Principles of Economics with Agrarian Reform and Taxation

Chapter IV: Production

Goods produced by man are called economic goods. There is a cost in the
production of economic goods. However, there are goods which are produced without
costs. These are produced by nature; such goods are called free goods.

Production is the creation of goods and services to satisfy human wants. The
factors of production are called the inputs of production, and the goods and services that
have been created by the inputs are called outputs of production.

Classification of Factors of Production

1). Fixed Factor – (Fixed Input) remains constant regardless of the volume of
production. (Land and Capital)
2). Variable Factor – (Variable Input) it changes in accordance with the volume of
production.

Theory of Production – the process of transforming both fixed and variable inputs
into finished goods and services.

4. 1. Factors of Production or Economic Resources – the things which are needed to

carry on the production of goods and services. These are the basic needs in
production.

1). Land –refers to all natural resources, which are given by and found in nature, and
are, therefore, not man made. This is also an original gift of nature that includes the
soil, rivers, lakes, oceans, mountains, forests, mineral resources, and climate. People
who own land and offer it to others for their use, earn an income called rent. The less
the supply of land available for man's use the higher is the rent that has to be paid for
it.
2). Labor – is an exertion of physical and mental efforts of individuals. Refers to any
form of human effort exerted in the production of goods and services. Labor covers a
wide range of skills, abilities, and characteristics. It includes factory workers who are
engaged in manual work. This applies not only workers, farmers, or laborers but also
to professionals like accountants, economist, or scientists.
3). Capital – refers to man made goods used in the production of goods and services.
This is not only include money, it also includes buildings, machinery, raw materials
and other physical necessities for use in production. Is a finished product which is
used to produce other goods. (Machines as far as economics are concerned.
Something that can be use to produce goods not as exchange between money and the
corresponding units of goods the owners earn income called interest.
4). Entrepreneur – is the organizer and coordinator of the land, labor and capital.
The one who command price. This price is the income earned by entrepreneur and is
called profit. The amount that is left behind after allocations to the other economic
resources have been made.

4. 2. Cost of Production

The Costs of Production is one of the determinants of supply. Producers have

greater ability and willingness to supply product which has a lower cost of production.
Cost does not only affect the producers but also the buyers. Since an increase in the cost
of production is also an increase in the prices of the products, the tendency of buyer is to
reduce their purchases. For this reason, producers have been always in the search of ways
and means of cost-reduction techniques. Lower cost means lower price, Lower price
means more sales and more profits. Cost of production refers to the total payments by a
firm to the owners of the factors of production. These are other expenditure-side of a firm
in the process of creating goods and services. The income-side of a firm is called revenue.
The difference between cost and revenue is either profit or loss, depending on which one
is higher. “If Total revenue is greater than variable cost, operate; if total revenue is less
than variable cost, shut down. (More labor inputs and less capital inputs = labor intensive
technology, while more capital inputs and less labor inputs = capital intensive)

Economic costs:
 1). Total Cost – is the sum total cost of production. It is composed of wages, rents,
interests, and normal profits. This is also known as factor payments: wage for
labor, rent for land, interest for capital, and normal profit for the entrepreneur.
Fixed cost plus Variable cost. Normal Profit – it is an amount which is sufficient
to encourage an entrepreneur to remain in business. While Pure Profit – it is an
amount which is in excess of the cost of production.
2). Fixed Cost – is a kind of cost which remains constant regardless of the volume of
production. (machines and building)
3). Variable Cost – is a kind of cost which changes in proportion to volume of
production. (wages, raw materials, and soil products)
4). Average cost – this is also called unit cost. It is equivalent to total cost divided by
quantity.
5). Marginal cost – is the additional or extra cost brought about by producing one
additional unit. It is obtained by dividing change in total cost by change in
quantity.
6). Explicit cost – this is also called expenditure cost. These are payments to the
owners of the factors of production like wage, interests, electric bills and so forth.
7). Implicit cost – also known as non-expenditure cost. The factors of production
belong to the users.
8). Opportunity cost – is a foregone opportunity or alternative benefit. When one
makes a choice, there is always an alternative that has to be given up. A producer
who decides to produce shoes, gives up other jobs that could be produced with the
same resources. A student who buys a book with his limited allowance, gives up
the chance of eating out or watching a movie.

Short Run refers to a period of time which is too short to allow an enterprise to change
its plant capacity (fixed factor such as machines, size and or a firm), yet long enough to
allow a change in its variable resources.

Long Run refers to a period of time which is long enough to permit a firm or enterprise
to alter all its resources or inputs (constructing more buildings, installing more machines
and equipment, and then hiring more workers and applying more raw materials and other
inputs) (both fixed and variable factors).

