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Shar Econtwo DLSU-Manila

Microeconomics

More concerned with individuals, household, firms and industry. More concerned with the economy as a whole. Focuses on economic behavior and policies that affect consumption and investment.

Macroeconomics

GOAL OF MACROECONOMICS
1. Sustainable Economic Growth = GDP+GNP o GDP (Gross Domestic Product) Made in the Philippines Value of final good and services produced in the country within the period GNP (Gross National Product) Made by Filipinos

GDP + NFIA (Net factor income from abroad) o Net domestic product = GDP Depreciation o National Income = NDP Indirect tax **For developing economies 5-7% yearly increase is needed** 2. Price Stability o Decrease in prices o Single Digit o Inflation Rate = ((CPIc-CPIp)/CPIp) x 100
CPI = Consumer Price Index (basket of goods) CPIc = Consumer Price Index Current CPIp = Consumer Price Index Past Describing inflation of 2008 Increasing Prices of goods in the economy is increasing Decrease in purchase power Example of how prices of goods increase P10,000 deposited in bank; bank lends out money to company; company buys raw materials; when company sells product price should include 10,000 + Interest + Profit Inflation Increase in Prices Deflation

o o

Decrease in Prices **When demand decreases, prices decreases, and unemployment increases.** o Recession two consecutive (-) growth in GNP (-) growth Increase in Unemployment Decrease in Prices Depression Prolonged Recession

Shar Econtwo DLSU-Manila o Headline Basket of Goods (all products) *is expected to be higher o Core - removed commodities (volatile)
EFFECTS OF GOODS TO INFLATION
Food, Beverage, Tobacco 50.031% Clothing 3.004% Housing and Repairs 16.796% Fuel, Light, Water 6.950% Services 15.889% Misc. 00.330% 3. Full Employment o All those who wants a job gets a job (at least 95%) Labor Force (15-65yrs old) Labor Force = Population non labor force members There cannot be 100% because there are:

Seasonal and Frictional Employment (Transitional) Frictional Employment those who are searching for jobs in between jobs

CAUSES OF UNEMPLOYMENT 1. Low Educational Background 2. Over Population 3. Job opportunities in other countries 4. Factors of Production Q = F(Labor , Capital) a. Labor is expensive o High Minimum Wage b. Capital is cheaper o No holiday pays and benefits o No Tariff (Duty-Free Importation) o Over-Valued Exchange Rate 5. Lack of job opportunities 6. Presence of foreign nationals

7. Inefficient Agriculture
POLICIES TO ALLEVIATE UNEMPLOYMENT 1. Promote cottage, small and medium scale industries labor intensive enterprises 2. Government to provide seed capital, technical extension and marketing services necessary for the promotion, expansion and growth. 3. Focus on investment program that will shift to small and medium scale and less foreign exchange dependent 4. Provision of initial support to small scale industry employment program 5. Labor intensive methods that will be used in the production of projects 6. Improve resources allocation efficiency and reliance on foreign borrowing 7. Improving training, rational allocation and efficient utilization of man power

Shar Econtwo DLSU-Manila


FORMS OF UNDER UTILIZATION 1. Open Unemployment

a. Voluntary does not want to work b. Involuntary has no choice wants to work but no job
2. Under Employment a. People working less than 8hrs 3. Visibly Active But Under Utilized a. Disguised Unemployment b. Hidden employment c. Over-qualified cannot find a job d. Premature Retirement 4. Impaired

INSTUMENTS IN MACROECONOMICS
1. FISCAL POLICY o Reduced by crowding out; increased government spending increases interest rates, reducing investment and partially offsetting the initial expansion in aggregate demand. o Government Expenditures Budget from taxes How the government gets budget?

Executive (initiative) > Legislative (approves) > Executive (implements) o National budget 2005/2006 P 946B 2007 P 1.026T 2008 P 1.227T 2009 P 1.4T ALLOCATION OF NATIONAL BUDGET

1. Debt Servicing

32%

2. Education 18% 3. National Defense 4. DPWH Pork Barrel > CDF > PDAF ** 3. and 4. are inter changeable depending on the need.** TAXES o Direct tax income tax o Indirect tax (sin tax) VAT (10%) > goods only E-VAT > goods and services R-VAT (12%) goods and services 2. MONETARY POLICY o Printing of money Central Bank

Shar Econtwo DLSU-Manila


1949-1992 Controlled by the President Bangko Sentral ng Pilipinas 1993-present

controlled by the monetary board o Has a Governor o 7 members o 2 Govt officials o 5 from private sectors Fixed term of 6years regardless of changing of President

