many economic transactions that take Pla ‘over a given period. ang day, for me take a jeep to school, buy a cookie from the can a ke a jeep back home. These are already forge (3) e t Ps you made in a day. If you do this e¥Ery day, tes this will be 1,095 transactions in a year (=3 transactions ‘x 365 days in a year). Multiply this further by the 100 malono B so Filipinos and what you have is a very rough (and unscieniy, Cestimate of the number of economics Philippines in a year. While this might see is likely to be way below the actual numb. take place in the country. For one, you and your parents often make more than three transactions in a day. In addition, there are many other transactions that take place between Sroups or institutions that have not been discussed Transactions like those described Paragraph are essential in indicators, However, their she, understanding €conomic tran, Section Provides which is an elega take place betwee; transactions jn the m a lot, your estimate er of transactions that in the _ previous estimating various economic er volume may make the task of Sactions seem overwhelming. This an introduction to the circular flow diagram, int tool for summ 8 the transactions that nomic agents, arizin, n different eco,tions they made yesterday. Does their list ind eir transactions more complicated than yours? pbuardians about the payments they received this month. A list these down and identify the groups that made payments to guardians. Do you believe that these payments should be classified as. Let’s Enrich Circular Flow Diagram for a Two-Sector Economy A useful step in describing the role of and interaction between economic agents is to simplify the world and assume that there are only two actors or sectors—households and firms, In such a setting, households are portrayed as owners of resources or factors of Production such as land, labor, and capital. Firms purchase or hire these resources in order to Produce goods and services. In exchange, households receive factor payments such as Wags Tent, interest, and profits. Wages are payments made for the use of labor. Rent represents fees for using properties like land and buildings. Households also lend funds to and are the “—_Migure 11.1 Circular Flow Diagram ‘oiilustrate, suppose that you decided to buy biscuits from a store. I a ‘ts the firm. The the arrow originating econd, your Payment for s. n this example, you circular flow diagram will rom firms will depict the the biscuits will appear in fansactions in the m, ats farkets for factors of production. AEOW from gy. 1S tepresents firms hiring factors of production or they make to hors ets oy es the Payments (w, ‘ages, rent, dividends, and © Use of the factors,yyments for the use of labor in order to produce goods and services ai; i ' MULTIPLE CHOICE ce, je arrow in the circular flow diagram that best describes the direction of the fion in each item. Write the letter of the correct answer. Item one provides an Market for Goods — & Services Households AGE. Market for Factors of Production Miguel Corporation paid Mr. Jose al nemiaech LonaRole They, are He ones who buys He stuf from Firms ne a fod ond clothes Wut Hay om eon Thase tires te get bride Tiga yeh prose or wonke Wings lo Pher eZ me alee fia ones prying te household fer here work, fay celled the taxes tem and hussiacrses « Ard fat noneg | Thr, is wee peple in used fo bed the pode, sehell mud ote: ee Gl, Bor Bas sinesses tron nether codes « ots on gente Wey beth eal buy. and gel th ob beNatTIONAL INcomME ACCOUNTING Let’s Explore People who go for a medical check-up are often subjected to a series of tests in which medical professionals examine several indicators. Doctors might check our temperature, height, and q weight. In more sophisticated exams, they might look at indicators like blood sugar and uric acid levels. E Like medical doctors, economists also examine different indicators in order to gauge the overall health of an economy. These Fe indicators include changes in production, prices, and the ability to ee find jobs, among many others and Trt Rie economists measure overall production or output in an economy. This lesson explores the means and approaches by which ai It also describes the key limitations of the indicators of economic production or output Let’s Find Out Check what you initially know about calculating and estimating production output by doing the following activities.ie Ta Members ing m the tasks below, = ae fan the number othous ences Spends studying in a given day r WN Possible TeASOnS why it ig ‘important to keep track of the amount Of time rou spend dying in «dey a ating a list of reasons why itis important to estimate the bya Country in one Year. ing the number of ho, 8 the output of aco, © tScUSsion by cre, Ut