Classification of Economies of Scale

1. External economies of scale – refers to those factors which are outside the
firm or enterprise, but they contribute to the efficiency of the latter in terms of
increased output and decreased unit cost of production. (Example: government
policies, electrification, transportation and communication facilities).
2. Internal economies of scale – these are the factors inside the firm or
enterprise which contribute to the efficiency of the latter. (Example: division
of labor, human resources development, managerial specialization, proper use
of machines and equipment, favorable management policies, effective
utilization of by-products, and modern techniques of production.

Micro economics VS Macro economics

Micro economics is the division of economics that studies the economy in parts. (price
system, economic models and other)

Macro economics is the division of economics that studies that deals with aggregate or
the totality of economics. It presents as picture of total: income, output, spending, and
employment. Study economics as a whole.

“One cannot study the whole without studying the parts”

Chapter V: Business Organization and Management

Business organizations constitute a major component of the whole economy. They
create investments, employments, productions and incomes. They make and supply goods
and services to the economy.
Major Forms of Business Organization

Single or sole proprietorship – it is a form of business organization which is owned by

one person.
Advantage:

1. It is easy to organize. Financial capital is small, and registration requirements

are not difficult to comply with.
2. The single proprietor is the boss. He makes the decisions, and enjoys
substantial freedom of action.
3. The owner acquires all the profits from his business. This gives him more
incentives to make his business grow.

Disadvantage:

1. In general, the financial resources of a single proprietorship are not

enough to transform the business into a large-scale enterprise. Banks are
reluctant to grant big loans considering its small assets and high mortality.
2. Benefits of specialization in business management are not present in
small-scale proprietorship. There is only one manager, and some cases the
owner is also the employee.
3. The owner has unlimited liability. This means the owner of the business
risks not only the assets of his small enterprise, but also his other personal
assets which are not part of his business.

Partnership – it is a form of business organization in which two or more persons agree to

own and operate a business. The partners agree to combine their resources. They also
share their profits and losses. (Silent partners contribute only the capital but don’t
participate in the management. Industrial partners – doesn’t contribute money to the
business organizations but he is responsible for its management) Under Articles 1767-
1867, Civil Code Defines By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. Two or more persons may also form a
partnership for the exercise of a profession.

Advantage:

1. It is also easy to organize.

2. Better management because of the presence of more participants in the
operations of the business.
3. Possibility of bigger resources than the single proprietorship exists.
Financial institutions may extend bigger loans to such business
organization considering the combined resources of the partners.

Disadvantage:

1. Conflicts or quarrels between or among the partners regarding the

management or policies of the business are likely to crop up.
2. It lacks stability. The death or withdrawal of one partner dissolves
the partnership. To continue its operation, a complete
reorganization is needed.
3. Subject to unlimited liability, except the limited partners. Such
partners’ liabilities are only confined to their share of capital
contribution in the form of cash or property.

Corporation – it is a legal entity, distinct and separate from the individuals who own it.
The Corporation Code states (B.P. Blg. 68. Sec 1-149)“Corporation is an artificial being
created by operation of the law, having the right of succession and the powers, attributes,
and properties expressed authorized by law or incident to its existence” only natural
persons are qualified to be incorporators. They must not be less than 5 but not more than
15, all of legal age, and a majority of whom are residents of the Philippines. Each
incorporator of a stock corporation must be an owner of at least one share of the capital
stock.

Advantage:

1. A member has a limited liability in case of bankruptcy.

2. It has the most effective means of raising money capital for its
operations, by selling stocks and bonds. (Stocks are certificates
of ownership while Bonds are certificate of indebtedness)
 3. It has a permanent existence. The life-span of a corporation is
50 years, and subject to renewal for another 50 years. The
death or withdrawal of some officers and members does not
affect the existence of the corporation.
4. It is capable of getting the most efficient management
considering its huge resources and large-scale operations.

Disadvantage:

1. It is not easy to organize a corporation. Aside from complying with capital

requirements, there are many paperworks involved in securing a charter. A charter
is a written document which contains the objectives and activities of the
corporation, among other things. It takes a longer time to secure the approval of
the Securities and Exchange Commission regarding the organization and
operation of a corporation.
2. Abuses of corporation officials are likely to emerge in situations where many
stockholders do not participate actively in the affairs of their corporation.
Examples of abuses of corporate officials are large salaries and fat allowances for
them.
3. Some corporations are engaged in questionable activities. For instance, they sell
worthless securities; they pollute the environment, or sell substandard goods. In
short, they do not comply with their social environment.
4. There is a very impersonal or formal relationship between officers and employees
of a corporation. In the case of single proprietorship and partnership, constant and
close contacts between owners and employees create a very personal and friendly
atmosphere. In a giant corporation the chairman is not possible to meet personally
all his employees. His very valuable time is devoted to planning or decision
making.

