ECODEV What This Diagram Omits

Microeconomics: The study of how individual  the government collects taxes, buys
households and firms make decisions, interact goods and services.
with one another in markets.  The financial system matches savers’
supply of funds with borrowers’
Macroeconomics: The study of the economy as
demand for loans
a whole.
 The foreign sector trades goods and
Gross Domestic Product (GDP) services financial assets, and currencies
with the country’s residents
 measures total income of everyone in
the economy. GROSS DOMESTIC IS
 GDP also measures total expenditure on
the market value of all final goods & services
the economy’s output of goods and
produced within a country in a given period of
services
time.
For the economy as a whole
market value Goods are valued at their market
income equals expenditure because every dollar
prices, so: All goods measured in the same units
a buyer spends is a dollar of income for the
(e.g., dollars in the U.S.)
seller.
Things that don’t have a market value are
The Circular-Flow Diagram excluded, e.g., housework you do for yourself.

 a simple depiction of the Final. Final goods: intended for the end user
macroeconomy illustrates GDP as Intermediate goods: used as components or
 spending, revenue, factor payments, ingredients in the production of other goods
and income
GDP only includes final goods—they already
Preliminaries: embody the value of the intermediate goods
used in their production
 Factors of production are inputs like
labor, land, capital, and natural goods & services
resources
GDP includes tangible goods (like DVDs
 Factor payments are payments to the
mountain bikes, beer) and intangible services
factors of production (e.g., wages, rent).
(dry cleaning, concerts, cell phone service).
The Circular-Flow Diagram
Produced GDP includes currently produced
Households: goods, not goods produced in the past.

 own the factors of production, sell/rent within a country GDP measures the value of
them to firms for income production that occurs within a country’s
 buy and consume goods & services borders, whether done by its own citizens or by
foreigners located there
Firms:
in a given period of time Usually a year or a
 buy/hire factors of production, use quarter (3 months)
them to produce goods and services
 sell goods & services

MRC ANTONARES – C02

The Components of GDP
Recall: GDP is total spending.
Four components:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
These components add up to GDP (denoted Y):

Y = C + I + G + NX

Consumption (C)
is total spending by households on goods and
services
Note on housing costs: ACTIVELEARNING
For renters, consumption includes rent
1 GDP and its components In each of the
payments.
following cases, determine how much GDP and
For homeowners, consumption includes the
each of its components is affected (if at all).
imputed rental value of the house, but not the
purchase price or mortgage payments. A. Debbie spends $300 to buy her husband
dinner at the finest restaurant in
Investment (I)
Boston.
is total spending on goods that will be used in
the future to produce more goods. Consumption and GDP rise by $300.
includes spending on
B. Sarah spends $1200 on a new laptop to
capital equipment (e.g., machines, tools) use in her publishing business. The
structures (factories, office buildings, houses) laptop was built in China.
inventories (goods produced but not yet sold)
Investment rises by $1200, net exports fall by
Government Purchases (G) $1200, GDP is unchanged.
is all spending on the goods and services
C. Jane spends $800 on a computer to use
purchased by govt at the federal, state, and
in her editing business. She got last
local levels.
year’s model on sale for a great price
 G excludes transfer payments, such as from a local manufacturer.
Social Security or unemployment
Current GDP and investment do not change,
insurance benefits. They are not
because the computer was built last year.
purchases of goods and services
D. General Motors builds $500 million
Net Exports (NX)
worth of cars, but consumers only buy
NX = exports – imports $470 million worth of them.
Exports represent foreign spending on the
Consumption rises by $470 million, inventory
economy’s goods and services. Imports are the
investment rises by $30 million, and GDP rises
portions of C, I, and G that are spent on goods
by $500 million
and services produced abroad.

MRC ANTONARES – C02

Real versus Nominal GDP
Inflation can distort economic variables like
GDP, so we have two versions of GDP
Nominal GDP values output using current
prices : not corrected for inflation
GDP Does Not Value:
Real GDP values output using the prices of a
base year : is corrected for inflation  the quality of the environment
 leisure time
 non-market activity, such as the child
care a parent provides at home
 an equitable distribution of income

Then Why Do We Care About GDP?

 Having a large GDP enables a country to

afford better schools, a cleaner
environment, health care, etc.
 Many indicators of the quality of life are
positively correlated with GDP. For
example

The GDP Deflator The GDP deflator is a measure

of the overall level of prices.

Real GDP per capita is the main indicator of the

average person’s standard of living. But GDP is
not a perfect measure of well-being
Robert Kennedy issued a very eloquent yet
harsh criticism of GDP:

MRC ANTONARES – C02

  pay depositors interest on their deposits
and charge borrowers slightly higher
interest on their loans.

