LESSON 3 and 4: ECONOMICS AS A SOCIAL SCIENCE AND ECONOMICS AS AN

APPLIED SCIENCE

Welcome to the lesson one and two of your Applied Economics 12. This lesson will
give you the practical application of the Basic concept of economics.
In this lesson cover about the economics . At the end of this lesson, you will learn
how to differentiate between economics as a social science and as an applied science.

At the end of the lesson, the student will be able to:

 make decisions based on how man can satisfy most of his wants given limited
resources; and
 differentiate macroeconomics and microeconomics

Economics- the branch of knowledge concerned with the production, consumption, and
transfer of wealth.
Allocation - the action or process of allocating or distributing something.
Microeconomics - is the study of individuals, households and firms' behavior in decision
making and allocation of resources.

1. Differentiate macroeconomics and

microeconomics?

ECONOMICS AS A SOCIAL SCIENCE

Economics is a different science from biology and chemistry as these are physical
sciences. Economics is a social science because it studies human behavior just like psychology
and sociology. A social science is, broadly speaking, the study of society and how people behave
and influence the world around them. As a social science, economics studies how individuals
make choices in allocating scarce resources to satisfy their unlimited wants.
MACROECONOMICS AND MICROECONOMICS
There are two branches of economics. These are macroeconomics and microeconomics.

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 Macroeconomics is a division of economics that is concerned with the overall
performance of the entire economy. It studies the economic system as whole rather than the
individual economic units that make up the economy. It focuses on the overall flow of goods and
resources and studies the causes of change in the aggregate flow of money, the aggregate
movement of goods and services, and the general employment of resources. Macroeconomics is
about the nature of economic growth, the expansion of productive capacity, and the growth of
national income.
Microeconomics, on the other hand, is concerned with the behavior of individual entities
such as the consumer, the producer, and the resource owner. It is more concerned on how goods
flow from the business firm to the consumer and how resources move from the resource owner to
the business firm. It is also concerned with the process of setting prices of goods that is also
known as Price Theory. Microeconomics studies the decisions and choices of the individual units
and how these decisions affect the prices of goods in the market. Likewise, it examines
alternative methods of using resources in Order to alleviate scarcity. It does not focus on
aggregate levels of production, employment, and income.
BASIC ECONOMIC PROBLEMS OF SOCIETY
All societies are faced with basic questions in the economy that have to be answered in
order to cope with constraints and limitations. These are:
1. What to produce and how much - society must decide what goods and services should be
produced in the economy. Having decided on the nature of goods that will be produced,
the quantity of these goods should also be decided on.
2. How to produce - is a question on the production method that will be used to produce the
goods and services. This refers to the resource mix and technology that will be applied in
production.
3. For whom to produce - is about the market for the goods. For whom will the goods and
services be produced? The young or old, the male or female market, the low-income or
the high-income groups?
How these questions are answered depends on the nature of the economic system in place.
The economic system is the means by which society answers the basic economic problems.
ECONOMIC SYSTEMS
The economic system is the means through which society determines the answers to the
basic economic problems mentioned. A country may be under any of the following types or even
a combination of the three economic systems:
1. Traditional economy. Decisions are based on traditions and practices upheld over the
years and passed on from generation to generation. Methods are stagnant and therefore
not progressive. Traditional societies exist in primitive and backward civilizations.
2. Command economy. This is the authoritative system wherein decision-making is
centralized in the government or a planning committee. Decisions are imposed on the
people who do not have a say in what goods are to be produced. This economy holds true
in dictatorial, socialist, and communist nations.
3. Market economy. This is the most democratic form of economic system. Based on the
workings of demand and supply, decisions are made on what goods and services to
produce. People's preferences are reflected in the prices they are willing to pay in the
market and are therefore the basis of the producers' s on what goods to produce.