Cooperative – Presidential Decree No. 175 defines a cooperative as “only organizations

composed primarily of small producers and consumers who voluntarily join together to
form business enterprises which they themselves own, control and patronize” A small
producer is an individual who provides (or together with his family) the primary labor
requirements of his business enterprise, or one who earns at least fifty percent of his gross
income from his labor. The government in its effort to promote the organization of more
cooperatives throughout the country has extended several power and privileges (tax
exemptions) to cooperatives. Cooperatives have been very effective in improving the
social and economic conditions of the poor countries.

Similarities between a cooperative and corporation are:

1. Factors of production are privately owned and managed.

2. Both depend on business efficiency to survive in as competitive market.
3. Their activities and operations are both regulated and supervised by the
government.
4. Both enjoy a reasonable degree of economic freedoms.

Differences between a cooperative and a corporation are:

1. A cooperative is for service while a corporation is for profit.

2. Membership in a cooperative is open and voluntary while in a corporation
membership is only for wealthy relatives and friends.
3. Government in a cooperative is democratic. It is one man one vote and no proxy
voting. In the case of a corporation, it is one share one vote, and more shares more
votes. It is the rule of the minority. (richer member)
4. Savings or net profit are refunded to the members of a cooperative on the basis of
their individual patronage while in a corporation, profit are distributed to the
stockholders on the basis of number of their shares.

Business management provides the data and the tools for decision making. This is also
involves proper allocation and use of the resources of the organization. This management
has three social responsibilities: to make good profits for the stockholders; to give fair
wages to its workers; and to satisfy its customers. But its social responsibility to society is
the most important.
The essence of social responsibility is when a man thinks of the whole system, and begins
to develop societal values into his actions. Business has a social responsibility because it
is part of society; it has resources for solving social problems; and in the long run,
business benefits from a peaceful and prosperous society.

Foreign aid, in most cases, is not money. It is in the form of goods and services. The
reasons for foreign aids are: national interest, humanitarian, moral and ethical
considerations and maintenance of viable global system. It has been noted, however, that
foreign aid benefits more the donor country than the beneficiary.

The best way to help the poor is help them how to help themselves.

Chapter VI: Economic Growth and Business Cycles: Unemployment and Inflation

Economic Growth – simply refers to the goods and services produced by economic
development. These are the road, buildings, cars, houses, hospitals, schools, food and so
forth. The reasons for slow economic growth are not only lack of funds, and primitive
technology but also the results of unfavorable attitudes, values and institutions pervading
in the less developed countries. This is also the product of economic development. The
product of economic development measured through the GNP. These are the new jobs
and product created in a given year, usually one year. The efficiency of economic
development is determined by the number of goods and services it can produce in one
year.

Economic Development – is a progressive process of improving human conditions, such

as the reduction or elimination of poverty, unemployment, illiteracy, inequality, disease
and exploitation. It involves the interaction between economic and non economic factors.
The economic factors are capital, technology, and market while non economic factors are
government, geography, religion, education, population, social structure, attitudes and
values. Both factors are the determinants of economic development. However, the non
economic factors have greater influence on economic development.

Stages of Economic Growth

One theory in determining the stages of economic growth is based on exchange systems.
That is from barter economy to money economy, and finally to a credit economy.

Stage 1: Agriculture is the main source of employment and income.

Stage 2: Manufacturing industry becomes the major economic activity as a country
develops.
Stage 3: Service industries grow to be the dominant feature of the economy as a country
further develops.
Classification of countries is measured by its annual GNP (Gross National Income) by
IMF. If the GNP (Gross National Income) falls within the bracket of that of the US whose
per capita income is more than 20,000 dollars, then it is classified as highly developed.
The poorest countries whose average per capital income is more or less 100 dollars are
classified as less developed (or developing) countries.