The financial system consists of the group of

Banks help create a medium exchange by
institutions in the economy that help to match
allowing people to write checks against their
one person’s saving with another person’s
deposits
investment. It moves the economy’s scarce
resources from savers to borrowers A medium of exchange is an item that people
can easily use to engage in transactions
Financial institutions can be grouped into two
different categories: . this facilitates the purchase of goods and
• Financial Markets services
Stock Market
Bond Market
• Financial Intermediaries NATIONAL INCOME ACCOUNTS
Banks
Mutual Funds National the total income in the economy that
remains after paying for the consumption and
Financial markets are institutions through government purchases
which savers supply funds directly to
borrowers SAVINGS = Y ( GDP) - C - G = I

Financial intermediaries are institutions SAVINGS = INVESTMENTS

through which savers supply funds indirectly You will have to keep reminding students what
to borrowers determine investment means to
macroeconomics. Outside of the economics
profession, most people use the term saving
The Stock Market and investing interchangeably.
 Stock represents a claim to partial In macroeconomics:
ownership in a firm and is therefore, a
claim to the profits that the firm makes. investment refers to the purchase of new
 The sale of stock to raise money is capital, such as equipment or buildings.
called equity financing. If an individual spends less than he earns and
 Compared to bonds, stocks offer both uses the rest to buy stocks or mutual funds,
higher risk and potentially higher economist call this saving
returns.
National saving (saving) : the total income in the
economy that remains after paying for
Banks consumption and government purchases

 take deposits from people who want to SAVING CONTINUED

save and use the deposits to make loans SAVINGS = Y ((GDP) - C - G
to people who want to borrow.

MRC ANTONARES – C02

IF T = TAXES AND TRANSFER PAYMENTS BACK TO
AND WELFARES S = (Y-T-C) + ( T+G)

Private saving - the income that households

TYPES OF UNEMPLOYMENT
have left after paying for taxes and consumption
Frictional unemployment - unemployment due
Y-T-C
to the natural frictions of the economy which is
Public saving - the tax revenue that the caused by changing market condition and is
government has left after paying for its spending represented by qualified individuals with
transferable skills who change jobs
T-G

Budget surplus - an excess of tax revenue over 1. unemployment that results from the
government spending process of matching workers and jobs,
or
Budget deficit - a shortfall of tax revenue from 2. unemployment that results because it
government spending takes time for workers to search for jobs
that best suit their tastes and skills
T-G = NEGATIVE
Structural unemployment - unemployment due
to structural changes in the economy that
The important point to make here is that deficit, eliminate some jobs and create others for which
public saving is negative and the public sector is is unemployed are not qualified so they have
thus dissaving. non- transferable skills:
To make up for this shortfall, it must go to the Unemployment that results because the number
loanable funds market and borrow the money. of jobs available in some labor markets is
This will reduce the supply of loanable funds insufficient to provide a job for everyone who
available for investment. wants one.

Natural unemployment rate - the sum of

frictional unemployment rate and the structural
THE LABOR PARTICIPATION RATE
unemployment rate
The percentage of an adult population that is in
Rate of unemployment is an employment does
the labor force
not go away on its own even in the long run It is
the amount of unemployment that the economy
normally experiences
LABOR FORCE X 100
ADULT POPULATION Full employment - when the unemployment
rate is equal to the natural and unemployment
rate Full employment

Because frictional and structural unemployment

are unavoidable does not count against
unemployment

Cyclical unemployment does, Thus 100 percent

employment is not truly 100 percent .I f there

MRC ANTONARES – C02

were no cyclical unemployed in the economy we
would have 100 percent employed.

Cyclical unemployment rate -

the difference between the
unemployment rate and the
lateral unemployment rate this
is due to the division demand
and implies a recession

cyclical unemployment
Refers to the year-to- year
fluctuations in an employment
around its natural rate.
associated with short-term ups
and downs of a business cycle.

MRC ANTONARES – C02

INTERNATIONAL TRADE WHAT THEY DO?

• The branch of economics concerned • Implementation and monitoring trade

with the exchange of goods and services
• Dispute settlement
with foreign countries
• Building trade capacity
• Purchase, sale, or exchange of goods
and services across national borders • Investment and Trade
• Almost every kind of product can be • Trade policy reviews
found on the international market such
as: Food, Clothes, Spare Parts, Oil
Jewelry, Wine, Stock and Currencies TRADE POLICY DEVELOPMENTS
The Growth in World Trade Philippines: continues to hold with importance
• about 15 percent of the world's output its membership in the WTO and recognizes the
is traded in international markets in a value of the WTO's achievements in fostering a
typical year. competitive environment.

