CHAPTER I Socialism--->Communism

MACROECONOMICS FUNDAMENTALS -equittable not equal.

ECONOMICS - is a social science that deals with -Mixed----> system of state.

“proper” allocation and distribution of limited
resources to satisfy unlimited wants and needs.
CHAPTER II

2 DIVISIONS THE NATIONAL INCOME ACCOUNTING

MICROECONOMICS - small. GDP vs. GNP

- firms and consumers. GROSS DOMESTIC PRODUCT - total market or

money value of all final goods and services produced
MACROECONOMICS - big. in a economy over a period of one year.

- national economy aggregate. GROSS NATIONAL PRODUCT - total market or

money value of all final goods and services produced
- how we can increase our by a nation’s residents, no matter where they are
country’s wealth given the available resources. located.
NORMATIVE vs. POSITIVE 3 WAYS TO MEASURE GDP
NORMATIVE - subjective. EXPENDITURE APPROACH - measures GDP by
- dependent on ethical considerations such adding all the spending for final goods during a period
as “fairness”. of one year.

- “should”. GDP=C+I+G+(X-M)

POSITIVE - facts or relationships which can be proven C - Personal consumption expenditure.

or disproven. I - Gross private domestic investment.
- “will”. G-Government consumption expenditures and gross
CIRCULAR FLOW MODEL - movement of goods investment.
and services between household (consumer) and the (X-M) - Net exports.
firm (producer).
INCOME APPROACH - measures GDP by adding all
ADAM SMITH - Father of Economics. the incomes earned by households in exchange for the
- Classical economics. factors of production during a period of time.

- Market oriented. NATIONAL INCOME(NI) = W + R + P + i

- Wealth of nations. GDP = compensation of employees + rents + profits

+ net interest + indirect taxes + depreciation
SOCRATES
GDP = NI + IBT + D
PLATO----->ARISTOTLE----->ADAM SMITH
IBT- Indirect business taxes.
|Republic.
GDP INDUSTRIAL ORIGIN APPROACH - considers
|Socialism the contribution of three sectors, namely: (1)
agriculture, fishery, and forestry sectors; (2) industry
|Communism
sector; and (3) service sector.
|Utopian State
GDP = GVA or GDP = AS + IS + SS
>KARL MARX
GDP SHORTCOMINGS - nonmarket transactions; MPS + MPC =1
distribution kind and quality of products; neglect of
leisure time; the underground economy and economy S=i
bads. i=Y- C
NOMINAL/CURRENT GDP - value of all final goods where:
and services based on the prices existing during the
time period of production. S - Aggregate savings from currently generated
income.
REAL GDP - the value of all final goods and services
produced during a given time period based on the i - Inflow.
prices existing in a selected base year.
M= Y
REAL GDP = NORMAL GDP X 100
t
GDP DEFLATOR
M = 1 - MPC, then
CHAPTER III M= 1
CONSUMPTION AND SAVINGS 1 - MPS
CONSUMPTION - expenditures made by households Generating more income means more savings.
on goods and services.
FACTORS OF CONSUMPTION
Y=Cb+ C
>Taste and preferences.
where:
>Population.
Y - Factor income.
>Income.
Cb - Borrowings from the economy’s stock of savings.
>Price level.
C- Change in consumption.
>Innovation and promotion.
National income minus Inflows of investment (I),
Government spending (G), and Net exports (Xn). CHAPTER IV
MULTIPLIER - process of generating income through INVESTMENT FUNCTION
the circular flow exchange between the households and
the firms. INVESTMENT - process of increasing the capital
stock and the expenditure in which it determines the
MULTIPLIER CONCEPT - phenomenon whereby income and production in the economy.
some initial increase or decrease in the rate of spending
will bring about more than proportionate increase or INVESTMENT EXPENDITURE - component of
decrease in national income. aggregate demand and an injection into the circular
flow of national income.
K= 1 = 1 INVESTMENT AND THE MULTIPLIER
1-(MPC) MPC y = IM
where: y=I+ C
K - multiplier coefficient. since initially:
MPC - marginal propensity to consume. y=C
MPS=1-MPC - marginal propensity to save. therefore:
 y=C+ C+I >Price level.

y=C+I >Population growth.

where: >Taxes and interest rates.

y - income. >Innovations.

C - consumption. >Profits

I - investment. >Expectations.

M - multiplier. INVESTMENT DEMAND DETERMINANTS

- change in. >Interest rates.

Kn = (K+I-D), Yn = (y+ y1- yd) ACCELERATION PRINCIPLE - states the level of

where:
Kn - capital stock after investment and depreciation or
net capital stock.
K - capital stock before investment and depreciation
I - investment.
D - depreciation.
Yn - output after investment and depreciation.
y - output before investment and depreciation.
y1 - change in output due to investment.
yd - change in output due to depreciation.
SAVINGS - unspent portion of income.
S=Y-C
investment is a function of desired changes in output.
INTRO CHAPTER
THEORIES
What is ECONOMICS?
A science that deals with the management of scarce
resources. It is also described as a scientific study on
how individuals and the society generally make
choices.
Origin of the term “economics”
The two Greek roots of the word economics are oikos –
meaning household – and nomus – meaning system or
management. Oikonomia or oikonomus therefore
means the “management of household.”
With the growth of the Greek society until its
development into city-states, the word became known
or was referred to as “state management”.