A). highly developed countries

US, Japan, France, Denmark, Australia, Russia, Sweden, Germany, Canada and Israel

B). Intermediate countries

Argentina, Cuba, Libya, Spain, South Africa, Austria, Saudi Arabia, Singapore, Poland
and Venezuela

C). Less developed countries

Kenya, Egypt, Panama, Jamaica, El Salvador, Honduras, Peru, Pakistan, Philippines and
Vietnam

How we Classify countries:

For operational and analytical purposes, the World Bank’s main criterion for classifying
economies is gross national income (GNI) per capita. In previous editions of our
publications, this term was referred to as gross national product, or GNP. (Learn more
about this change in terminology.) Based on its GNI per capita, every economy is
classified as low income, middle income (subdivided into lower middle and upper
middle), or high income. Other analytical groups based on geographic regions are also
used.
A short history

The Bank's analytical income categories (low, middle, high income) are based on the
Bank's operational lending categories (civil works preferences, IDA eligibility, etc.).
Learn about the history of operational guidelines.
Group definitions

These tables classify all World Bank member countries (187), and all other economies
with populations of more than 30,000 (213 total).
Geographic region: Classifications and data reported for geographic regions are for low-
income and middle-income economies only. Low-income and middle-income economies
are sometimes referred to as developing economies. The use of the term is convenient; it
is not intended to imply that all economies in the group are experiencing similar
development or that other economies have reached a preferred or final stage of
development. Classification by income does not necessarily reflect development status.
Income group: Economies are divided according to 2009 GNI per capita, calculated
using the World Bank Atlas method. The groups are: low income, $995 or less; lower
middle income, $996 - $3,945; upper middle income, $3,946 - $12,195; and high income,
$12,196 or more.
Lending category: IDA countries are those that had a per capita income in 2009 of less
than $1,165 and lack the financial ability to borrow from IBRD. IDA loans are deeply
con cessional—interest-free loans and grants for programs aimed at boosting economic
growth and improving living conditions. IBRD loans are non cessional. Blend countries
are eligible for IDA loans because of their low per capita incomes but are also eligible for
IBRD loans because they are financially creditworthy.
Notes: Income classifications are set each year on July 1. These official analytical
classifications are fixed during the World Bank's fiscal year (ending on June 30), thus
countries remain in the categories in which they are classified irrespective of any
revisions to their per capita income data. Taiwan, China, is also included in high income.

There are three lists of countries of the world sorted by their gross domestic product
(GDP) (the value of all final goods and services produced within a nation in a given
year). The GDP dollar estimates given on this page are derived from purchasing power
parity (PPP) calculations.

Using a PPP basis is arguably more useful when comparing generalized differences
in living standards on the whole between nations because PPP takes into account the
relative cost of living and the inflation rates of the countries, rather than using just
exchange rates which may distort the real differences in income. Economies do self-
adjust to currency changes over time, and technology intensive and luxury goods, raw
materials and energy prices are mostly unaffected by difference in currency (the latter
more by subsidies), however this is taken into account by the price comparison surveys,
such as the International Comparison Program, which are used as the basis for PPP
calculations. These surveys include both tradable and non-tradable goods in an attempt to
estimate a representative basket of all goods.

Several economies which are not considered to be countries (world, EU, and some
dependent territories) are included in the list because they appear in the sources. These
economies are not ranked in the charts here, but are listed in sequence by GDP for
comparison.
The first table includes data for the year 2010 for 183 of the current 183 International
Monetary Fund members and the Republic of China (Taiwan), as well as for the
following unranked entities: the European Union, China's Hong Kong Special
Administrative Region, and the world. Data are in millions of international dollars and
were calculated by the International Monetary Fund. Figures were published in October
2010.

The second table includes data for the year 2009 for 178 of the 192 current United
Nations member states, the two Chinese Special Administrative Regions (Hong Kong and
Macau), and for the unranked entities of the world and the Eurozone. Data are in millions
of international dollars (rounded to the nearest 100 million) and were compiled by the
World Bank. Figures were published in April 2010.

The third table is a tabulation of the CIA World Factbook GDP PPP data update of 2010.
The data for GDP at purchasing power parity (PPP) have also been re based using the
new International Comparison Program (ICP) price surveys and extrapolated to 2007.
Final figures are estimates in millions of international dollars.

Economic Growth Model – show the relationship of inputs and outputs. These are
expressed in the form of graphs, tables, mathematics or words. Economic models can be
simple or sophisticated. Most of these models are formulated by the Western countries,
especially United States. However, their effective applications depend on local conditions
such as climate, natural resources, manpower, culture, attitudes, and values.

1). Ricardian model – the key factor is land. This means agriculture is the first priority
in the attainment of economic growth. This model appears to be appropriate to poor
countries that depend mostly on the land for their livelihood. (By David Ricardo, a
prominent classical economist)

2). Harrod-Domar model – this was developed by Sir Harrod of England and Professor
Domar of America. The factor is physical capital like machines, buildings, equipment,
and so forth. The input is capital, and its efficiency is determined by the number of output
it can produce.

3). Kaldor model – according to Nicholas Kaldor, the author of the model, the key factor
is technology which is embodied in physical capital. Japan is the best example which has
achieved phenomenal economic growth through technology. It emphasizes research and
technology in its economic programs.