Of ou tS YOU spend studying ; untry? Explain you ae Let’s Enrich ir answer, The calculation of output for an €conomy we We followed in Tealities of, the mo, wo! a few adjug e cOmplex world Procedure that we live i ‘apture the M order to ¢, in, Gross Domestic Product Measurin g the @gEregate op the process alio total Output of W analysts isiuon tells them if actions or adjustments are ample, falling output serves as a signal eae tn onder 19 4 sconomy for the reasons behind this event, Af, alysts and deck then develop measures to reverse the trend, er identifying th ‘The measurement of the aggregate output nee Qu .ccounting. In the Philippines, the agency of a “Authority (PSA). Y tesponsibl ‘One of the most well-known oute -omes of natic DP). al ional inco Ee ce is : a : ee used a8 an indicator ae Sccounting is gross an econ lustrate, the PSA (2019) stat 1 overall out domestic i states that the G] IPUt oF producti 7179 trilion. This means that the Philippines produ ¢ GDP of the Philipines for 2090 of and services in that year. ced about F173 trillion worth of goods lion worth of goods Strictly speaking, GDP is defined as the market valu produced by an economy over a given period. In most cas ‘ orl lost cases, the word economy ; s to a country. Howev cam ae country. However, there are also estimates at the sub. a the Philippines has GDP estimates for each of its regions a od ae ions calle: led gross regional domestic product (GRDP). Like many countries in the world, the GDP estima generated for every quarter and year. mates of the Philippines are ‘There are two aspects of the definition of GDP that require closer scrutiny. Fi market values? Second, why focus only on final goods? ee The market value of a good is the product of its price (P) and quantity (Q). That is, market value = P x Q. GDP estimation involves calculating the market values of goods and services and then adding these up in a manner similar to what you did in Activity} Based on your calculations in the said activity, the GDP of the simple economy is 85,000. on for using market values is that it is not ‘mathematically possible to Activity 1, you saw this in the inability © take the goods into their market ‘The primary add the quantities of different goods. In sumber of haircuts. Converting sum of rice produ tion and the r pesos and centavos) h good into a common unit values transforms the production of eac i order to generate an aggregate that may then be added to the values of other goods in estimate. chase a good for direct resale 0 sons, First, they may Pu ities are called to sell. Such commodi People buy goods for two rea nsforms into bread .d that they intend pakery buys flour which itt! treated as intermediate 8 ad. The second reason is nd sells afterwards. In this case, flour 18 ted as intermediat s0 be a tion or at least not for he purpose ° resale od for consumption OF at least gee nal goods. For example for transformation into another g0° intermediate goods. An example is when @ when the buyer purchases @ 8° These commodities are called fi. economy. Intermedia, GDP only includes the values of final goods produced pang the vue oF 8 0d B00ds are excluded in order to avoid double-counting or conaxe bread: Pedro then boy mes. To illustrate, assume that a baker purchased flour €0 intermediate £004 While bre the bread and consumed it at home. In the example, flour i mm jue of the bread. The paymery 's8 final good. The calculation of GDP will only count the iting GDP. The reason is that yy, of the baker for the flour will no longer be counted in ee of the flour 28 to Prodi value of the bread that Pedro bought already includes the is jg therefore already includeg j, the bread. The value of the flour used for baking the arts, then we will be Counting th, GDP. If we still count the payment of the baker for the four Value of the same amount of flour twice. Let’s Examin —_—_—_—_—_—_o“oOO- = Activity 3: SEARCHING FOR DATA Search the Internet for the information below. * GDP of the Philippines for the previous year * Most recent quarterly estimate of Philippine GDP * Most recent estimates of GRDP Some possible sources of data are the following: + Philippine Statistics Authority: www:[Link] * Asian Development Bank: [Link] + World Bank: [Link] org Ea ala for countries other than + There are other Websites wh, ete data is avai f make sure that you indicate, ein ans at et to ne these sources, 9 Wer ng the ‘Westions on Page 15Advance opp ond GNI from GDP, another common outcome of nati ; income (GND —previously known as gross ee or GNP. os Rigi GNI by adding net primary income (NPI), also knownas net facto pe ca goad (NFIA), to GDP. That is, GNI = GDP + NPI. i Using the Philippines as a point of reference, NPI is the difference between the earnings of Filipinos