word/s from the definition requires clarification. These are:
1. Total – This means adding together all goods and services with different units of
measurement. (For example, rice is in kilos, milk is in liters, doctors’ consultation is in
hours and many more). To do this, all goods and services are translated into monetary
value. So GNP/GDP as an aggregate measure is in monetary terms or in pesos in the
Philippines.
2. Market Value – To get the market value of goods and services, price per unit is multiplied
by the physical quantity produced or rendered. This connotes that goods and services that
did not pass through the market are excluded from GNP/GDP. Among the non-market
transactions are backyard production for own consumption, services of housewives and
household chores performed by the members of the family, and volunteer works.
GNP/GDP Defined continued…
3. Final Goods – To avoid double counting, goods that are not ready for consumption are
excluded from GNP. Raw materials are processed into final good before including them to
GNP. For example, flour is not counted because the final product which is bread will included.
4. Produced – The transaction should entail production of goods and services. There are so
many financial transactions that do not require production and yet involves big amount of
money. Buying of securities (stocks, bonds), lotto winnings, donations, gifts are among them.
These are purely financial transactions and are not included in the estimation of GDP. There
are also transactions that production did not happen during the current year. These are
secondhand sales For example, a house worth P2 million was built last 2018. The owner
decided to sell it this year for P3 million. The whole amount of P3 million is not part of this
year’s GNP. Only the P1million will be recorded as capital gains in this year’s GNP. The
remaining P2million was already recorded in 2018 GNP. This is to avoid double-counting
GNP vs. GDP
As defined earlier, GNP includes all citizens’ output regardless of geographical area. While GDP
includes all output of a county regardless of nationality. Or
GNP = C + I + G + Xn + NFIA
where:
C = household consumption
I = gross private domestic investment
G = government spending
Xn = net exports
NFIA = Net factor income from abroad
GNP vs. GDP continued …
while,
GDP = C + I + G + Xn
Given the above formula, the difference between GNP and GDP is NFIA. The
NFIA is equal to incomes of nationals from abroad less the incomes of foreigners in
the domestic economy. If the incomes of nationals abroad is greater than incomes of
foreigners domestically, NFIA becomes positive and consequently GNP exceeds GDP.
Otherwise, GDP is more than GNP.
GNP vs. GDP continued …
Most of the time, GDP is used to indicate the economy’s health than GNP. GDP is
considered to be more accurate measure as it reveals the productive capacity of a
country.
Approaches in Estimating GDP
There are three approaches in estimating GDP. These are:
1. Factor Income Approach
2. Final Expenditure Approach
3. Value Added or Industry-origin Approach

al-income .
Approaches in Estimating GDP
Source: Palistha Maharjan, "Three Approaches to measuring National Income," in Businesstopia, January 6, 2018, 
https://www.businesstopia.net/economics/macro/three-approaches-measuring-nation

1. Factor Income Method

Income method is also termed as factor income method or factor share
method.
The factors of production include land, labor, capital, and entrepreneurship.
Individuals who provide these factor services get payment in the form of rent,
wages/salaries, interest, and profit respectively. The total sum of income
received by these individuals comprise the national income for a given period
of time.
Approaches in Estimating GDP
GDP= Rent Income + Wages/Salaries + Net Interest Income + Undistributed Corporate Profit +
Dividends + Direct taxes + Depreciation
where:
Rent (Rental incomes on agricultural and non-agricultural properties)
Wages/Salaries (Wages and salaries earned by employees including
supplements)
Interest (Net interest earned by individuals other than governmental
bodies)
Undistributed Profit (Profits earned by businesses before payment of
corporate taxes and liabilities)
Approaches in Estimating GDP
2. Final Expenditure Approach
In this method, only the value of final goods and services are computed
while estimating GDP, regardless of any intermediate goods and their
processing. This method takes into account only those goods and services
that are purchased and consumed by the final consumers in the economy.

GDP = Consumption + Gross Private Domestic Investment

+ Government Purchases + Net Exports
Approaches in Estimating GDP
where:
Consumption (C) includes household expenditures on durables,
non-durables and services
Gross private domestic investment (I) are expenditures of the business
sector on buildings, machinery, tools, infrastructures furniture
including allocation for depreciation and accidental damages; and,
changes in inventories
Government purchases for goods and services (G) excluding
transfers
Net Exports (Xn)is the difference between Export Revenues (X) and
total import expenditures (M)
Approaches in Estimating GDP
3. Value Added Approach
In the value added method of measuring national income, the value of
materials added by producers at each stage of production to produce the final
good is considered. The difference between the value of output and inputs at
each stage of production is the value added. Thus,
Value added= Value of output – Cost of intermediate goods
GDP= Total product of industry + service + agriculture
sectors
Nominal vs. Real GDP
Nominal GDP is also known as GDP at current prices (GDPcr). This means that the
total nation’s output for the year is valued using current prices.

