FD NECON: APPLIED ECONOMICS

Marginal Benefits
Term 1: Week 1
➔​ Additional benefits.
BUILDING A DEFINITION OF ECONOMICS ➔​ The benefits connected to consuming an additional unit of a
Goods and Bads good or undertaking one more unit of an activity.
●​ Good: Anything from which individuals receive utility or Decisions at the Margin
satisfaction. ➔​ Decision making characterized by weighing the additional
●​ Utility: the satisfaction one receives from a good. (marginal) benefits of a change against the additional (marginal)
●​ Bad: Anything from which individuals receive disutility or costs of a change with respect to current condition.
dissatisfaction.
●​ Disutility: the dissatisfaction one receives from a bad. Efficiency
●​ MB = marginal benefits
Resources ●​ MC = marginal costs
●​ Land
➔​ All natural resources, such as minerals, forests, water, and ➢​ In the exhibit, the MB curve of studying is downward sloping
unimproved land. and the MC curve of studying is upward sloping.
●​ Labor ➢​ As long as MB > MC, the person will study.
➔​ All natural resources, such as minerals, forests, water, and ➢​ The person stops studying when MB = MC. This is where
unimproved land. efficiency is achieved.
●​ Capital
➔​ Produced goods that can be used as inputs for further
production, such as factories, machinery, tools, computers,
and buildings.
●​ Entrepreneurship
➔​ The particular talent that some people have for:
◆​ Organizing the resources of land, and capital to
produce goods.
◆​ Seeking new business opportunities
◆​ Developing new ways of doing things.
●​ Technological

Scarcity
➔​ The condition in which our wants are greater than the limited Definition of Terms
resources available to satisfy those wants. ●​ Incentives
➔​ Something that encourages or motivates a person to take
an action.
Economics, the Science of Scarcity ●​ Unintended Effects
The science of how individuals and societies deal with the fact
➔​ A positive or negative outcome that was not anticipated,
that wants are greater than the limited resources available to
satisfy those wants. ●​ Exchange/Trade
➔​ The process of giving up one thing or another.
◆​ Export and Import (BOP)
Opportunity Costs
➔​ The most highly valued opportunity or alternative forfeited
The Market and Government Addressing Issues
when a choice is made.
●​ Financial problems in the banking sector.
➔​ Economists believe that a change in opportunity cost can
●​ The economic effects of falling real estate prices.
change a person’s behavior.
●​ Growing deferral budget deficits.
➔​ The higher the opportunity cost of doing something, the less
●​ A fall in economic activity, as measured by the total output of
likely it will be done.
goods and services produced in the country.
Scarcity, Choice and Opportunity Costs
●​ Rising unemployment.
●​ The looming crisis in Social Security.
●​ Health-care issues.
●​ Issues related to climate change and the environment.
●​ The proper role of monetary policy.
●​ The proper role of government regulatory policy in the
economy, and much more.
 FD NECON: APPLIED ECONOMICS

4.​ How does a consumer determine how much of a good he or

The Market and Government she will buy?
When it comes to economic problems, the national debate usually 5.​ Can government policy affect business behavior?
proceeds along these lines: 6.​ Can government policy affect consumer behavior?
1.​First, the problem is identified and defined or described.
2.​Second, individuals attempt to identify the cause of the
●​ Macroeconomics
problem.
➔​ Deals with human behavior and choices as they relate to
3.​Third, individuals propose solutions to the problem.
highly aggregate markets (e.g., the goods and services
market) or the entire economy.
With respect to both the cause and the solution, we often hear two
words mentioned the “market” and “government.” Macroeconomic Questions
●​ Either: the market (or capitalism) is the cause of the problem. 1.​ How does the economy work?
2.​ Why is the unemployment rate sometimes high and
●​ Or: the government is the cause of the problem.
sometimes low?
●​ Either: the market (or capitalism) is the solution to the problem.
3.​ What causes inflation?
●​ Or: the government is the solution to the problem. 4.​ Why do some national economies grow faster than other
national economies?
Definition of Terms 5.​ What might cause interest rates to be low one year and high
●​ Ceteris Paribus the next?
➔​ A Latin term meaning “all other things constant” or 6.​ How do changes in the money supply affect the economy?
7.​ How do changes in government spending and taxes affect
“nothing else changes.”
the economy?
➔​ Ceteris paribus is an assumption used to examine the
effect of one influence on an outcome while holding all Term 1: Week 2
other influences constant. Types of Poverty
➔​ Qdx = f(Px) ●​ Income poor
➔​ # of students in DLSU = f (tuition fee in DLSU) ●​ Food poor
●​ Theory ●​ Chronic poor
➔​ Economists build theories to answer questions that do not ○​ Vicious cycle of poverty (generational)
have obvious answers. ○​ Solution: at least one of them should finish
education