from activities in other countries and the earnings of foreigners from activities in the Philippines. Higher earnings of Overseas Filipino Workers (OFWs) and profits of Filipinos from their investments abroad will make the NPI of the Philippines larger. Im contrast, higher earnings of foreigners in the country, be it from labor or investments, will make the NPI of the Philippines smaller. What all this means is that GDP refers to the value of production in the Philippines regardless of who makes the goods and services, In contrast, GNI _ refers to the value of production of citizens of the Philippines regardless of where the output was made. Table 12.1 provides estimates of the GDP and GNI of the Philippines for 2020. Tee estimate of NPI suggests that Philippine citizens made 1.4 trillion more from activities overseas than what foreigners made from activities in the Philippines: ‘This positive value thereason why the GNI (= ®'19.3 trillion) is larger than GDP (F179 trlion)a ee suring GDP: Basic Principles emma tid vate approaches for estimating GDP — Porta cidiog on final goods a : p approach calculates eee Fie een for the eet fon e roach a _— Services, income approach sah Fold Finily, the value added 2s Eee Ids Production — ‘Wages, rent, interest, an ana s in an economy. We may calculate the Value ic wi et OF the ee ee on goods and services Prosied Y other cr mee Be es 2 Worth oF 1s produces F400 to other fi in things like flour, sugar, and gas for the o its value itms for things like fl gar 8 ven, then its val rs 1000 - F-4o0), and paig added ig GDP by the expenditure approach = spending on good 1 + spending on ‘good 2+... spending on good n + spending onservice 1+ ... spending on service k GDP by the income approach ~ Wages + interest + rent + profits GDP by the value added pproach ~ Value added of firm 1 + ya Sirm2+.. lue added of value added of firm m @ different wa YY of viewing and ex; Penditure approaches, hould be included in S is the only One way to do so be an expenditure2.2 be used in calculating GDP? The income approach terest + profits. This means that the contribution of the GDP will be F700 (=100 + 150 + 50 + 400). As noted earlier, value added ween sales and purchases from other firms. The values in Table 12.2 = 1000 — 300). This will be the contribution of sh and is identical to its contribution with the How will the values in Table 1 pees that GDP = wages + rent + in ical firm to js the difference bet that the value added of the firm is 700 (- the firm to GDP nsing the value added approsc income approach. Why are the expenditure and valu fact that both these approaches genera using the income approach. ¢ added approaches equivalent? The answer lies in the te estimates of GDP that are equal to those calculated. Let’s Relate Approaches for Measuring The actual numbers for GDP adhe presented earlier, However, information is organize itself to a more meaningful analysis. ‘Actual estimates al: thatcapture some ofthe features of the real world. GpP: Actual Accounts re to the principles behit .d and presente so incorporate a few adju ind the three approaches din a manner hat ends eeital formation, refers 4, jestic capital “apital formation, also known as be ee This inictudes aes ofa ni i h: fi investments. by the Private and uta Mosc: vehicles oe vente a On Physical capital (eg, Mee and changes in firm inve ie i infrastructure, et), ae the spending on Philippine p; by 4. Exports Ff goods an services s Serco {ind services captures expenditures of the PI hilippines on goods and Services produced elsewhere in the world. > Captures Teporting, Tecording, and ‘up, however, the PSA nates (National Statistics largest Component of . Amounting to about 13,5 P for the period, The 4S exports and @ccounted for nal trade » these two items| ‘| tacome Approach 63 35% | ‘Compensation of employees Gross operating surplus 10.5| 58% | Tndirect taxes less subsidies 12| 7%| 179| 100% | [Gross Domestic Product take its ratio to GDP and then multiply the result ich item, expenditure is calculated as ‘Note: To estimate the share of ea f Household final consumption by 100. For example, the share o (13.5/17.9) x 100. Source: PSA (2020) Rather than presenting value added data by firm, the actual accounts organize information by types of activities. ‘The Agriculture, fishery, and forestry sector combines the value added of firms engaged in the production of crops (e.g palay, corn, fruits and 1 plants, harvesting of fish from the wild, vegetables, etc.), livestock and poultry, ornamental aquaciture, and forestry products. Industry includes the value added of firms engaged in the manufacture of food and non-food items, mining and quarrying, construction, utltes (gas, electricity, water, etc.). The Services sector iS composed of