Gross Domestic Product
Measure of aggregate output
Monetary measure
One factor we consider in knowing if we have an increasing/ developing economic growth.
Overall production of goods and services within the Philippines.
Lahat ng produkto ng Pilipino na gawa sa Pilipinas ay kasali rito.
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Final good – (part/ kasali)
Intermediate good – (ignore) a possibility to use it again. Hence, not yet the end.
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Avoid multiple counting
Market value final goods
Ignore intermediate goods
Count value added
Exclude financial transactions
Public transfer payments
Private transfer payments
Stock (and bond) market transactions
Second-hand sales
Sell used car to a friend
Example:
In 2018, you bought a car– included in GDP. However, in 2020, you sold the car for 660K– not included in GDP. However, If modified (e.g. +pakpak), it is included,
Two Approaches to GDP
Income approach
Count income derived from production
Counting all income that you are getting from all the sectors of the economy.
Kita ng lahat ng tao.
Wages, rental income, interest, income, profit
Components of National Income
Compensation of employees
Rents
Interest
Proprietor’s income
Corporate profits
Corporate income taxes
Dividends
Undistributed corporate profits
Taxes on production and imports.
Income Approach
From national income to GDP
Net foreign factor income
Statistical discrepancy
Consumption of fixed capital
Other national accounts
Net domestic product (NDP)
National income (NI)
Personal income (PI)
Disposable income (DI)
DI = C + S
Income Relationships
Gross domestic product (GDP)
Less: Consumption of Fixed Capital
Equals: Net Domestic Product (NDP)
Less: Statistical Discrepancy
Plus: Net Foreign Factor Income
Equals: National Income
Less: Taxes on Production and Imports
Less: Social Security Contributions
Less: Corporate Income Taxes
Less: Undistributed Corporate Profits
Plus: Transfer Payments
Equals: Personal Income (PI)
Less: Personal Taxes
Equals: Disposable Income (DI)
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Expenditure approach
Count sum of money spent buying the final goods
Lahat ng gastos (all sectors )
Who buys the goods?
Consumption by Households + Investment by Businesses + Government Purchases + Expenditures By Foreigners = GDP
Wages + Rents + Interest + Profits + Statistical Adjustments = GDP
Expenditure Approach
Personal consumption expenditures (C)
Durable consumer goods
Non-durable consumer goods
Consumer expenditures for services
Domestic plus foreign produced
Gross private domestic investment (I)
Machinery, equipment, and tools
All construction
Changes in inventories
Creation of new capital asset Non-investment transactions
Non-investment transactions
*insert formula and picture
Government purchases (G)
Expenditures for goods and services
Expenditures for social capital
Excludes transfer payments
Net exports (Xn)
Add exported goods
Subtract imported goods
NX = exports - imports
GDP = C + Ig + G + Xn
(additional)
Industrial approach
All industries (agriculture, manufacturing, food, etc.) – all products that they produce have a counterpart price.
Income Approach = Expenditure Approach = Industrial Approach
However, expenditure approach is usually used to for GDP: H + B + G T
Because not everyone announces their income.
Industrial Approach (usually late data)
Nominal vs. Real GDP
GDP is a PESO measure of production
Using PESO value creates problems
Nominal GDP
Use prevailing price
Real GDP
Reflect changes in price
Use base year price
Shortcomings of GDP
Non-market activities
Leisure
Improved product quality
The underground economy (not included)
Ex: blackmarkets
GDP and the environment
Payoff of economic growth, environment. (pareto efficiency)
Composition and distribution of the output
Non-economic sources of well-being
(insert business cycle)
UNEMPLOYMENT AND INFLATION
Durable and nondurable industries are affected differently.
Unemployment
Twin problems of the business cycle
Unemployment
Inflation
Measurement of unemployment
Who’s in the labor force
Problems with the unemployment rate
Part-time employment
Discouraged workers
insert unemployment rate formula
Types of unemployment
Frictional → same work
ex: teacher → teacher
Structural → ibang work
ex: teacher → call-center
Cyclical → cycle/ seasonal
ex: Christmas mascot or farmer sa tanim/ ani
Full employment defined:
No cyclical unemployment
Natural rate of unemployment
Full employment rate
Natural rate of unemployment
1980s 6%
Today 4-5%
Aging labor force
Temp agencies and the internet
New welfare laws and work requirements
Prison population has doubled
Cost of Unemployment
Foregone Output
Potential Output
GDP gap
(Actual output - potential output)
Okun’s Law
Each 1% above NRU creates negative 2% output gap
Unemployment
Unequal burdens
Occupation
Age
Race and ethnicity
Gender
Education
Duration
Non-economic costs
Inflation
Rise in general level of prices
Consumer price index (CP)
Market basket
300 goods and services
Typical urban consumer
2 year updates
insert CPI formula
Types of inflation
Demand pull – You’re getting/ attracting an increase in the prices of goods and services in the demand.
(increase) P
more demand attracts higher prices
Cost-push – Resources are expensive
(high) production of those goods, thus, (high) price of goods and services.
Redistributive Effects
Nominal and real income
Growth in nominal income vs. inflation rate
Anticipated vs. unanticipated inflation
Who is hurt by inflation?
Fixed-income receivers
Savers
Creditors
Who is unaffected or not hurt by inflation?
Flexible-income receivers
Cost-of-living- adjustments (COLAs)
Debtors
Other inflation Issues
Deflation – (decrease) price level
(add.) Stagflation – Big (increase) in price level
(increase) unemployment
Mixed effects
Arbitrariness
Cost-push inflation and real output
Demand-pull inflation and real output
Hyperinflation
(add)
Savings = ex: Php 500 → Php 500 (after months)
Invest - spend = spend + payoff
(increase) money in circulation (MS)
(increase) production
(increase) employment
(increase) GDP