Characteristics of the Third World Countries

Third World countries refer to the less developed or developing countries. (The poorest
countries are located in Asia, Africa and Latin America).

Characteristics of the poor countries:

- Subsistence agricultural economy - Low per capita income - High birth rate
- High illiteracy - Poor health - Negative attitudes, values and institutions
- Inefficient public administration - High rate of unemployment

In the Philippines, the central planning agency of the government is the NEDA (National
Economic and Development Authority) (Cayetano W. Paderanga Jr. Director-General)
The principal aim of the Philippine developmental plan is to improve the quality of life of
the people. There is a big difference between a plan and reality. Government plans are
always excellent but when it comes to implementation, there are always major
shortcomings. One factor is lack of funds, and another is government inefficiency in the
implementation and management of government plans and programs.

The NEDA is the Philippines' social and economic development planning and policy
coordinating body.
The National Economic and Development Authority (NEDA), as mandated by the
Philippine Constitution, are the country’s independent economic development and
planning agency. It is headed by the President as chairman of the NEDA board, with the
Secretary of Socio-Economic Planning, concurrently NEDA Director-General, as vice-
chairman. Several Cabinet members, the Central Bank Governor, ARMM and ULAP are
likewise members of the NEDA Board.

ANG MISYONG NEDA

Bilang kasapi ng pamilya ng NEDA at ng bansang ito,

Kami ay nangangakong ipagtanggol ang Saligang Batas
At ang mga simulain ng bansang nabubuklod sa pagkakaisa.

Tungkulin namin ang bumalangkas ng mga planong pangkaunlaran

At tiyakin ang pagpapatupad ng mga ito
Ay makatutugon sa mga layunin ng pambansang kaunlaran.

Sa pagtupad ng tungkuling iniatang sa amin,

Kami ay gagabayan ng mga alituntunin
Ng pribadong pagkukusa at pagsasalita ng kapangyarihan
Upang makamit ang pakikipagtulungan ng higit na marami sa proseso ng pag-unlad.

Sa patnubay ng aming pananalig sa Diyos at ang inspiradong liderato

Ang aming magiging tatak bilang isang institusyon sa pagpapaunlad
Ay itatatag sa pagkakaisa
At sa katapatan, propesyonalismo, at kahusayan
Ng bawat isang tauhan.

Kami ay walang ikukubli sa aming gagawin

At patuloy na susunod
Sa pinakamataas na antas ng tuntunin
Ng paglilingkod sa bayan
Sapagkat ang amin ay isang mapagkalingang tanggapan
Laging handang tumulong sa pangangailangan ng bawat kasapi
Habang nagsisikap para sa pangkalahatang kagalingan.

The NEDA Mission

As members of the NEDA family and of this nation,
We are committed to uphold the Constitution
And the ideals of a nation united.

Ours is the task to formulate development plans

And ensure that plan implementation
Achieves the goals of national development.

In the performance of our mandate,

We shall be guided by the principles
Of private initiative and devolution of powers
That greater people participation in the
Development process may be achieved.

Guided by our faith in God and an inspired leadership,

Our hallmarks as a development institution
Shall be founded on unity and solidarity
And on the integrity, professionalism and
Excellence of each and every staff.

We shall be transparent in all our actions

And continue to adhere to the highest
Tenets of public ethics.
For ours is a caring agency responsive
To the needs of every member,
While working for the welfare of all.

Principles in Planning

1. Planning must realistic – it must be based only on existing available

resources.
 2. Planning must be based mostly on the felt need of the masses – this is the
concept of real economic development. The fruits of development will go to
people who really need those most.
3. Planning must come from below – the people know best their problems and
needs. Hence, they should be involved in the planning of the solutions of their
own problems and needs. Outsiders are not expected to be more interested in
the welfare of the people in a community than the people themselves.
4. Planning must be multisectoral – An economic problem is a product of
several interdependent factors. To solve therefore a problem, all the factors
affecting it should be dealt with. In reality, an economic problem is caused by
social, cultural and political limitations.
5. Planning mist be flexible – resources, needs and conditions change.
Planning, to be effective and relevant, must be tailored to such changes.
6. Planning must have the full support of top government officials –
government is responsible for the implementation of plans and programs. A
government planning agency should therefore be under the chairmanship of
the president of a country.
7. Planning must start with simple projects – this applies to less developed
countries. A simple project or program requires simple skills, simple
organization, simple technology, and less money and materials.