where: Scarcity
 The basic and central economic problem
S - saving
confronting every society.
Y- income  It is also “limited resources in Demand.”
C - consumption  The heart of the study of economics, and the
SAVING-INVESTMENT EQUILIBRIUM - the reason behind its reality.
increasing, decreasing or maintaining the level of Four Basic Economic Questions
investment expenditure.
1. What to produce?
Y=C+I
2. How to produce?
Y-C=I 3. How much to produce?
S=I 4. For whom to produce?
DETERMINANTS OF SAVINGS 3Es in Economics
1.Efficiency refers to productivity and proper
allocation of economic resources.
1. 2. Equity means justice and fairness.
2. 3.Effectiveness means attainment of goals and
objectives.
3. Ceteris Paribus Assumption
4. The assumption of “Ceteris Paribus” is
important in studying economics. Ceteris
paribus means “all other things held constant or
all else equal.”
Microeconomics
 Deals with the individual decisions of units of
the economy—firms and households, and how
their choices determine relative prices of goods
and factors of production.
 The market is the central concept of
microeconomics. It focuses on its two main
players—the buyer and the seller, and their
interaction with one another.
 Microeconomics operates on the level of the
individual business firm, as well as that of the
individual consumer. It concerns how a firm
maximizes its profits, and how a consumer
maximizes his/her satisfaction.
Macroeconomics
 Studies the relationship among broad economic
aggregates like national income, national
output, money supply, bank deposits, total
volume of savings, investment, consumption
expenditure, general price level of
commodities, government spending, inflation,
recession, and employment.
 Macroeconomics focuses on the four specific
sectors of the economy: the behavior of the
aggregate household (consumption); the
decision making of the aggregate business
(investment); the policies and projects of the
government (government spending); and the
behavior of external/foreign economic agents,
through trading (export and import).
Types of Economic Systems
Traditional Economy
It is basically a subsistence economy. A family
produces goods only for its own consumption.
Command Economy
It is a type of economy, wherein the manner of
production is dictated by the government. The
government decides on what, how, how much, and for
whom to produce.
Market Economy
or capitalism’s basic characteristic is that the resources
are privately owned, and that the people themselves
make the decisions. It is an economic system wherein
most economic decisions and means of production are
made by the private owners.
Socialism
It is an economic system wherein key enterprises are
owned by the state. In this system, private ownership is
recognized.
Mixed Economy
This economy is a mixture of market system and the
command system. The Philippine economy is described
as a mixed economy since it applies a mixture of three
forms of decision-making.
Birth of Economic Theory: Classical Economics
Adam Smith, 1723-1790
• He is considered the most important
personality in the history of economics—being
regarded as the “Father of Economics”.
• He was responsible for the recognition of
economics as a separate body of knowledge. His book,
“Wealth of the Nations”, published in 1776, became
known as “the bible in economics” for a hundred years.
• One of his major contributions was his
analysis of the relationship between consumers and
producers through demand and supply, which
ultimately explained how the market works through the
invisible hand.
David Ricardo
• He developed the basic analysis of the
political economy or the importance of a state’s role in
its national economy.
Karl Marx
• A German, who is influenced by the
conditions brought about by the industrial revolution
upon the working classes. His major work, Das
Kapital, is the centerpiece from which major socialist
thought was to emerge.
Neoclassical Economics (1870s)
Leon Walras, who introduced the general economic
system, and Alfred Marshall, who became the most
influential economist during that time because of his
book Principles in Economics.
• Walras developed the analysis of equilibrium
in several markets. On the other hand, Marshall
developed the analysis of equilibrium of a particular
market and the concept of “marginalism”.
 economic phenomena in formulating different kinds of
studies and new theories in economics.

• This development in economics is applicable

to concerns of developing countries, and was largely an
Keynes’ General Theory of Employment, Interest outcome of concern for the growth of developed
and Money
countries. The great economists like Smith, Ricardo
and Malthus addressed this problem.
John Maynard Keynes
• An English economist who offered an
explanation of mass unemployment and suggestions for
government policy to cure unemployment in his
influential book: The General Theory of Employment,
Interest and Money (1936). Keynes’ concern about the
extent and duration of the worldwide interwar
depression led him to look for other explanations of
recession.
• Furthermore, he argues that investment
depends primarily on business confidence which would
be low during a depression so the investment would be
unlikely to rise even if interest rate fell. Finally, he
argued that the wage rate would be unlikely to fall
much during a depression given its ‘stickiness’, and
even if it did fall, this would merely exacerbate the
depression by reducing consumption.

Non-Walrasian Economics (1939)

John Hicks was recognized for his analysis of the IS–
LM model, which is an important macroeconomic
model. IS refers to the goods market for a given
interest rate, while LM means money market for a
given value of aggregate output or income.

Post-Keynesian Economics (1940 and 1950s)

This Era saw the development of rules and regulations
of different private and public institutions. This period
introduced major post-Keynesian, neoclassical
economists, whose views are known as the post-
Keynesian “mainstream economics”.

This period welcomed various economists like Paul A.

Samuelson, Kenneth J. Arrow, James Tobin and
Lawrence Klein, to mention some recognized leaders;
and others are Joan Robinson; and Michael Kolechi.
Another stream of thought was introduced by liberal
market post-Keynesians, mainly the monetarists, led by
Milton Friedman.

New Classical Economics

• New Classical Economics highlighted the
importance of adherence to national expectations
hypothesis and analysis, which included various