WHY ECONOMICS IS IMPORTANT

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 Students may ask, "Why do we need to study economics?" To know how important the
subject is, all they need to do is read the front page of the newspapers to see that the most
important news are economic in nature. Watch the news on TV and for sure, economic news
always presents important issues.
Economics will help the students understand why there is a need for everybody, including
the government, to budget and properly allocate the use of whatever resources are available. It
will help one understand how to make more rational decisions in spending money, saving part of
it, and even investing some of it.
On the national level, economics will enable the students to take a look on how the
economy operates and to decide for themselves if the government officials and leaders are
effective in trying to shape up the economy and formulate policies for the good of the nation.
SCIENTIFIC APPROACH IN THE EMPIRICAL TESTING OF AN ECONOMIC
THEORY
Economics is a study that attempts to explain how an economy operates and how the
consumer attempts to maximize his/her wants within limited means. Using tools such as logic,
mathematics, and statistics, the student needs to approach the empirical testing of an economic
theory in a scientific manner. This scientific approach involves the following steps:
1. State the propositions or conditions that are taken as given and do not need further
investigation, as the basic starting point of investigation. These propositions will serve as
the premises upon which the theory is established.
2. Observe facts in connection with the activity that we want to theorize.
3. Apply the rules of logic to the observed facts to determine causal relationships between
observed factors and to eliminate facts that are Unnecessary and irrelevant.
4. Establish a set of principles such that formulated hypotheses may be tested as to whether
they are valid or not.
5. Use statistics and econometrics as empirical proof in testing the hypotheses.
POSITIVE ECONOMICS VERSUS NORMATIVE ECONOMICS
Positive economics deals with what is—things that are actually happening such as the
current inflation rate, the number of employed labor, and the level of the Gross National Product.
Normative economics, on the other hand, refers to what should be—that which embodies the
ideal such as the ideal rate of population growth or the most effective tax system. Positive
economics is an overview of what is happening in the economy that is possibly far from what is
ideal. Normative economics focuses on policy formulation that will help to attain the ideal
situation.
MEASURING THE ECONOMY
We always get to read in the newspapers how our economy has grown in recent years.
Before we go into the essence of applied economics, it is beneficial that students get to learn first
how the growth of the economy is actually measured. The national government is always happy
to inform the people that the country's Gross Domestic Product (GDP) has grown in rates, much
higher than in the previous administration. We will now go into a short discussion of what the
GDP is all about.
The government plans for a better economy from a perspective of what the economy has
been. Shaping the economy's future is changing past and present perspectives extended to the
future. In particular, looking ahead is grounded on past and present performance and health of
the economy. The heart of the economy is production whose value measures both resource input
and output of people. The interplay of resources and outputs tells how well the economy has
performed.

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Counting All through GNP
As the mirror of all products, Gross National Product (GNP) is the market value of final
products, both sold and unsold, produced by the resources of the economy in a given period.
Market value is determined by supply and demand while the economy's resources are those
belonging to Filipino citizens and corporations. Not all resources belonging to the economy are
in the economy, like the capital and entrepreneurship that brought the SM mall to China.
Conversely, not all resources in the economy belong to the economy like the capital and
entrepreneurship brought to the country by multinationals like Nestlé and Procter and Gamble
(P&G). In addition, the value of final products already includes the values of its components
from the lower production stages. For example, the price of your leather wallet already includes
the value of leather that in turn includes the value Of animal hide. In other words, counting the
values of products from the raw material to the intermediate and on to the final production
stages, double counts and overstates the value of the economy's production. Likewise, the value
of any product in a certain period should no longer be counted in succeeding periods to avoid
double counting and overstatement that can mislead decision-making.
GNP/GDP: Expenditure Approach
One way to account GNP and classify its components is by end-use expenditure. Products
are final when they have reached the highest levels of processing in the economy for different
uses in the given period. They are household and individual consumption (C), and government
expenditure on goods and services including labor (G) and exports (X). Products, regardless of
production stages, are also considered final when basically stocked (unused) as capital goods and
inventories of raw materials and intermediate products. Classified as investments (I), they are
stock of values for future use and therefore, have reached the highest possible production stages
for the given period. On the other hand, their import components (M) are excluded since import
products are produced in other economies. To restate the GNP equation:
GNP = C+ I + G + (X-M)
Table 1.1 presents Philippine GNP statistics whose components are classified by expenditure
accounts. Capital Formation is Investment (I) by both the private sector and government that
consists of fixed capital and inventory changes. Fixed Capital includes capital goods (buildings,
machineries, equipment) while inventory changes are stocks (unused) for future use from all
stages produced in that year. Net Factor Income from abroad is net export of factor services
equal to Factor Income from abroad less the factor payments of other countries. Factor payments
are for the direct services of resources like the remittances of our overseas contract workers for
labor export. Likewise, profit remittances to the home countries of multinational companies like
Nestle and Procter and Gamble (P&G) represent our payments for importing their capital and
entrepreneurship. These factor payments to other countries represent additional imports excluded
from our GNP, on the other hand, payments for non-factor services as part of trade balance (X-
M) are for services using all factors (resources) of production. Profit brought home by a Filipino
construction firm for construction services in Saudi Arabia is an example of nonfactor service
export receipt.