Business cycles – which are the fluctuations in the economy, are caused by internal and
external factors. Examples of external factors are political conditions and natural
calamities while internal factors are monetary policies. There are also non-cyclical causes
like school opening or Christmas. The biggest economic problems of business cycles are
unemployment and inflation. These problems affect almost all sectors of the economy
and society, particularly the low-income groups.

The Theories of Business Cycles explain the changing behavior of the economy.

1). Exogenous theories – forces outside the economic system create the business cycles.
Example of these forces is wars, political developments, natural disasters, or major
innovations. Clearly, governments which are not stable do not attract both local and
foreign invents.
2). Endogenous theories – forces within the economic system cause the fluctuations in
the economy. Examples are accelerators, multipliers, innovations, or monetary policies.
An increase demand results to a greater increase in investments. Aggregate demand is
composed of household consumption, business investment, and government expenditure.

Phases of the Cycle

1. Prosperity – this is the peak of the business cycle. There is full

employment, and the national output is a full capacity, or close to it. Price
level tends to increase due to increasing demand for goods and services.
Output can no longer be increased because productive resources are at full
capacity or fully employed.
2. Recession – both production and employment fall. The price level is likely
to decrease only if recession is of longer duration. The analysis of UP
economists on our economic crisis was different from that of the
government. The roots of the existing crisis this means a one-man rule
government, and those who controlled our economy were the closed
friends of the administration. It can be said therefore, that economic
opportunities were not equal, and the principle of business efficiency was
likely ignored. Everything depended on the right connections.
3. Depression – both production and employment are at their lowest levels.
This is the valley of the business cycle. Under such conditions, no private
businessman is willing to invest because demand for goods and services is
also at its lowest point.
4. Recovery – both production and employment rise towards full
employment. During this stage, price level may increase.

Types of Unemployment

1. Frictional unemployment – this is caused by interruptions in

production for technical reasons, or when workers are temporarily laid
 off due to renovation works. It is also a situation when workers left
their jobs and are looking for new ones.
2. Structural unemployment – a change in technology renders the skills
and talents of some workers obsolete. For example, the introduction of
modern machines in agriculture or the use of modern computers in
offices may reduce the number of workers.
3. Cyclical unemployment – this is caused by the fall of business
activities in the economy. When aggregate demand decreases,
production subsequently declines. Some workers have to be laid off.
4. Seasonal unemployment – during slack periods, many workers in
farming and construction are laid off.

Full Employment – when there is an available job for every person who is willing and
able to work, it is full employment. However, does not mean that unemployment is zero.
Several factors of unemployment during a period of full employment:

1. Some people are sick, and therefore unable to work.

2. Many employees left their jobs because of dissatisfaction.
3. In rich countries, the legal minimum wage is usually high.
Employers realize that such wage is more than the value of the
output of many young workers, thus, it is not profitable to hire
them.
4. Because of old age or other personal handicaps, some groups stand
at the borderline between employability and unemployability. As
long as their status has not been settled definitely, they are still
considered part of the labor force.

Theories of Employment – (1) the classical theory states that employment increases at
lower wages. Employers are willing to hire more workers at lower wages because it is
more profitable. (2) The Keynesian theory of employment (modern theory of
employment) states that employment is determined by aggregate or total demand for
goods and services. When people, together with business and government sectors,
purchase more goods and services, it is simply means there is a very good market. Such
situation induced more production. Decrease in general demand is mainly due to fall in
real income. Naturally, when people have less purchasing power due to inflation or low
wages, they can buy less number of goods. This is one of the reasons of our economic
recession in the Philippines. Business activity has declined because of the fall in demand.

Full Employment Policies: for increasing total demand for labor.

1. Shorter work week – a reduction of work week from 44 to 40

hours would increase the number of workers. In the industrial
countries, workers are paid by the hours. In industrial countries
they do not hire more workers because they are capable of
increasing their output despite reduction of work hours through
technological efficiency.
2. Postponement of technological developments – it is claimed
that the use of time and labor saving devices decreases the
number of workers (labor intensive industries (more on
application of labor or manpower) and capital intensive (more
on application of machines)
3. Public investment – the government should utilize its
resources to increase demand for goods and services. Create
massive public works.

Inflation – refers to the rising of general level of prices. When prices keep on increasing,
people are inclined to spend their money before it loses its value. Clearly, inflation
encourages more consumption and less saving to take places the natural demand for
goods and services. (An Increase in the overall level of prices in the economy) (When a
government creates large quantities of the nation’s money, the value of the money falls)
the value of money, like that of any other commodity, is the power of money to command
goods in exchange for itself. Its value means its purchasing power. When we speak of the
value of money we mean the exchange relation between goods and money.
In economics, deflation is a decrease in the general price level of goods and services.
[1] Deflation occurs when the annual inflation rate falls below 0% (a negative inflation
rate).

