Notes in Economic Development
SAS #2 Introduction to Economic Development
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ECONOMICS – the study of the choice we make because of scarcity.
MACROECONOMICS- studies the economy as a whole
MICROECONOMICS – the analysis of the behavior of individual decision-making units
The Circular Flow Model of Economic Activity
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Notes in Economic Development
SAS #3 Economic Growth Indicators and Economic Development
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Economic Growth – refers to an increase in real national income/national output (rise of income level & volume
of production) key issue: traditional quantitative
Economic Development – refers to the improvement in the quality of life and living standards (rise of income
level and improve human being) main issue: modern qualitative
GDP VS GNP
1. Gross Domestic Product (GDP) – measures the market value of all finished goods and services within a country’s
borders
MV = Price * Quantity
3 Methods of GDP
Calculation:
Actual Components Formula
1.) Expenditure Approach sum of the spending on
different final good and
services
Personal Consump. Expe
+Gov’t Consump. Expe.
+GDCF
+Exports
(-) Imports
+Statistical Discrepancy
Total GDP
xx
xx
xx
xx
(xx)
xx
2. Income Approach - sum of
the payments to the
different factors of
production
+Compe. Of Emp.
xx
+Net operating Surplus xx
+Depreciation
xx
+Indirect Taxes
xx
(-) Subsidies
(xx)
Total GDP
3. Value Added Approach sum of the value added of
each firm or economic
activity
+ Agriculture,
Fishery and Forestry
+Industry
+ Services
Total GDP
xx
xx
xx
Components Definition
a. Personal Consumption Expenditure - the
spending of households and non-profit
organizations on good and services.
b. Government Consumption Expenditure spending of the gov’t on the salaries of its
workforce and its day-to-day operations.
c. Gross Domestic Capital Formation investments in physical capital as well as
changes in inventory stocks.
d. Exports and Imports account for the fact that
the Philippines sells and buys goods and
services to and from other countries.
e. Statistical Discrepancy - reporting and
recording errors that arise in estimation process
a. Compensation of employees - wage
payments.
b. Net operating surplus -profits, rents and
interest.
c. Depreciation - adjustment item representing
the consumption or wear and tear of existing
capital. Treated as a business expense.
d. Indirect taxes less subsidies account for
items like taxes on the use and purchase of
goods and services and grants from gov’t
subsidies.
a. Agriculture, Fishery and Forestry sector - the
value added of activities associated with the
production of agricultural crops, ornamental
plants, livestock, fishing, harvesting of marine
products, aquaculture, logging, and the
harvesting of forestry products.
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Notes in Economic Development
b. Industry sector includes mining and
quarrying, manufacturing, construction, and
utilities.
c. Service sector includes activities related to
transportation, communication and storage,
wholesale and retail trade, real estate and
private and government services.
2. Gross National Product (GNP) – measures the market value of goods and services produced by all citizens of a
country—both domestically and abroad.
Formula: GNP = GDP + Net Property Income from abroad**
** Net Property Income from Abroad represents the difference between the earnings of Filipinos from activities
overseas and the earnings of foreigners in the Philippines.
*GDP Deflator- measures the cost of a given bundle of goods in one year relative to the cost of the same bundle of
goods in the same year.
Formula: GDP Deflator = (Nominal GDP / Real GDP) x 100
*GNP at current prices or nominal GNP is calculated using the prices that exist for the year it is computed. For example,
the nominal GNP for 2007 is computed using the prices of goods and services in 2007.
Formula: Nominal GDP = (Deflator x Real GDP) / 100
*Real GNP or GNP at constant prices overcomes the weakness of nominal GNP by removing the impacts of price
changes.
Formula: Real GDP = (Nominal GDP / GDP Deflator
SAS #4 Aggregate Expenditures and National Income
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Aggregate Expenditure- determines the total amount that firms and households plan to spend on goods and
services at each level of income
Equation:
AE = C + I + G + NX
Elements:
Consumption (C): The household consumption over a period of time.
Investment (I): The amount of expenditure towards the capital goods.
Government expenditure (G): The amount of spending by federal, state, and local gov’t.