MACROECONOMIC PROBLEMS
➔​ Theory is an abstract representation of the real world
designed with the intent to better understand the world. ●​ High inflation rate
●​ High unemployment rate
Economic Categories ●​ High-interest rates
Positive vs Normative Economics ●​ Low economic growth or stagnation
●​ Positive (facts)
➔​ A study of “what is” in economic matters. Inflation
➔​ Is an increase in the price level and is usually measured on an
annual basis.
➔​ The inflation rate is the positive percentage change in the price
●​ Normative (norms and judgements) level on an annual basis.
➔​ The study of “what should be” in economic matters.
➔​ Judgement and Opinion When you know the inflation rate, you can find out whether
your income is:
Microeconomics vs Macroeconomics
●​ Microeconomics (1)​ Keeping up with,
➔​ Deals with human behavior and choices as they relate to (2)​ Not keeping up with, or
(3)​ More than keeping up with inflation.
relatively small units – an individual, a business firm, an
industry, a single market. Ex. current inflation rate is 5%, ideally, income must be raised by
Microeconomic Questions around 5%.
1.​ How does a market work?
2.​ What level of output does a firm produce? How you are doing depends on whether your income is rising
3.​ What prices does a firm charge for the good it produces? by:
 FD NECON: APPLIED ECONOMICS
Unemployment
(1)​ The same percentage as,
(2)​ A smaller percentage than, or ●​ The total population of the United States can be divided into
(3)​ A greater percentage than the inflation rate, respectively. two broad groups.
➔​ One group consists of persons who are (1) under 16 years
of age, (2) in the armed forces, (3) institutionalized (in
➔​ When you make this computation and comparison, you are prison, mental institution, or home for the aged.)
determining your real income for different years. ➔​ The second group, which consists of all others in the total
➔​ Real income is a person’s nominal income (or current dollar population, is called the civilian non-institutional
amount of income) adjusted for any change in prices.
population.
➔​ Real income is computed as follows:

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 Who are the Unemployed?

*Real income = ( 𝐶𝑃𝐼 (𝑚𝑒𝑎𝑠𝑢𝑟𝑒 𝑜𝑓 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛) ) 𝑥 100

*value of your income corrected with the rate of inflation

Macroeconomic Measures - Prices

●​ Price level
➔​ A weighted average of the prices of all goods and services.
●​ Price Index
➔​ A measure of the price level.
●​ Consumer Price Index (CPI)
➔​ A widely cited index number of the price level; the
weighted average of prices of a specific set of goods or Who Are the Employed?
services purchased by a typical household.
●​ Base Year According to the Bureau of Labor Statistics (BLS), employed
➔​ The year chosen as a point of reference or basis of persons consist of:
comparison for prices in other years; a benchmark year. ➔​ All persons who did any work for pay or profit during the
survey reference week.
➔​ All persons who did at least 15 hours of unpaid work in a
Computing the Consumer Price Index
family-operated enterprise.
➔​ All persons who were temporarily absent from their regular
jobs because of illness, vacation, bad weather, industrial
dispute, or various personal reasons.