Product Price per Unit in Quantity Value at Current

year 2021 Produced in year Price(in M pesos)
2021
Price P50.00/kilo 100 M kilos P5,000.00

Eggs P96.00/dozen 1 M dozens 96.00

Chicken P250.00/kilo 10M kilos 2,500.00

Doctor’s Service P500.00/hour 200,000 hours 100.00

GDP at current P7,696.00

prices for 2021
Nominal vs. Real GDP
Real GDP is also GDP at constant prices (GDPcn). It is called deflated or adjusted
GDP because it eliminates price changes.
Product Price per unit in Quantity Value of Output at
base year 2012 Produced in year Constant prices
2021
Price P 35.00/kilo 100 M kilos 3,500.00

Eggs P72.00/dozen 1 M dozens 72.00

Chicken P150.00/kilo 10M kilos 1,500.00

Doctor’s Service P400.00/hr 200,000 hours 80.00

GDP at Constant 5,152.00.00

Prices for 2021
Philippine National Income Accounts
For illustration of the Philippine National Income Accounts, please access the link:
https://psa.gov.ph/tags/national-accounts
Real Economic Growth Rate
Economic growth rate is always used to gage the economy’s well-being. To get an
accurate picture on how productive a nation during the year, real economic growth is
determined.
Real GDP per Capita is computed to incorporate the effect of changes in population to
nation’s output. The formula is
Real GDP per Capita (RGpC) = GNPcn/Population
To get Real Economic Growth Rate (r)
r = RGpC for current year – RGpC for previous year x 100
RGpC for previous period
Shortcomings of GDP as a Measure of
the Economy’s Performance
An increasing GDP does not necessarily indicate a better-off economy because of the
following:
1. It does not reveal the composition of output.
2. It does not reveal the distribution of output.
3. It does not accurately reveal improvement of product quality.
4. It does not account for underground activities.
5. It does not account for diseconomies of production and consumption
Other Measures Used
Other measures are developed to indicate the condition of a country. The globally
acceptable measure is the Human Development Index (HDI). The HDI is a summary
measure of average achievement in key dimensions of human development: a long
and healthy life, being knowledgeable and have a decent standard of living.
(http://hdr.undp.org/en/content/human-development-index-hdi
Nation’s Output and Employment
Nation’s output and level of employment are directly related. The more production
there will be, the higher the level of employment. Recession is always accompanied
by high rates of unemployment.
Professor Arthur Okun of Yale University postulated the Okun’s Law in 1960. The
law states that a country’s GDP must grow at about 4% rate for one year to achieve a
1% reduction in the rate of unemployment. Or it tells us “how much of a country’s
GDP may be lost when the unemployment rate is above its natural rate.”
Important Technical Terms
(Source:https://psa.gov.ph/article/technical-notes-labor-force-survey2012-08-16-1659)

Important terms as defined by PSA are follows:

a. Labor Force - refers to the population 15 years old and over who contribute to the
production of goods and services in the country. It comprises the employed and
unemployed.
b. Employed - consists of persons in the labor force who are reported either as at work or
with a job or business although not at work. Persons at work are those who did some
work, even for an hour during the reference period.
c. Unemployed - consists of persons in the labor force who are reported as (1) without
work; and (2) currently available for work; and (3) seeking work or not seeking work
because of the belief that no work is available, or awaiting results of previous job
application, or because of temporary illness or disability, bad weather or waiting for rehire
or job recall.
Important Technical Terms
(Source:https://psa.gov.ph/article/technical-notes-labor-force-survey2012-08-16-1659)

d. Underemployed - refers to the employed persons who express the desire to

have additional hours of work in their present job or an additional job, or have a
new job with longer working hours.
e. Labor Force Participation Rate (LFPR) - proportion of total labor force to the
total household population 15 years and over.
f. Employment Rate - proportion of employed persons to the total labor force.
g. Unemployment Rate - proportion of unemployed persons to the total labor
force.
h. Underemployment Rate - proportion of underemployed persons to total
employed persons.
Causes of Unemployment
The cause of unemployment are:
1. Natural Unemployment – This kind of unemployment is experienced by a growing economy. It is
normal for workers to move from one job to another and reported to be unemployed awaiting for
a job application and or may be out of work for health reasons. This is also called frictional
unemployment. Another case of natural unemployment are those workers who were not able to
get a job because their skills do not jibe with the demands of the industry. These are structurally
unemployed workers.
2. Cyclical Unemployment – This happens when there is a downswing in the business
activities. Some workers are laid-off or retrenched by companies adversely affected
by the downtrend. This may last long depending upon the ability of the economy to
recover. The government takes deliberate actions to remedy the situation.
The Nation’s Output and the Price Level
The GDP Deflator
One way to trace changes in price level is through the GDP deflator.
This compares nominal to real GDP.
GDP Deflator = Nominal GDP x 100
Real GDP