transportationfrom profits, profit 's. These items are f f financial suppo ern nt te ne ie Pe inc side of Cong nd 48 an adjustment item in the income side because aS ee at market prices, which incorporate the impacts se Reine oer P63 ane geen : ; ee rs rely 35% of the total, 123 the sizable contribution caine fer approximately free ro ee ie cee ited combined contribution > this amount is smaller than the estima ‘ and profits by about P42 trillion (= 10.5 - 6.3). J st Be fe ae activities and expenditure items. ae Eee : ilippines, 2 Philippine Statistical Yearbook and the National Accounts of the Philipp! Ss such as are both Published by the PSA, offer more details. te thi vi st aggregated t the values provided in Table 12.3 reflect the most aggreg note that the‘Indleators of a Nation's Health aake some adjustments to the estimates of GDP, GNI, and their components snéleators more useful for analysis. These revision, include accounting and population over time, and exchange rates of different countries, ‘is a description of adjustments to GDP.4 shows that nominal GDP and th , = YE) 1¢ GDP deflator for 2020 and 102.3, respectively. Applying the form 4 ula ed in. above suet 17,938,582.4 Real GDP in 2020 = ————— x 100 = 17,527,234 102.3 “9 sae of réal GDP here are valued at 2018 prices because the base year for GDP 3, In other words, the estimate of real GDP means that, valued at 2018 § P17527334.1 million. The estimate ofa 2020 were higher than prices : =e that prices in 2020 were, ~The estimates deflator is year 201: the GDP of the Philippines for 2020 wa GDP for 2020 is lower than nominal GDP because prices in api8. To be more specific, the GDP deflator of 102.3 for 2020 means Helis average, 2.3% (= 102.3 - 100) higher than in the year 2018. Table 12.4 Selected Economic Indicators for the Philippines, 2018 to 2020 Nominal GDP (million pes [abe deltr (2018 = 100) ~ Real GDP (million pesos, 2018 prices’ Note:*“2018 = 100” means that the base year for the GDP deflal tor is yeat 2018.161,137.44 108.8 because these provide a sense of the Productivity. tration, imagi F at arcs of, of an illustration, imagine two kitchens that are e ab : day. Suppose further that kitchen A has 2 workers 7 Per day, while : in kitchen A is, on the average, able tg that a worker in his information tells us are more Productive toy 100 pieces/4 workers ra ‘© Means that the d is higher than what it was in the Previous period, jn change in the opposite direction, For positive numbers SBRStS a faster ra He Of change. 7 he growth rate of any uation below,0 use estimates of GDP to, com pare the levels of production of different 1 challenge in doing so, however, is that GDP is typically one in me pesos while that of Japan isin yen. “These eotimates are ngt ely Cem ‘currencies, like goods, have different valuations or prices. Nae qf inorder to make meaningful comparisons of GDP across countries, estimat. {nveried into a common currency. While any currency will do for tis ade ae es festeommon practices is to use US dollars, The equation below chore thal hg ae viding GDP expressed in local currency (e-8» pesos) by the exchange rate (€.g, eee pesos tobuy one US dollar). GDP in local currency GDP in US dollars = ————————— Exchange rate Table 12.5 shows national accounts and population data for seven selected countries. It indicates that the GDP of the Philippines for 2020 was 361.5 billion US dollars (€ 361,489.3 /1,000). In terms of GDP, the Uni ted States (GDP = 20.9 trillion US dollars) and China (GDP = 14.7 trillion US dollars) orld. Their national outputs combined for about 45% of the 2020 GDP of the 193 countries reported by the World Development Indicators of the World Bank. are the largest economies in the wfable 12.5 Supports 4 ( he Common ‘and incomes) among countrieg a, had the highes ted here ang among the tro Manil. c disparity can be seen S that of the Philippines © GDP per capita of 14.6/365) US dollars "8s higher than the GDP * entire ) v of 2020, What this “Mbourp Produces Mor, © in one day than afe overall ipa oe 1 costs associated with higher levels of output. For ey Bilas in onder to achieve higher lees of sae Pie, pec at the cost of less time for rest and aed Wide stres son the part of the workforce. Other things being the same, higher 1 , requires more ‘inputs and generates more waste. This may translate ear e natural resources of a country. It may also mean greater pressure on the enviro ti of higher pollution levels: Ton pent i epee, Por. nae nicase pon coco > rs ignore transactions that do not pass through markets. pae of the many examples here are the chores we do at home. The services af cook or chef in a restaurant are likely to be counted in the GDP of a country, However, when we cook dinner for our family, the service is