Who Are the Unemployed

According to the BLS, unemployed persons consist of:

➔​ All persons who did not have jobs, who made specific active
efforts to find a job during the prior four weeks, and who
were available for work.
➔​ All persons who were not working and who were waiting to
be called back to a job from which they had been
Changes in Prices temporarily laid off.
𝐶𝑃𝐼 𝑙𝑎𝑡𝑒𝑟 𝑦𝑒𝑎𝑟 − 𝐶𝑃𝐼 𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟
Percentage change in prices = ( 𝐶𝑃𝐼 𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟
) 𝑥 100
Example: In 2005 the CPI was 195.3; in 2006 the index was 201.6/ ●​ Unemployment Rate
what was the percentage change in prices from 2005-2006? ➔​ The percentage of the civilian force that is unemployed:
​ Answer: 3.23%
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛𝑠
U= 𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝑥 100
GDP Implicit Price Deflator vs. Consumer Price Index
●​ GDP Implicit Price Deflator is based upon all goods and services ●​ Employment Rate
produced in an economy. ➔​ The percentage of the civilian noninstitutional population
●​ CPI is based upon a representative group of goods and services that is employed:
purchased by a typical household.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑝𝑒𝑟𝑠𝑜𝑛𝑠
(E) = 𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛−𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑥 100
 FD NECON: APPLIED ECONOMICS

➔​ Natural unemployment rate = Frictional

●​ Labor force participation rate unemployment rate + Structural
➔​ The percentage of the civilian non-institutional population unemployment rate.
that is in the civilian labor force:
Full ➔​ The condition that exists when the
LFPR =
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝑥 100 Employment unemployment rate is equal to the natural
𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑛𝑜𝑛−𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 unemployment rate.

Who are the Unemployed ●​ Cyclical Unemployment Rate

➔​ The difference between the unemployment rate and the
Job loser ➔​ This is a person who was employed in the
natural unemployment rate.
civilian labor force and was either fired or laid
off.

Job leaver ➔​ This is a person employed in the civilian labor

force who quits his or her job.

Reentrant ➔​ This is a person who was previously

employed, hasn’t worked for some time, and
is currently reentering the labor force.

New entrant ➔​ This is a person who has never held a

full-time job for two weeks or longer and is
now in the
➔​ civilian labor force looking for a job. Economic growth is different from development
Growth = high per capita income (basis whether a country is
considered rich or poor.
Discouraged Workers
GDP per capita = GDP/population
➔​They are former workers who are not actively looking for work
Development =
and are not waiting to be called back to a job or to report for a
job.
➔​Discouraged workers are not counted as unemployed workers. GROSS DOMESTIC PRODUCT (GDP)
➔​ The total market value of all final goods and services produced
Unemployment Rates annually within a country’s borders.

Ways to Compute GDP - Expenditure Approach

➔​ Add the amount of money spent by buyers of final goods and
services
◆​ Goods in the hands of their final users.
➔​ Avoid double counting.
➔​ Do not count intermediate goods
◆​ Goods that are inputs for the production of final goods.

Ways to Compute GDP Income and Value-added Approaches

Types of Unemployment/Employment
➔​ Income Approach - add the sum of all incomes earned (wages,
Frictional ➔​ Unemployment due to the natural interest, rents, and profits) in producing goods and services.
Unemployment “frictions” of the economy, which is ➔​ Value-added Approach - add the value added at each stage of
caused by changing market conditions and production of all goods and services.
is represented by qualified individuals with ➔​ Expenditure Approach - C + I + G + NX
transferable skills who change jobs.

Structural ➔​ Unemployment due to structural changes Certain non-market goods and

Unemployment in the economy that eliminate some jobs services such as chores performed at
and create other jobs for which the home by family members.
unemployed are unqualified.
What’s Not Included in Underground activities, both legal and
Natural ➔​ Unemployment caused by frictional and GDP illegal such as legal unrecorded
Unemployment structural factors in the economy. activities paid for in cash or illegal
 FD NECON: APPLIED ECONOMICS

gambling. ◆​ If PCI - 3,000, % Growth = 10%:

70
●​ 10 = 7 years it would take 7 years for income
Sales of used goods.
to double.
➔​ Keywords: “inequality,” “pump prime,” “take-off,”
Financial transactions such as trading
“trickle-down.”
of stocks and bonds.
Stocks = shares of the company,
claim/own part of the company
Bonds = debt instrument (priority) GDP - Expenditure Approach Sectors

Government transfer payments, a Consumption ➔​ The sum of household spending on:

payment to a person that is not for ◆​ Durable goods
goods and services currently supplied ◆​ Nondurable goods
such as social security. ◆​ Services

Leisure time.
Durable Goods: are goods that are expected to
GDP and Bads last for more than three years, such as
➔​ GDP counts the goods and services, but it does not net out the refrigerators, ovens, or cars.
air and water pollution.
➔​ Thus, some economists argue that GDP overstates our overall Nondurable Goods (perishable): are goods that
economic welfare. are not expected to last for more than three
years, such as food.