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 However, a better indicator of domestic employment opportunities is Gross Domestic
Product. Gross Domestic Product (GDP) is defined as the market value of final products
produced within the country, The resources in the economy include capital and entrepreneurship
belonging to other countries brought to the domestic economy by foreign businesses. In Table
1.1, GDP is net of GNP after deducting Net Factor Income from abroad or by deducting factor
income from abroad and adding back Factor Payments to other countries. In other words, a
negative sign to Net Factor Income from abroad changes the sign of Factor Income from abroad
from positive to negative and Factor Payments to other countries from negative to positive. The
table shows that Household Consumption is the biggest GDP expenditure (74%) followed by
Capital Formation (19%) led by the construction industry. In other words, our economy mostly
produces consumer goods and buildings and other construction structures. The dominance of
household consumption reflects households' propensity to consume more and save less. On the
other hand, construction is both private investments by the rich and public capital spending by
government largely financed by borrowings.
Net Inflow = Inflow - Outflow to - Net Inflow = - Inflow + Outflow
GNP/GDP: Income Approach

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 Another way to account GNP and classify its components is by resource uses and
contributions that make up the production stages. As basic factors of production, resources (land,
labor capital, and entrepreneurship) add value to products (e.g., leather) as processed into higher
forms (e.g., shoes). If all payments for resource contributions (rent, wage, interest, and profit)
went to resource owners, GNP would simply be the sum of all factor payments from the raw
material to the final product stage. In Figure 1.1, the value of, say, the final product (P700) is
equal to the intermediate product (P300) plus the factor contributions (P400) that transformed the
latter into its final form. Following the arrow directions, the value of the intermediate product
(P300) is from the factor contributions at the intermediate stage (P200) and the raw material
stage (PI00). In Other words, factor contributions made the raw material (P 100) and the
intermediate Pr0duct (P200) through the value added by factor contributions. The same logic
applies to the final product whose material purchase is a product of factor contributions from the
lower stages. In conclusion, all products and their values are the contributions of these essential
(basic) factors of production.
Raw Material Intermediate Product
Purchase (P300)
(P100)

+ +

Resource Resource Resource

Contributions/Income Contributions/Income Contributions/Income
(P100) (P200) (P400)

= = =

Value of Raw Material Value of Intermediate Value of Final Product

Product
(E.g., animal hide (E.g., Wallet, P700)
P100) (E.g., leather P300)

Figure 1.1. Value- Added Flow

Table 1.2 presents the Philippine GNP statistics whose components are classified by
factor contribution of the economy's producing sectors. The biggest contributor of GNP is the
Service Sector (48%) serving all industries. Next is the import-dependent Industrial Sector (44%)
providing industrial input across sectors. The smallest sector is Agriculture, Fishery, and
Forestry combined (8%), needing import complements to provide for the food requirements of
the population. Net Factor Income from the rest of the world is factor income apart from the
factor contributions of the sectors. It includes the OFW remittances and transfer payments from
abroad.

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Economics as an Applied Science
Applied Economics is the application of economic theory and econometrics in specific
settings with the goal of analyzing potential outcomes. As one of the two sets of fields of
economics (the other set being the corel), it is typically characterized by the application of the
core, referring to economic theory and econometrics, as a means of dealing with practical issues
in fields that include demographic economics, labor economics, business economics, agricultural
economics, development economics, education economics, health economics, monetary
economics, economic history, and many others. John Neville Keynes is attributed to be the first
to use the phrase "applied economics" to designate the application of economic theory to the
interpretation and explanation of particular economic phenomena.
We should be able to improve human welfare among Filipinos by the investigation and
analysis of economic problems in the real world. Applying economic theory in our lives means
trying to address actual economic issues and be able to do something about it. The concept of
scarcity and choice should encourage us as individuals to help in our own way to provide
solutions to the country's economic problems.