Net exports (NX): Total exports minus the total imports
Note: An economy is at equilibrium when aggregate expenditure is equal to the aggregate supply (production) in the
economy:
AE
=
Y
AE = C + I
=
Y = C +S
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Notes in Economic Development
C+I =
I =
Legend:
C+S
S
AE = aggregate expenditure
Y = income or output
C = consumption
S = Savings
I = investment
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Marginal Propensity to Consume
MPC = change in consumption spending / change in income
= C2 – C1 / Y2 – Y1
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Marginal Propensity to Save
MPS = change in savings / change in income
MPC + MPS = 1
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Investment multiplier = change in equilibrium income / change in investment
=
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Consumption Function
Equation: C = C + mpc*Y
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Saving Function
Equation: S = -C +(1- mpc)*Y
SAS #5 Unemployment and Underemployment
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Unemployment - actively searching for employment but still unable to find work.
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Types of Unemployment;
1) Frictional Unemployment - voluntarily changing jobs within an economy because the work
environment (eg. Fresh graduates; relocating & reentering)
2) Cyclical Unemployment- Unemployment rises during recessionary periods and declines during
periods of economic growth.
3) Structural Unemployment – advances in technology – job sourcing
4) Institutional Unemployment - results from long-term or permanent institutional factors and
incentives in the economy.
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Underemployment is a measure of employment and labor utilization in the economy (capabilities are not
maximized)
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Notes in Economic Development
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Types of Underemployments
1) Visible Underemployment - an individual works fewer hours than is necessary for a fulltime job
in their chosen field. (part-timer)
2) Invisible Underemployment – full- time but not exercised their chosen career
SAS #7 Concepts of Inflation
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Inflation - an increase in price and a decrease in the purchasing power of a nation’s currency.
Types of Inflation:
(1) Demand-Pull inflation – When demand for goods/services exceed production capacity/supply (higher
demand and lower supply)
(2) Cost-Push inflation – when production costs increase prices
(3) Built-In inflation – When price rise, wage rise too, in order to maintain living costs
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Consumer Price Index – measures inflation
Step 1: Compute the nominal spending: Price x Quantity
Step 2: Choose the base Year
Step 3: Multiply the prices of a given year by the BASE YEAR quantities and add them up.
Step 4:
CPI = Price of BASE YEAR consumption basket in any given year x 100
Price of BASE YEAR consumption basket in the BASE year
*Inflation Rate = [(Ending index – Beginning index) / Beginning Index] X 100
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Deflation - A general decline in prices for goods and services, typically associated with a contraction in the
supply of money and credit in the economy
SAS #8 Headline Inflation and Core Inflation including Hyperinflationary Economy
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Headline Inflation - refers to the rate of change in the CPI, a measure of the average price of a standard basket
of goods and services consumed by a typical family.
Core inflation measures the change in average consumer prices after excluding from the CPI certain items with
volatile price movements.
o exclusion method, which computes core inflation by taking out the prices of a fixed, pre‐ specified set of
items from the CPI basket
Specific Items EXCLUDED in the computation of Core Inflation
The items in the CPI that were excluded in the definition of core inflation components and their corresponding CPI
weights (2012=100) are as follows:
Rice (9.6 percent)
Corn (0.6 percent)
Meat, fresh, chilled or frozen (4.8 percent)
Petroleum and fuels for personal (2.0 percent)
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Fish, fresh, chilled or frozen (4.3 percent)
Vegetables, cultivated for their fruit (0.9 percent)
Vegetables, cultivated for their roots (0.6 percent)
statistically‐based methods that remove extreme or outlier price changes (both positive and negative)
from the overall inflation rate.
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Notes in Economic Development
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econometric techniques to estimate core inflation by estimating or calculating a statistical relationship
between inflation and other relevant economic variables
Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.
SAS #9 Monetary Policy (Expansionary and Contractionary Policy)
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Monetary policy - refers to the actions undertaken by a nation's central bank to control money supply to achieve
macroeconomic goals that promote sustainable economic growth
Loose Money Policy
Contractionary Policy
Other Terms
Loose monetary policy
Tight monetary policy
Purpose
Helps speed up the economy or
Helps slow down the economy or
increase economic growth
slow economic growth
Objective
Designed to counteract the effect
Designed to counteract the effect
of recession
of inflation
Differentiation
1. Borrowing is easy (fall in
1. Borrowing is difficult (higher
nominal and real interest rates)
interest rates on loans and savings)
2. Consumer buy more
2. Consumer buy less
3. Business expand
3. Businesses postpone expansion
4.More people are employed
4. Unemployment increases
5. Depreciation in the exchange
5. Appreciation in the exchange
rate
rate
1. Discount Rate
Lower discount rate
Higher discount rate
2. Reserve Requirements
Low reserve requirements
High reserve requirements
3. Open Market Operations
Buying of securities
Selling of securities
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