A decline in general price levels, often caused by a reduction in the supply of money or
credit. Deflation can also be brought about by direct contractions in spending, either in
the form of a reduction in government spending, personal spending or investment
spending. Deflation has often had the side effect of increasing unemployment in an
economy, since the process often leads to a lower level of demand in the economy. (The
opposite of inflation)

Types of Inflation

1. Demand-pull inflation – it occurs when demand for goods

and services exceeds supply. Pull inflation is the excess
money supply. When money supply increases, without
corresponding increase in production of goods and services,
prices rise. More money supply is created whenever a
government prints money or when foreign loans are not
used for production.
2. Cost-push inflation – an increase in the cost of production
results to an increase in prices.
3. Structural Inflation – explains the viability of some sectors
of our economy to respond immediately to demand for
goods and services.

Chapter VIII: Measuring National Outputs and Income

The income of the nation is measured by the total earnings of the factors of production
owned by its citizens or by the total market value of all final goods and services produced
by its citizens. Such earnings or market value of final goods and services are estimated on
a yearly basis. These indicate whether the national economy is progressing or regressing.
(If national income is bigger this year than in the previous year and that last year’s
national income was bigger than in the previous years, then it can be said that the
economic performance of the country has been improving during the last few years.
However, if it is a reverse situation, then the national economy is regressing. In fact, such
declining national income has been experienced by many poor countries)

The variations (ups and downs) in national income are the products of interactions
between and among several factors like populations, investments, savings and
consumptions.

A company hires the factor of production from individuals or households who own them.
These productive factors are land, labor, capital and entrepreneurship. In return, the
owners of said factors receive their payments such as wages for the laborers, rents for the
landlords, interest for the capitalist, and profits for the entrepreneurs (top managers or
owners of the business).

Gross national product (GNP) – is the total market value of all final goods and services
produced by citizens in one year. Includes the citizens earned from abroad

National Income – this is the sum of all payments for the factors of production or this is
the total income of the factors of production in one year or the total payments received by
citizens in one year. GNP has a greater value than national income because the latter is
equivalent to total cost of production.

Per capita income (PCI) – is income per head.

PCI = National/Population Per capita GNP=GNP/Population

Gross domestic product – is the total market value of all final goods and services
produced within the territories of a country in one year (excluded the income from
investments or wealth in foreign countries). In a country dominates by multinational
corporations or foreigners, the GDP is bigger than GNP. This is the actual situation in
many less developed countries.
Money GNP – is the value of GNP at current price or market price.

Real GNP – is the value of GNP in terms of the number of goods and services produced.
This is equal to Money GNP/Price Index X 100.

A price index (plural: “price indices” or “price indexes”) is a

normalized average (typically a weighted average) of prices for a given class of
goods or services in a given region, during a given interval of time. It is
a statistic designed to help to compare how these prices, taken as a whole, differ between
time periods or geographical locations.

Price indices have several potential uses. For particularly broad indices, the index can be
said to measure the economy's price level or a cost of living. More narrow price indices
can help producers with business plans and pricing. Sometimes, they can be useful in
helping to guide investment.

Final Goods and services – are those which are sold for the last time, and these are not for
further processing or manufacturing. (Examples is bread, while the flour is intermediate
product)

Disposal Income – is personal income less personal taxes.

Difference between GDP and GNP or GNI

GDP can be contrasted with gross national product (GNP) or gross national
income (GNI). The difference is that GDP defines its scope according to location, while
GNP defines its scope according to ownership. In a global context, world GDP and world
GNP are therefore equivalent terms.

GDP is product produced within a country's borders; GNP is product produced by

enterprises owned by a country's citizens. The two would be the same if all of the
productive enterprises in a country were owned by its own citizens, and those citizens did
not own productive enterprises in any other countries. In practices, however, foreign
ownership makes GDP and GNP non-identical. Production within a country's borders, but
by an enterprise owned by somebody outside the country, counts as part of its GDP but
not it’s GNP; on the other hand, production by an enterprise located outside the country,
but owned by one of its citizens, counts as part of its GNP but not its GDP.

To take the United States as an example, the U.S.'s GNP is the value of output produced
by American-owned firms, regardless of where the firms are located. Similarly, if a
country becomes increasingly in debt, and spends large amounts of income servicing this
debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a
country sells off its resources to entities outside their country this will also be reflected
over time in decreased GNI, but not decreased GDP. This would make the use of GDP
more attractive for politicians in countries with increasing national debt and decreasing
assets.