It uses the aggregate output rather than a fixed market basket of goods and services
as observed in Consumer Price Index (CPI)
The Nation’s Output and the Price Level
The Consumer Price Index
(Source: https://psa.gov.ph/sites/default/files/Primer%20on%20Consumer%20Price%20Index2_1_0.pdf)

The Consumer Price Index (CPI) is an indicator of the change in the average retail prices of a fixed basket of goods and services
commonly purchased by households relative to a base year. (PSA)
The uses of Consumer Price Index (CPI) are as follows:
a. To calculate inflation rate and purchasing power of the peso.
b. It is a major statistical series for economic analysis and as a monitoring indicator
of government economic policy.
c. It is also used to adjust other economic series for price changes.
d. It is also used as basis to adjust wages in labor management contracts as well as
pensions and retirement benefits.
The Philippine Statistics Authority (PSA) is mandated to monitor prices of goods and services typical consumers buy and prepares
corresponding reports at least monthly.
The Nation’s Output and the Price Level
The Consumer Price Index
(Source: https://corporatefinanceinstitute.com/resources/knowledge/economics/laspeyres-price-index/)
The Laspeyres Price Index is a consumer price index used to measure the
change in the prices of a basket of goods and services relative to a
specified base period weighting. Developed by German economist
Etienne Laspeyres, the Laspeyres Price Index is also called the base year
quantity weighted method.
The base period is a year. This is the reference in which the average retail
prices of a fixed market basket of goods and services are compared.
Normally, the chosen base year is when the Family Income and
Expenditure Survey (FIES) was conducted.
Calculating Laspeyres Price Index
The Nation’s Output and the Price Level
where:

Pi,0 is the price of the individual item at the base period

 Pi,t is the price of the individual item at the observation
period.
Qi,0 is the quantity of the individual item at the base period.
 
The Nation’s Output and the Price
Level
Item Po Qo Pt PoQo PtQo
A P35.00 100 P50.00 P3,500.00 P5,000.00
B P150.00 10 P200.00 P1,500.00 P2,500.00
C P72.00 10 P 96.00 P720.00 P 960.00
D P400.00 5 P 500.00 P2,000.00 P2,500.00
E P50.00 50 P 75.00 P 2,500.00 P3,750.00
F P20.00 200 P 30.00 P4,000.00 P6,000.00
Total P14, 220 P20,710.00
The Nation’s Output and the Price Level

Calculating Laspeyres Price Index

Substituting the values ,

LPI = (20,710 x 100)/14,220

= 145.6399 %
This indicates that the price level has gone up by 45.64% from 2012 (the base year)
to 2021 (the observation year)
 The Nation’s Output and the Price
Level

Inflation Rate
The inflation rate is the annual rate of change or the year-on-year change of the CPI
expressed in percent.

Inflation Rate (Ir) = CPI in current year – CPI in previous year x 100
CPI in the previous year
The Nation’s Output and the Price Level

The purchasing Power of the Peso

The purchasing power of the peso shows how much the peso in the base
period is worth in the current period. It is computed as the reciprocal of
the CPI for the period under review multiplied by 100.

Purchasing Power of the Peso (PPP) = 1 x 100

CPI
Relationship of Inflation and
Unemployment
•It is very likely that less developed economies
experience both unemployment and inflation or the
condition of stagflation.
•The Phillips curve relates the rate of inflation with the
rate of unemployment. The Phillips curve argues that
unemployment and inflation are inversely related: as
levels of unemployment decrease, inflation increases.
The Phillips Curve
(Source: https://courses.lumenlearning.com/boundless-economics/chapter/the-relationship-between-inflation-and-unemployment/)
Aggregate Demand and the Phillips Curve
•Aggregate demand and the Phillips curve share similar components. The
rate of unemployment and rate of inflation found in the Phillips curve
correspond to the real GDP and price level of aggregate demand.
•Changes in aggregate demand translate as movements along the Phillips
curve.
•If there is an increase in aggregate demand, such as what is experienced
during demand-pull inflation, there will be an upward movement along the
Phillips curve. As aggregate demand increases, real GDP and price level
increase, which lowers the unemployment rate and increases inflation
Chapter Assessment