unlikely to be counted in GDP. Our action involves the same service, although on a smaller scale, as the cook in the restaurant but is not recorded in the national accounts because it does not go through a market, Second, there are also transactions which go through markets that are not counted im the national accounts. Many activities are not reported because these are illegal. Examples include drug trafficking and prostitution. ‘There are also many other activities which do not have legal issues as significant as the two previous examples but are nonetheless not reported to the authorities. Examples for the Philippines include transactions with street vendors aad unregistered sari-sari stores in our neighborhoods.Whar em 56 ensdeen ton erase? Wl “Pend Tore? Will you dave nigfe iB v You do both atthe sore er an ee ie eae Snswer if their incomes increase or é | scale, countries also grapple with the question of Spending oy Saving when there is a change in their overall income. This lesson will discuss the linkages between consumption, Savings, and income. It will also explain the importance of savings and consumption in modern economies. Let’s Find Out Check what You initially know about consumption and Saving by doing the following activities, ee _ its I Activity 1: RECALLING THE PAST Se Money to buy it?M -write your nameon the some your: have at the end of the year? ‘on how the money of the class will be os stolid 3 and.5 on a piece of paper. Get someone in class to write vial ss to questions 3 and 5. Are these different? Ifso, why a answers to questions ‘answers on the board. re the answers of your cla: let’s Enrich The Importance of Savings and Consumption Savings and consumption s consumption spending means that people are thet they want. From a macroeconomic perspectives translates to higher national income or output. An easy Way that Household final consumption expenditure is one of the components higher value for this item means 1 ie of GDP is going tobe hi vay to view this is that, if people want then we can expect firms producing more. in modem economies. Higher of the goods and services higher consumption spending also to understand this is f recall of GDP. Hence, # er as well. Another < to respond by spending are important able to purchase more hat the val to buy mores; ha se Musto do scor eT aS er eg te * 15F°50.000 a month, If it spends ‘set aside or save, 5.000 (= 50009 F45,000) that it can aa as tie iy rate, SUPP ian "ds fo buildup the assets, To De becaueal 5 200,000 and saves Ti worth OF asset a ge * saved 50,000, Flor will have two. This implies thay at she saves another 30,000 ist ypen? Recall = Flor ag the end of year 2. How did that the 30,000 wortl of Saving, end of year 1. We can then add end of year 2 (i.e., 80, ‘0 determine her assets at the riod = asses atthe oe let to det =e ieee s assets at the & be riod. ude cash, property in the current pen st ine mee ‘ay be held in many forms. ccounts, stocks, c i struments (funds in bank =. ep her assets (P8099 inancial instrumer ps Mee ee anche oben find ack to the earlier a eae Bee however, ns a = = deposit it in a bank. In m: rrcctlexartiple. is eit assets in fake nh ‘one form. Applied to the acd then keeping the reg °F from holding #29, 000 worth of her assets in cas bank account There are three Consumption fron, ‘OW suppose th 1 in assets by 50,000 wor th of assets at the Dae Ohi sot, ord 1000 + 30,000). 14 other wor the previous The ass, Period + Savings i *t5 Of households m, d buildings), 6 Welty. Going b, © form of cash i, andy ) ple thin, ting oF even je home in th, holding th to stop Fi g. The common reasons or motives for saving. Th ‘he present to the future, This means th oday happens when you date. In Activ; first is t0 trans, at any savings today in favor of more funds for consumption in the me sc 2 Part of your allowance in order to buy s ty 1, for example, stated that goods cided not to spend by also wi Preparation for retirement, The less consumption 4 translates to What days. This i Ing at a later ased using fundg orkers save You may hay efore. This is were purch: that you de hat you see when w funds in “cond reason for saving is called the bequest motiye This occurs when people save 50 that they have something to leave behind to theiy heirs, Finally People save to protect themselves $euinst unexpected (ang undesirable) event like losing theit Jobs, getting sick, OF getting into an accident. This ig known as Precautionary say ‘ings At the Mactoeconomic level, Savings are ™Portant be, ‘ause the TV€ as sources * 88 banks and Other’ financial ince ‘utions lend the Private ang Sovernment Entities ¢ t in physical “stments may benefit the €cono; r ) Ways, First ji 7 Pending. This leads to higher Gpp ; rh “SY Way to Visualize this ey