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 APPLIED ECONOMICS IN RELATION TO PHILIPPINE ECONOMIC PROBLEMS
A solid understanding of economic principles and how they are applied in real-life
situations can serve as significant tools to help address the country's economic problem. For
example, understanding the existence of scarcity can help Economics students analyze how to
maximize the use of available resources in order to overcome scarcity. Knowledge of economic
theories such as the Law of Supply and Demand can help in analyzing why prices are high and
what the government can do to help bring down prices.
The Philippines' Basic Economic Problems the Philippine economy has grown
significantly during President Benigno Simeon Aquino's administration. With a growth rate of
the country's Gross Domestic Product of 6.8% in 2012; improving to 7.2% in 2013, and slowing
down to 6.1% in 2014, these rates are an improvement of past rates preceding President Aquino's
term. It is also higher than its Asian neighbors such as Malaysia, Thailand, South Korea,
Hongkong, India, and Indonesia (CIA World Factbook 2013).
Despite this admirable growth, people, especially the poor, have been complaining of
non-inclusive growth. Millions of Filipinos are claiming they experience hunger or they still live
below the poverty level.
Unemployment is still a main problem of the Philippine economy despite improvements
reported by the National Statistics office. Unemployment rate in the Philippines decreased to
6.4% in the second quarter of 2015 from 7.0% in the previous year. Philippines' unemployment
rate average is 8.85% from 1994 until 2015, reaching an all-time high of 13.90% in the first
quarter of 2000 and a record low of 6.0% in the fourth quarter of 2014. In July 2015, the Labor
Force Survey (LFS) released by the Philippine Statistics Authority (PSA) showed the country's
unemployment rate at 6.4% or an estimated 2.68 million individuals.
Another significant socio-economic problem in the country is poverty. As reported by the
National Statistics Coordination Board, in 2006, poverty incidence of the population registered at
26.4%, 26.5% in 2009, 25.2% in 2012, and 28.8% in the first semester of 2014.
The booming population growth in the Philippines is another basic economic problem
that can be connected to the issue of scarcity. When population becomes too big, economic
resources may no longer be enough to support the growing population. Let us take a look at the
basic population data. According to the 2010 census, the Philippine population stood at 92.3
million. As of 2014, it has reached more than 100 million— growing by 2% from the previous
year and one of the highest in Asia. The population of the Philippines represents 1.37% of the
world's total population. This is apparently the reason why schoolrooms are not enough for our
children who are of school age. This could also be an explanation why government hospitals are
crowded with sick people and maternity wards are full of women giving birth with hospital beds
that are not enough to accommodate them. The population issue will be further discussed in next
lesson.
The country's problems vary with times and circumstances. It is now a challenge for the
students to observe and identify what these problems are.
ASEAN ICON
Lee Kuan Yew (1923-2015) is an economic icon and an example of how a leader of a
previously undeveloped country can lead to overcome its country's basic economic problems and
move toward economic growth.
Lee Kuan Yew was the prime minster of Singapore from 1959 to 1990, making him the
longest-serving prime minister in history. During his long rule, Singapore became the most
prosperous nation in Southeast Asia.

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 Born in Singapore on September 16, 1923, Lee Kuan Yew became the longest-serving
prime minister in world history. Before Lee rose through the ranks of his country's political
system, Singapore was a poor nation that is mired in debt and plagued by poverty. When he
became the first prime minister of Singapore in 1959, Lee Kuan Yew introduced a five-year plan
calling for urban renewal and construction of new public housing, greater rights for women,
educational reform, and industrialization. In 1962, Lee led Singapore into a merger with
Malaysia but three years later, Singapore left the union for good. Lee resigned as prime minister
in 1990 and his son became the prime minister in 2004. He died on March 23, 2015.
Lee has left behind a legacy of an efficiently run country and as a leader who brought
prosperity unheard of before his tenure, at the cost of a mildly authoritarian style of government
and by imposing discipline among his people. By the 1980s, Singapore, under Lee's guidance,
had a per capita income second only to Japan's in East Asia and the country had become a chief
financial center of Southeast Asia envied by many Asian countries including the Philippines.

TEST 1. Classify the following topics. Write MIC if it falls under

Microeconomics; MAC, if it falls under Macroeconomics.
____1. The inflation rate in the Philippines in the last quarter of 2013
was 4.8%.
____2. A P340-billion deficit in the Philippine budget is expected in the year 2015.
____3. Prices of Toyota vehicles are predicted to go up in December.
____4. Garlic prices in the past months have risen because producers hoarded their supplies in
their bodegas.
____5. Unemployment rate has dropped because of the increase in the number of OFWs.
____6. In the past year, Coca Cola was named the fastest selling product in the market.
____7. Rental on land could not be increased by landowners because of the Rent Control Law.
____8. Prices of apples and grapes tend to increase during the Christmas season.
____9. The Philippine economy grew at the rate of 5.8% in 2013.
____10. Philippine congress passed the Value Added Tax Law to strengthen the Philippine tax
system.
TEST II. ESSAY.
1. Why is economics deeply rooted in the concept of scarcity?

2. In what way is applied economics important in tackling economic issues or problems of

the country?

Reference:

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Baleña, E., Lucero, D. (2016). Applied Economics. 11-B Sunrise Drive, Brgy. Bagong Lipunan
ng Crame, Cubao, Quezon City: Educational Resources Corporation.

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