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Lesson #1 Introduction to Macro Economics Macro Economics It is a branch of economics that studies the overall behaviour of an economy as a whole.

. The FOUR aggregate sectors Household sectors (all of us) Business sector (corporations, partnerships, SMEs) Government sector Foreign sector (countries link to the Macro economy)

FACT: Around 97% of the establishments are micro & medium size enterprises. (Philippines) Government increases average cost if the service render increases.

The Circular Flow of Income the interaction of the four aggregate sectors

Bond gives interest to the investors. Stockholders earns interest through profits. Three branches of Government. Legislature Judiciary Executive

Maximum Income Tax Rate 32% In Macro Economics always look in relative terms. 51 states in the USA Higher than 32% in New York State owned enterprises Business owned by the Government Conditional cash transfer the parents should strive to give (cash) education to their child.

Note: If 1Billion pesos are the profit of the corporation 32% will earn the government 320,000M

Fallacy of Composition the good for one may not be good for all. Philippines Largest importing rice country. 2/3 if electronic products are exported by the Philippines.

FACT: Top 5 Economies in the World US China Japan Germany France

Brazil Largest Inequality Income in the world. Spain 24% unemployment rate mostly fresh graduates Indonesia Lady Gaga banned Philippines 44 in Top 50/5th in Southeast Asia, $ 200 billion 2010 Nominal GDP Bill Gates - $ 50 billion net worth GDP = Total Income Average Income = Total Income/ Population

Lesson # 2 Macroeconomic Goals 1. High Economic Growth Short run period: smoothen the business cycle Long run period: maintain stable growth to improve standard of living. Better that there will be more economic expansion rather that contracting. Large number of fluctuations is a bad sign for the foreign investors. 2. Price Stability ( contrary to Price Instability) Inflation the rate of increase in prices, must be stable (2.9% Inflation rate from May 2011 May 2012) Zimbabwe 3,000,000% Inflation Rate 3. Employment Expand Job opportunities, minimize unemployment.

MACROECONOMIC POLICIES

1. Fiscal Policy ( Goals 1 & 3) Uses government spending and taxation Objective: To promote growth and employment 2. Monetary Policy ( Goal 2) Manages the money supply Objective: To ensure price stability as well as promote growth and employment

FACT: Central bank is independent form the national government. ( They must coordinate their work)

Types of Fiscal Policy 1. Expansionary Fiscal Policy Increases Government spending and/or lower taxes. Objectives: Promote growth and employment Trade off: Creates inflationary pressures 2. Contractionary Fiscal Policy Reduces government spending and/or raises taxes Objectives: Mitigate inflationary pressures; improve the fiscal position of the government Trade off: Slows down growth; worsens unemployment (Government Fiscal Position) (Each Fiscal Deficit more borrowing to the world bank) FACT: USA largest country to have a debt. Types of Fiscal Policy Expansionary Monetary Policy Increases more supply (to be made by BSP) Objective: Promote growth and employment Trade off: Creates inflationary pressures Contractionary Monetary Policy Reduces money supply (higher interest rate) Objective: Mitigate inflationary pressures Trade off: Slows down growth, worsens unemployment.

Lesson # 3

Origin of Macroeconomics (20th Century)

The Great Depression A prolonged economic recession that started in 1929 and ended in 1939. Started in the United States Over 1929-1933, the US central bank Federal Reserve reduced the money supply by 1/3 Massive bank failures due to bank runs US international trade fell sharply due to smooth- Hawley Tariff Act of 1930. US exports plunged by 67% between 1929 and 1933 while US imports also dropped on trade retaliation by US trading partners US unemployment rate reached 25% in 1933

Keynesian Economics Introduced by British economist John Maynard Keynes through his 1936 book The General Theory of Employment, Interest, and Money Rebuked the concept on Classical Economics that an economy has a self-correcting mechanism via price and wage flexibility allowing it to maintain full employment.