Counts, 54.income ond Consumption jon fanction is a well-known relationship in macroeconomics. It states ‘The shat a higher tedsto higher consumption spending, It captures the idea that people who earn more tend to ational income, which could be represented by indicators like GDP oF GNI, more. Jable 13.1 illustrates the basi¢ principles behind the consumption function. First, it shows that consumption tends to increase aS national income rises. For example, the table shows that consumption in the hypothetical economy rises from 340 to 420 when income increases from 300 to 400. Second, the table indicates that consumption exceeds income at low levels hincome, We can see this happenin at income levels less than 500. In this situation, people are either borrowing or selling assets in order to pay for consumption. A simple way t© understand this is to note that people need to eat and spend for things even if they ate earning nothing or very little. Third, income exceeds consumption at higher levels of income. In Table 500. Fourth, the level of income (500) where BA, this occurs at income levels greater thai “tthe break-even eve of ncomes consumption and income are the same is callepet's Relate savings ‘The previous section savings fit into the story? ‘As with any household, a country can allocate its income (Y) between consumption © ‘ndsvings (6) In other words, income that was not spent must have been saved. In symbols, epresent this as Y= C + S. Using algebra, the previous equation can be manipulated to how that savings are equal to the difference betw Applying this equation to the values prese nted in the previous section allows us to generate a sgvings schedule as shown in Table 13.2 discussed the links between consumption and income, Where does een income and consumption or $ = Y-C. ‘Table 13.2 Consumption, Income, and Savings in a Hypothetical Economy eS 0 -100 100 -80 200 -80 300 a 400 — 500 500 f 600 580 2a 700 660 40 800 740 2 900 820 a uimption Note: * Savings = Income - ConsTHE SAVEN , a * ‘the Values in Table 13.2 a = in the diagram belove Connect the dots that represent “Combinations of sevings and income,_ INFLATION Let’s Explore Changes in prices affect the lives of people. To how you will react if the prices of the goods you buy at thi canteen were to double, Taking this point further, h parents feel if the prices of goods and services thet they ty?! see this, imagine ¢ school ically buy in the market increase? ‘The decisions that people make are also ll change over time. Farmers, driven by how they for example, will ¢ of harvest. They of fertilizer and believe prices wil think about the prices of their produce at the tim ‘will also want to have a good sense of the prices other inputs during the cropping season. ‘The issues described above relate to the concept of inflation This lesson defines inflation and discusses " provides the menu of actions that the government address this important economic concern. ts causes. It also can use tourement of Inflation and Its Meas' vp refers to the overall increase in the prices of goo nd decision makers attemPt to measure price changes because, like domestic these affect the lives of people and could be indicative of deeper issues in the .ds and services of an economy. nts in prices as 2 whole, analysts often examine the inflation rate. ib moveme his indicator represents percentage changes in the general price level and is calculated using ‘he formula below. price level at time t - price level at time tl Inflation rate at time t = x 100 price level at time t-1 sneral price ly used as an indicator of the get the CPI measures the cost it may also be defined relative to a base yeat is its focus 07 below provides index or CPI is common! te, Like any other price index, one year relative to a base year ces in one year (egn the GDP deflator), hpold, The equation ‘The consumer price Jpeel in estimating the inflation 12! tfa bundle of goods and services in as the weighted average of prices of goods and servi ‘What differentiates the CPI from ol goods and services that are consumed by the averas formula for calculating the inflation rate Using the CPI. CPI at time ther price indices ge housel CPI at time t-1 x 100 e t-1 Inflation rate at time t cP atge oF Dine e CPLa rate the as a whole Se 1 or 2020 of 1233 enFaNhe OE pace that the inflation than the base year (2012). Table 14.1 also in eqithibene an ir Was 2.69%. This suggests that prices in 2020 were oh oe higher than in 2019. The inflation rate for 2020 was also Sei Tate for 2019 (2.5%). This implies that prices rose faster in Bia one "wever, the inflation rate for 2020 is lower than the inflation rate for 2 .2%). This that prices in 2020 rose at a slower ‘Pace compared to 2018. . 