TOOLS:
1. Primary Tools o Open Market Operation (OMO) for the federal reserve Sells Securities to increase money stocks Buys Securities to decrease money stock KINDS OF GOVT SECURITIES Treasury Bills 30-365 days Bonds 5 years Notes 11 years **RISK FREE compared to banks with risk** 2. Secondary Tools o Rediscount Rate Private banks borrow from Bangko Sentral ng Pilipinas Increase in money supply decreases interest rates Reserve Requirement Special Deposit Account

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Bank deposits to BSP Minimum of 2 weeks maximum of 6months ** BSP 7%> BANK 6%> DEPOSITOR Printing money (inflamatory) Moral Suasion (least effective) 3. Exchange Rate Policy o Local Currency VS Foreign Currency

National Income Accounting


Income = GDP GDP > VALUE ADDED > Intermediate Goods v.s. Final Good 3 APPROACHES Final Expenditure = GDP ** GDP = Y = C + I + G + (X-M) 1. Consumption (C) Durable more than 1 year life Non-Durable less than one year life o Clothes are classified here

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2. Investment (I) Short-term Long-Term 3. Government Expenditures (G) Public Investment Public Service 4. Trade (T) Import Export Income Approach = GDP o Sources of Income (add everything) Sole Proprietorship + Partnership + Corporations Value Added/ Industrial Origin = GDP Agriculture + Manufacturing + Services = GDP

SECTOR ECONOMIES
1 Sector economy y = C (at equilibrium) Income Consumption 0 150 200 300 450 450 600 600 800 750 1000 900 ** y-y1=(y2-y1/x2-x1)(x-x1) ** Sample C = 150 + 0.75y C = 600 2 Sector economy y=C+I ** Sample I = 300 Y = 150 + 0.75y + 300 Ye = 1800 3 Sector economy Y=C+I+G G= 200 Y= 150+0.75+300+200 0.25y= 650 Ye=2600 3 sector economy with tax Y=C+I+G C= 150 = 0.75YD (YD disposable income) T= 2 + 0.099y

Shar Econtwo DLSU-Manila


y=150+0.75(y-T)+300+200 y=150+0.75(y-2 + 0.099y )+300+200 y=150+0.75y-1.5-0.7425y+300+200 0.32425y=648.5 ye=2000 4 Sector economy Y=C+I+G+(X-M) y=150+0.75(y-2 + 0.099y )+300+200+(135-3.5-0.00075) ye=2400

ECONOMIC STANDING
Trade Standing of the country X=135 M= 3.5 + 0.00075y M= 3.5 + 0.00075(2400) M= 5.3 ** X>M => Surplus ** X<M => Deficit ** X=M =>Balance Budget Standing G=300 T=2+0.99y T=2+0.99(2400) T=239.6 ** G>T => Deficit ** G<T => Surplus ** G=T =>Balance Income Level that will generate Balanced Trade/Budget Trade Balance X=M 135= 3.5 + 0.00075y Y=175333.33 Budget Balance G=T 200=2+0.99y Y=2000 Regular 150 + 0.75yd 300 200 2+0.099y 135 3.5+0.00075y Multiplier EQ Co + C1 Io Go To + T1 Xo Mo+M1

C I G T X M 0 when the is no y 1 if there is a y

For government to borrow money from IMF (international monetary fund)

Shar Econtwo DLSU-Manila


IMF RECOMMENDATIONS: 1. Fiscal Discipline a. Lower government expenses i. Streamlining of government functions ii. Cost-cutting (Utilities) iii. Cost-cutting (Travels) iv. National budget be maximized less expense but mor benefit 2. Tax Reform (increase taxes) a. New tax system i. Old: 3, 5, 7, .. 35% ii. New: 5, 10, 15, 32% iii. R-VAT 12% iv. Minimum wage (tax exemption) 3. Privatization and Deregulation a. Privatization - Selling of government properties to people i. Reduce/Remove government control subsidies 1. Napocor b. Deregulation Remove Government control pricing i. Sample: OIL 1. Tariff Differention a. being unfair like refined oils tariff 7% and unrefined is 3% it does not give chance to those who want to join in the competition

2. Predatory Pricing destroyer pricing


4. (firms sell at very low price to elimiate other firms) 3. 30 day Inventory requirement Trade Liberalization a. Remove government Restrictions (Tariff) i. Sample: Luxury Vehicles a. from 200% to 150% tax 2. WTO says that 2020 should be 0-5% tariff 3. WTO says that 2032 should be 0% tarriff Financial Liberalization a. Let more banks foreign or local open because 1997 only 10 foreign banks were allowed this was not only limited b. IMF: Should be fully Liberated (2002) Liberal Foreign Investment a. Old law only 40% of investment by foreigners are allowed b. IMF: should take the limit out and allow 100%, because this discourages and stops investments from coming in. except for the negative list this was enacted Prudent Policy on money Supply a. Money supply increases 2-3% only