Lesson # 4 Aggregate Demand & Aggregate Supply Aggregate Demand: AD=C+I+G+NX Total demand for all goods and services produced in the economy. This Includes: Personal Consumption (C) - Consumption of durable and non-durable goods, consumption of services. - (durable goods, refrigerator, cellphone) - (non-durable goods, food clothes) - Philippines consumes more services Investment Spending (I) - Residential Investment, Inventories, Capital Investment. - De la Salle Business Sector Government Spending (G) Net Exports (NX): NX=X-M where: X-eXports of goods and services M-iMports of goods and services If X>M Net Exports X<M Net Imports

If the American demands Philippine mangos it is recorded in the Aggregate Demand of the Philippines. Lady Gaga Concert it is a import in service and import. In the latter they will just cancel. Aggregate Demand Curve The aggregate demand (AD) curve presents the negative relation between the overall price level and aggregate output (Income) The AD curve shifts to the right (left) given and expansionary(contractionary) fiscal policy or and expansionary(contractionary)

Aggregate Supply & Aggregate Supply Curve Aggregate supply is the total supply of all goods and services in the economy In the Short run period, the aggregate supply (AS) curve is an upward sloping curve showcasing a positive relation between overall price level and aggregate supply.

Shifts in AS Curve The AS curve shifts to the right given - Decrease in production costs - Good weather - Economic Growth Increase in factors of production labor, capital Technological improvement Public Policy Ex. Tax cuts to boost production The AS curve shifts to the left because of - Higher production costs - Public policy - Bad weather and natural disasters

Lesson # 5 Schools of Thought in Macroeconomics ** Different Schools of Thought in Macroeconomics I. II. III. IV. V. Classical Economics ( mid-1770s to mid-1930s) Keynesian Economics ( 1936-1970s) Monetarism (since 1950s) New Classical Economics (since 1970) New Keynesian Economics (since 1970s)

Classical Economics (Adam Smith, Alfred Marshall, David Ricardo, Karl Marx, Jean Baptiste Say) Popular over the 1776-1936 period. Adam Smith Wealth of Nations Alfred Marshall Marshallian Demand Curve, Individual demand curve David Ricardo Politician, Comparative Advantage Karl Marx Taxes Assumes the following; - Economic agents are completely rational - Prices and wages automatically adjust, such that both goods and labor markets clear. - TEMPORARY unemployment only from A to B - Supply creates its own demand ( Says Law)

Government enforces property rights and ensures market competition. Neutrality of Money, Changes in money supply does not affect the real economy (GDP, employment) as these will be offset by proportionate change in prices and wages

Keynesian Economics John Maynard Keynes (Main Proponent) James Tobin (Nobel Laureate in Economics. 1981) Argues that prices and wages are NOT flexible , but rigid and sticky The LONG RUN method doesnt have C Postulates that aggregate output and employment is determined by effective demand

Given persistent unemployment, government must act to raise effective demand by conducting expansionary macroeconomic policies and/or increasing transfer payments to serve as automatic stabilizer. Assumes money is not neutral Changes in money supply affects effective demand affecting aggregate ouput and employment. B to A thru government spending

Monetarism Chicago School Main proponent: Milton Freedman Argues that the labor market clears at a natural rate of unemployment the rate of unemployment when the economy is a full employment. Frictional unemployment Fresh Graduate Structural unemployment Money is not neutral in the short-run, but neutral in the long run. If workers and firm expect the central bank to increase money supply in the long run, then workers will bargain for higher wages and firms will raise prices ahead of time, fuelling inflation Calls for the central bank to increase money supply at a constant and predictable rate.