7 Phrases “as a whole” or “on the average” are important in the interpretation cst the tate. The reason is that the inflation rate for 2020 does not mean that all prices in Year went up by 2.6%, It is merely an average increase of the prices of goods which might "have individually risen ot fallen at different rates. To see why this is so, all you need to do is _ go back to Lesson 12 of this unit, In Your calculations in Activity 6 in the said activity, you found that the price index for er than the price index for year 1, However, ifAlcoholic 7 beverages ond tobacco, 1.6 x \_ Clothing and Housing, water, Footwear, 2.9 electricity, gos and — other fuels, 22.0 Source: PSA 1 Weights for the CPI of the philippines, base year = 2012, in percent Figure 14. of the Philippines, 2018 to 2020 Source: Barigko Sentral ng Pilipinasi I |. This Suggests a los, lilo det [= 200/750 pet what you got back uy 4 kilos of rice (= {los Gaeett Patt because you effectively lent more (5 ive of the amount lent rspective of kilos). The losses here can be viewed nat from the ng or nilations Peepla e vi or borrowed but = 1m what that money can buy after ac interest on loans. However, 0 ee 7 charging an of course guard against the loss by Fition. ae it is possible to Whatever gains from interest can also aes eee To see this, it is 2 ae se 00 Borrowers: Borrowers are likely to gain ~ ined. The borrower gain feats “ssert that your friend, who borrowed 200, g pee eile! onkaeeeee from the transaction because he/she borrowed 5 rice from the trans to that of lenders as 1 here is similar * Savers: Savers lose from inflation. The reasoning y the future as a re: the money which savers set aside today are able to buy less in sult of the price increases. Elo hee Fized income earners: Many workers have incomes that tend to be fixe , 4 , ic condit ese le also lose from adjust quickly to changing economic conditions These people inflation because their incomes are able to buy less if p rices rise + Entrepreneurs and businesspersons: The impacts of inflation , © incomes of People in this group js a little bit harder to determine. To illu consider an cobreDreneur who sells beet tapa If part of the Teason for inflation he higher price of beef tapa, then the entrepreneur will benefit However, it is no} whether the tt it i en j Preneur does gain in the end. The Teason is that inflation may hay © been caused by higher prices of, the inputs used to Produce heer apa such as beer d Sat such as beef, so Sauce, an iBredients, Jp this Case, higher Production Costs wil] erode ar 8ains to theof this commodity is 50 = om " can purchase So Lies @ Sous oe fe Seeteeckice te expected to double by the end ofthe ee Fee ny wn slo by be oa sharp increase in prices can affect the mindset of Gout one “workers to demand payment of their wages earlier, say ne bey rush to the store and buy rice before its ‘ties goes up. This = might want to shop more often so that they can eee eh ; of price increases. Because their incomes are able to buy less than what it did ae are als0 likely to demand higher wages which their employers might not be capable of givin e be for there to be hyperinflation? es no How high should the inflation rate strict definition, Dornbusch, Fisher, and Startz (2018) note that inflation rates above 1,000% are often regarded as hyperinflation. If we work with the definition above, then the Philippines has not experienced hyperinflation in the ~ Post-World War Ii data for the country shows that the highest inflation rate it experienced was 47.1% jn 1984 (see Activity 3 of this Jesson). However, other countries wer< not as lucky. Table 14.2 presents selected countries that experienced hyperinflation in ‘or instance, Zimbabwe had an inflation rate of 24,411% in 2007. More recently, nted serious problems with 4 a 65,3749 inflation rate hyperinflation. The International Monetary Fun for the country in 2018. past decad ver the recent years. F Venezuela also confro! d (2019) estimate24,411 773 1994 a livia = : 1985 “tis Nicara a 1998 Nicaragua 85 1997 2 019 sicators, 20 ‘Source: World Bank, World Develop Ooi International Monetary Fund, 2 Let’s 5 Xamine 'YPERINFLATION Activity 5: rp EVALUATING YOUR SPENDING IN THE FACE OF H In Activity 4, You were asked to c SO8tS Of the good. happen if prices c For this activity, ities, prices, ang struct a table containing the quantities, pi ‘on examined what wil] ® Purchased with your current allowance. You also s Purchased with ye ange, calcul y at you purchased if Ate what will happen to the prices of the goods that you pi the inflation rates of 7; imbabwe in 2007 (=24,411%) were to happer e Philip, i (=24,411%) were pen in t Assessment Questions; nes, and services, how be able to buy the same with your current allowance? the same amount of You be able to buy 800ds? If not, what will 3. If you wish to buy Amount of goods, how much extra allowance will you ask from your parents &F Buardians? Do you believe that they will giy that much of an increase in your allowance? 