• while the importance of the with its membership in 1995, the Philippines
international sector varies enormously made substantial commitments on market
from country to country, the volume of access and plans to seek technical assistance
international trade has increased programs from its donor agencies and bilateral
substantially. partners to assist in the compliance of Trade
Facilitation commitments.
• Year 1947: saw the creation of the GATT
(General Agreement on Tariffs and It was last Nov. 10, 2012 when Management
Trade) as an attempt to reduce such Board of the Advisory Center on WTO Law
barriers to trade as quotas, subsidies, (ACWL)
tariffs and taxes. under Pres. Aquino appointed Ambassador
• In 1997 GATT was replaced by Esteban B. Conejos Jr. as Philippine permanent
the WTO (World Trade representative to the World Trade Organization
Organization), its mandate (WTO)
expanded to include
intellectual property rights and
foreign investment ABSOLUTE ADVANTAGE

WORLD TRADE ORGANIZATIONS occurs when one producer can do a task using
fewer inputs than the other producer
• only global international organization
dealing with The rules of trade between COMPARATIVE ADVANTAGE
nations. occurs when a person or country can produce a
Main Goal: to help producers of goods good or service at a lower opportunity cost than
and services, exporters, and importers others.
conduct their business.

MRC ANTONARES – C02

WHY SPECIALIZE? Import quotas A legal limit on the imported
quantity of a good that is produced abroad and
Because of specialization, both nations can be
can be sold in domestic markets
better off, even if one nation has an absolute
advantage in both goods over the other. Export subsidies Government payments made
to domestic firms to encourage exports.
WHY TRADE?
Closely related to subsidies is dumping.
Reasons countries benefit from foreign trade
Dumping A firm or industry sells products on
• They can import resources they lack at
the world market at prices below the cost of
home.
production.
• They can import goods for which they
Reasons for Trade Barriers
are a relatively inefficient producer.
• Domestic Employment
• Specialization sometimes permits
economies of large- scale production. • Low foreign wages

Trade Barriers • Infant Industry

(tariffs, quotas, and subsidies) • Unfair Trade

Tariff Trade Barrier • National Security

• a tax on goods shipped internationally Demand and Supply in International Trade

• A price-based barrier • CONSUMER SURPLUS Excess of what a

consumer is willing to pay to what he
Tariffs: Types of tariffs
actually has to pay.
• Import and export tariffs: a tax levied on
• PRODUCER SURPLUS Excess of what a
imports or exports of a country.
supplier is willing to receive at a
• Transit tariff: a tax levied on goods minimum amount and what he actually
passing through the country receives.

• Specific duty: a tariff based on the • DEMAND CURVER represents a

number of items being imported. collection of maximum prices a
consumer is willing and able to pay for
• Ad valorem duty: a tariff based on a different quantities of commodities.
percentage of the value of imported
goods. • SUPPLY CURVE Represents a collection
of maximum prices that suppliers
• Compound duty: a tariff consisting of require to be willing to supply different
both a specific and ad valorem duty. quantities of commodities.
Non- Tariff Trade Barrier

• Quota

• Subsidies

MRC ANTONARES – C02

 - It allows the transfer of knowledge,
technologies and information between
CONSUMER & PRUCER SURPLUS MAXIMIZE
trading partners
• Once the equilibrium output is reached - It enables the countries to specialization
at the equilibrium price, all of the which increases the world output and
mutually beneficial opportunities from standard of living
trade between suppliers and - It increases the need to become
demanders will have taken place. efficient and effective in the production
process because of competition
• Total gains to the economy from trade is - It stimulates research and development
the sum of consumer and producer policies and more rapid adoption of
surplus new technology to reduce cost of
LAW OF SUPPLY AND DEMAND production

INTERNATIONAL TRADE VERSION

• If the price of a good or service of Disadvantages of International Trade

Country X increases, the quantity of • One may need to wait for long term
goods or services offered by suppliers, gains
foreign and domestic, increases and
vice versa. • Hiring professional staffs to launch
international trade is timely and costly
• If the prices of the goods of Country X to do
increases, the demand for those goods
will decrease and the demand of the • Modifying product or packaging
goods of Country Y which costs less will
• Develop new promotional material
increase.
• Incur added administrative costs
ADVANTAGE AND DISADVANTAGE OF
INTERNATIONAL TRADE • Dealing with special licenses and
regulations
Advantages of International Trade
• Apply for additional financing
- Leads to more efficient resource
allocation and lower cost per unit of
output as the market becomes bigger
and broader to exercise economies of
scale, etc.
- Non-economic advantages like political,
social and cultural advantages to be
gained by fostering trade in
international organizations like WTO,
etc.
- It helps to widen the range of choice of
goods or products

MRC ANTONARES – C02

MRC ANTONARES – C02