New Classical Economics Proponents: Robert Lucas, Edward Prescott & Finn Kydland, Thomas Sargent Assumes that economic agents are optimizers, consumers maximize utility and firm maximize profits-based on rational expectations RATIONAL EXPECTATIONS are expectations formed on the basis of all relevant information with economic agents understanding the economic relationships of the variables considered. Assumes market clearing for labor and good market Call for the central bank to adopt a constant money supply growth rule. Stagflation Low aggregate output/High Unemployment/High Inflation

New Keynesian Economics Joseph Stiglitz & George Akerlof & Edmund Phelps Argues that markets do not clear instantaneously due to sticky prices and wages An economy is not by demand and supply shocks and coupled with sticky prices and wages results in business cycle fluctuations. Calls for a independent central bank to conduct monetary policy during times of economic crisis Proposes that the government targets a smoothening of the business cycle through automatic stabilizer.

Lesson#6 Measuring National Output Gross Domestic Product (GDP) Market value of all Final goods and services produced in the economy. GDP only considers current or new output and NOT old output. Ex. Sale of Car in 2010 is not included in 2011 GDP as it is already part of 2010 GDP. GDP excludes output production by domestic factors of production based abroad. Goods sold by Jollibee LA branch in us are not included in Philippine GDP. GDP excluded financial transactions that do not lead to new production of goods and services. Deposit transactions, stock market, bonds, sale of stocks, and other financial assets in the Philippines is not part of Philippine GDP.

Measuring in computing GDP Value Added Approach - GDP (or Gross Value Added) = Gross Output Cost of Intermediate Goods.

NOTE: Cost of Intermediate Goods = Gross Output GDP(or GVA) Hypothetical Example of Gasoline production Stage of Production Sales 1. Oil Drilling $2.0 2. Refining $2.5 3. Shipping $2.8 4. Retail Sale $3.5 Total Value Added: Note $3.5 is the GDP Expenditure Approach - GDP = C+I+G+NX Value Added $2.0 $0.5 $0.3 $0.7 $3.5

Income Approach - Total income earned by factors of production of an economy. - GDP = Compensation of employees + Depreciation + (Indirect Taxes Subsidies) + Gross Operating Surplus + Gross Mixed Income - Gross Operating Surplus part of income earned form the use of capital in production, i.e. value added minus compensation of employees.

GROSS NATIONAL PRODUCT (GNP) & GROSS NATIOANL INCOME (GNI) Market Value of all final goods and serviced produced by and economys factors of production. - Ex. Remittances of OFWs, Nestle, Citibank, Manulife.

FACT: The profit of the Foreign companies in the Philippines will be subtracted to the GNP. GNP = GDP + (Receipts of Factors Income from ROW Payments of Factors Income to ROW) where: ROW is Rest of the Wold. Net Factor Income form/to ROW = Receipts of Factor Income from ROW - Payments of Factor Income to ROW Trade Deficit Import > Export Trade Surplus Import < Export GNP excludes output produced by foreign-owned factors of production.

Nominal vs. Real GDP Nominal GDP GDP measured in current prices. - In theory, Nominal GDP = PxQ - Where P is price and Q is Output Real GDP GDP measured in constant prices. - In theory, Real GDP = PQ/Q = Q In practice, Real GDP can be calculated by deflating nominal GDP with a price index - Real GDP = Nominal GDP/Price Index - With price index in decimal form - Index = is in points form - 100pts =1 - 110pts=1.1 - Price Index weighted average of all prices. Labor Force

Notes # 7

1. Employment someone of working age who has a job. - 15 years possible year to work. 2. Unemployed a person of working age who has no job and who is actively looking for work (Internationally accepted definition) 3. Underemployed- a person of working age who is employed but expresses the desire to work additional hours, or to have an additional work, or to have a new job with longer working hours.

Concepts & Measures in Employment Labor Force = Employed + Unemployed Labor Force Participation Rate (%) = (Labor Force/Working-age population X100) Working age population = Labor Force / Not in labor force Employment Rate (%) = (Employed/ Labor Force) X 100 Unemployment Rate (%) (Unemployed/Labor Force) X 100