4. Do you think th How about the “old this kind of a a‘rising from an upward shift of the deman ; \d curve. In he source is an upward shift in the supply curve = : * peoand pul inflation happens when economic agents want to spend m that wishes to embark on infrastructure projects can cause prices Moreover, an increase in the supply of money in an economy is also a source of ullinfation. One way to explain this is that people will want to spend more if there is more fponey circulating in the economy. ‘As noted earlier cost-push inflation occurs when prices of inputs increase. Some ¢ this are higher wages, higher world prices of imported inputs, and jation. Higher wages make labor costs in the production process ‘ne world prices of imported inputs such as crude oil and other ‘The same thing happens when t saw materials rise. While the effects of higher wages and world prices on inputs are quite easy to understand, the role of the exchange rate depreciation requires more explanation. ‘The exchange rate refers to the price of foreign currency: it states how much local currency (egs buy one unit of foreign currency (e.g. US dollar). Table 143 provides examples of exchange rates of the Philippine peso with other currencies. It indicates, for example, that We 48.04 to purchase one US dollar at the end of 2020. It also 46 centavos to buy one Japanese Y° id. nin the same periobecomes More expensing ate depreciation happens when foreign ae when more pesos a 19 domestic currency Applied to the Philippines, ed issen that we ee PUY cae wsiber foreign exchange. ‘To illustrate, Tal 48.04 19 buy one us 1e peso is said to oil he exchange rate ofthe Philippines or the p a depreciated if thig Price rises to more than 48,04, ge rate is part of th ‘imported inputs into dollar and the price o the Philippines Pay P ign currency; ¢ it is used to Convery lee renal sppor tat the exchenge Bee each barrel of crude oil (= eee rate x or P50 per dollar x $60 per barrel). is oa re ‘a8; then local oil refineries will have to pay P3, ~ P55 per dollar x $60 per barrel). ‘This means that the exch their production costs by 300 per barrel (= 3,300 - F3,000). Addressing Inflation Price of ange rate depreciates barrel of crude jj ange rate depreciation raiseq and money supply ets the salaries of rds. In the Past, the ring down inflation ake control of the at“write D ifit is an example of ple of cost-push inflation. In their desire to raise investments, companies spend more for the construction of buildings. _ >, Imported raw materials used in Philippine factories become more arene +3. The peso depreciates from 50 centavos per Japanese yen to 80 centavos per Japanese yen. 4. Government spends more for the construction of roads. 5. Farmers pay more for fertilizer. 6. The Bangko Sentral ng Pilipinas lowers interest rates in order to raise money supply. 7. K storm destroys roads and makes it more expensive to transport ____ 00ds from farms to the market,i Presented earlier excludes government and ing that integrates these actors makes the diagram larger the additional agents interact with households — sae and whee Provide a large diagram, the next paragrap! just < it have to be accounted for when government and for a See'what an the extended circular flow da, like may consutt Case and Fair (1996), The Soveriment transacts with, households and firms. For instance, and services like pa, it purchases “Production from bi ‘Per and electricity from firms, The government al; ouseholds. An easy example here is that all gover including the President of the country, transactions into Figure 11.1, the start actor. We wil] then need to draw arroy households and ™ment employes, re to integrate they. ernment as anothe are members of households. If we a: "ing point will be to add the gov ws to (and from) the government it from (and to) the firms. These arrows will also need to pass through the So0ds, services, ang factor markets, The role of the Sovernment does not end factors with purchasing goods and services an S of production. It also charges taxes ‘and/or fees on economic Profits, ownership of Property; purchases of goods and services Payments are Tepresented in the circular flow as an arrow em; firms to the government. An arrow from the government This includes different kinds of. Support provided by the g iting agents for income and other transactions. These Snating from households and holds and firms also exists, vernment to the: ‘ntry also transact gents in the Philippine, The first are to house! Se agents, With foreigners, Let S and other countries Sales and purchases of