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Investment

Shar Econtwo DLSU-Manila


we have to know the present value PV = FV(1+i)^-n PV = FV/(1+i)^n Bonds 5yrs.. need more than 1 million Capital Gain/Loss Interest Gain/Loss (dividends)

EXAMPLE 1) Suppose a bond pays 8% interest per year for 5 yrs on the 5th year the
government pays 1000 plus interest. How much is the price of the bond? PB = 80/(1.08) + 80/(1.08)^2 + 80/(1.08)^3+ 80/(1.08)^4+ 1080/ (1.08)^5 PB= 1000 2) Suppose the interest rate decreased to 6% how much is the price of the bond? PB = 80/(1.06) + 80/(1.06)^2 + 80/(1.06)^3+ 80/(1.06)^4+ 1080/ (1.06)^5 PB = 1084 capital gain ** Only the present value will change not he interest id the value of the bond changes after you bought it.** 3) Suppose the interest rate increased to 10% how much is the price of the bond? PB = 80/(1.1) + 80/(1.1)^2 + 80/(1.1)^3+ 80/(1.1)^4+ 1080/(1.1)^5 PB = 924.18 Capital Loss = 924 1000 = 75.82 Capital Loss interest = effective yield 75.82 80 = 4.18 Increase of interest hold on bonds Decrease of interest sell Money barter system

Uses and function of money


Medium of exchange

Store of value wealth


Standard unit of value Standard unit of deferred payment

Motives why people hold money


Transaction Motive

Shar Econtwo DLSU-Manila


Precautionary Motive Speculative Motive ** 1 and 2 are F(Y) ** 3 is F(i)

Money Market Equilibrium


Money demand = Money Supply Transactions (+) Precautionary (+) Speculative (-) F(Y) Lt = (trans + precau) F(i) Ls = (spec) Money Supply Composition M1 (narrow money) = Currency in Circulation (paper bills and coins) + Demand Deposit (checking account) Individual Check Managers Check

M2 (Broad Money) = M3 (Money Supply) =

M1 M2

+ +

Savings and Time Deposit Deposits Subsidies (government issued)

MD > MS deficit inflation MD < MS surplus deflation

EXAMPLE
Ms = 200 Lt = 0.25y Ls = 50-200i Y initial Level = 700 GDP = Y (C+I+G+X-M) Money Market Equilibrium MD = Lt + Ls = 0.25Y + 50 - 200i = 0.25(700) + 50 - 200i = 225 200i MD = MS 225 200i = 200 ie = 0.125 Plot MD and MS

Shar Econtwo DLSU-Manila

General Equilibrium Model Goods Market Y= C+I+G+X-M IS (investment saving) Money Market MD=MS LM C= 180 + 0.625 I= 300 10i G= 150 T= 50 = 0.2y MS = 360 Lt = 0.25 Ls = 100-20i IS EQ LM EQ GENERAL EQUILIBRIUM If G ^ to 300 Ye? If I decrease to 200 Ye?

Changes
Change in IS Fiscal Policy (C, I , G , X, M) Change in LM Monetary Policy

Shift
Right Expansionary Left Contractionary

Goals of the Economy


1) Internal Balance Income Level at Full Employment

a. Recession 2 consecutive (-) growth High unemployment Rate Low Inflation b. Economic Boom High Growth (7%) Low Unemployment Rate High Inflation

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Shar Econtwo DLSU-Manila


2) External Balance Condition where Balance of Payment (BOP = 0) Means all international transactions of the economy (foreign transactions currency) Inflow increase in BOP Outflow decrease in BOP a) Current Account = Merchandise (trade) + Non-merchandise (service) Inflow Export ; OFW Remittance Outflow Import ; Foreign Income b) Capital Account Inflow Foreign Investment; Foreign Loans Outflow Local Investing in foreign currency ; debt payment c) International Reserves BSP 1. Foreign Currency 2. Gold Reserves

Causes of Inflation
1. Demand Pull Inflation D>S AD>AS increase in price supply cannot just adjust to demand 2. Cost Push Inflation Supply side Increase in cost of production o Raw Materials Oil o Equiptment Foreign Exchange Rate (depreciation) o Legislative Minimum Wage Increase 1. Short Term Solution a. Contractionary Monetary Policy (decrease in MS) 2. Long Term Solution a. Iprove/Increase Productive Capacity

Solutions

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