Gross national income (GNI) equals GDP plus income receipts from the rest of the world
minus income payments to the rest of the world.

The real economic achievements of any country are measured by the number of goods
and services its citizens have produced in a given year. If we depend on the market value
of final goods and services, it is not most of the time accurate because of price
fluctuations. In case of inflation (high prices), the market value of GNP naturally
increases, while in case of deflation (low prices), the market value of GNP is low.
Limitations of GNP

GNP has several very useful functions such as a measurement of national economic
performance, as a tool in both government and business planning, and as yardstick of
economic growth of the different countries which is the basis of comparison.

1. It does not show the allocations of goods and services among the members of society.
It only shows the number of goods and services produced by citizens in a given period.
An increase in GNP does not necessarily mean that the economic and social welfare of
the masses has improved. In a society where there is a widespread of mal-distribution of
wealth, an increase in GNP only benefits the very rich who own the productive resources.
2. GNP accounting in less developed countries is understated. There are many economic
transactions especially in the rural areas which are not registered in the market.
3. The evils of economic growth like population, congestion and dirty environment are
not reflected in the GNP. The cost of such destruction to the health of human beings and
to the balance of nature is high. The social price of economic growth such as broken
families, drug addiction, and other pervasive social crimes are not part of GNP.
4. GNP only measures the number of goods and services but not the quality of goods and
services. Needless to say, quality is an important feature. It affects the well-being of
people.
5. Incomes or products from illegal sources are not included in the GNP. Examples are
gambling, prostitution, unlicensed money lending, and the narcotics business.

Income Distribution is the allocation of income among the owners of the factors of
production.

Type of Income Distribution

1. Personal distribution – is the allocation of income among persons or households.

2. Functional distribution – is the allocation of income among the factors of
production: land, labor, capital and entrepreneur.

Causes of Income Inequality

1. Intelligence and talents – individuals who are more intelligent and talented are
more likely to earn more income.
2. Education and training – those with higher levels of education and training
generally gets higher income. However, in countries where there is an over-supply
of professionals, their salaries are low.
3. Unpleasant and risky jobs – in highly developed countries, employers provide
financial incentives to work that are dirty, unpleasant, difficult and risky.
4. Ownership of productive factors – Only few families own most of the productive
factors. These are the ones who are rich. They derived big income from their
properties.
5. Luck and connections – the more experienced old folks claim that it is luck that
counts much. It has been said that the destiny of a person has been made, and no
amount of hard work can change it. People with big connections are more likely
to succeed in life. It is whom you know that matters.

Theories of income distribution

1. Marginal productivity – holds that the income of the factor of production is equal
to the value of its marginal product. (That the owners of the factors of production are
paid based on their contribution to production under a competitive market condition)
except there is no government laws to comply with, and the market is not perfectly
competitive.
2. Needs – determine the amount of income of families or individuals. Those who
have more needs receive more income in proportion to their needs.
3. Social usefulness – is the basis of income distribution. Jobs which are more useful
to society are paid higher.
4. Equality – in which all members of society receive an equal amount of income.
This is an idea of communism in an attempt to erase the gap between the rich and
the poor.
Consumption – is the amount of money spent on goods and services which yield direct
satisfaction. Savings – is the part of income which is not consumed. Contribute to the
economy if these are placed in the banks and other financial institutions.

Factors Influencing Consumption

1. Distribution of national income – when there is a very uneven distribution, income is

largely concentrated in the hands of a very small portion of the population. Individuals
with big incomes are proportionately big savers, While if there is a very even distribution,
the concentration of the bulk of aggregate income is in the hands of individuals with
moderate incomes.
2. Rate of interest – people tend to save more at a higher interest rate.
3. The desire to hold cash – such needs for cash for personal or business reasons reduce
consumption and raise saving.
4. Price level – when prices are high, people spend more amounts of money.
5. Population – more people means more consumption. (More people to buy more goods
and services)
6. Income – Higher income results to more consumption.
7. Taxes – more taxes reduce disposable income.
8. Attitudes and values – there are individuals who are thrifty or extravagant. Evidently,
these factors influence consumption or savings.

Investment – is expenditure on new capital goods. Capital goods are produced goods
which are used to produce other goods. Investment plays a very vital role in the economy
because it creates more employment, production and consumption. Determinants of
Investment are: 1. Marginal efficiency of investment or returns of investment and 2.
Interest rate

Investment creates more income several times (multiplier effect). (From supplier to
seller) while accelerator effect, more consumption stimulates further investment)

When investment is greater than saving, there is an expansion of economic activities.

Conversely, there is contraction of economic activities.

Reference:

1. Economics 3rd Edition by Feliciano R. Fajardo