GDP - Expenditure Approach 4 Sectors Services: are intangible items such as lawn care
car repair, and entertainment.
●​ Household Sector - Consumption
●​ Business Sector - Investment Investment ➔​ The sum of all purchases of:
●​ Government Sector - Government Purchases
◆​ Fixed Investment - newly produced
●​ Foreign Sector - Net Exports
GDP Formula: capital goods - business purchases of
capital goods, such as machinery and
GDP = C +I + G + (X-M)
factories.
*trade deficit (-) ◆​ Inventory Investment - changes in
*trade surplus (+) business inventories (stock of unsold
goods).
GDP Per Capita ◆​ Purchases of new residential housing

𝐺𝐷𝑃 Government Includes:

➔​ 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 Purchases ➔​ Federal, state, and local government
➔​ Per capita Income purchases of goods and services and gross
➔​ Determines whether a country is rich/poor. investment in highways, bridges, and so on.
➔​ Determines whether a country is a developed/developing
Excludes:
one.
➔​ Developed: $9,000 Per capita income. ➔​ Government transfer payments to persons
➔​ Developing: $8,999 and below Per capita income. that are not made in return for goods and
➔​ Developing is subdivided into 3 categories (upper, middle, low services currently supplied.
class).
➔​ Developed is only concentrated in a few parts of the world Net Exports ➔​ Exports (X)
(Europe, North America, Japan, South Korea, Singapore, etc.) - ◆​ Total foreign spending on domestic
and the rest of the region is poor.
(U.S.) goods.
➔​ Rule of 70: explains the doubling number of years (of any
Less
number)
◆​ Example: the PCI of the PH in 2023 is $300, and the ➔​ Imports (M)
GDP growth rate is 4%: ◆​ Total domestic (U.S.) spending on
70 foreign goods.
●​ 4 = 17.5 years it would take 17.5 years for
income to double ●​ If a country imports more than it exports, it
●​
70
= $6,000 runs a trade deficit. (-)
40
○​ Pay in dollars
 FD NECON: APPLIED ECONOMICS

○​ Currency appreciates
National Income
○​ Bumaba peso = appreciate (inverted) ➔​ Total income earned by PH citizens and businesses, no matter
●​ If it imports less than it exports, that creates where they reside or are located.
a trade surplus. (+) ◆​ Sea-based
○​ Earn dollars ◆​ Land-based
○​ Currency depreciates ➔​ National income is the sum of the payments to resources (land,
○​ Tumaas peso = depreciate (inverted) labor, capital, and entrepreneurship).

GDP - Expenditure Approach Computing National Income

National Income = Compensation of employees

+ Proprietors’ income
+ Corporate profits
+ Rental income
+ Net interest

Compensation of Employees
➔​ Compensation of employees consists of wages and salaries paid
to employees plus employers’ contributions to Social Security
and employee benefit plans plus the monetary value of fringe
*govt purchases : only state and local (no federal) in the philippines benefits, tips, and paid vacations.

GDP - Income Approach Proprietors’ Income

➔​ Proprietors’ income includes all forms of income earned by
1.​ Purchases (expenditures) made in product markets flow to self-employed individuals and the owners of unincorporated
business firms. businesses, including unincorporated farmers.
2.​ Business firms then use these monies to buy resources in
resource markets.
3.​ These monies flow to the owners (suppliers) of land, labor, Corporate Profits
capital, and entrepreneurship. ➔​ Corporate profits include all the income earned by the
4.​ The sum of these resource payments is total income, which stockholders of corporations.
flows to households. In this simple economy total purchases
(expenditures) equal total income. Rental Income (of persons)
5.​ Because total purchases (expenditures) equal GDP and total
➔​ Rental income is the income received by individuals for the use
purchases equal total income, it follows that GDP equals total
of their non-monetary assets (land, houses, offices).
income.
➔​ It also includes returns to individuals who hold copyrights and
GDP (external) = GDP (internal)
patents.
Simple analogy ➔​ Finally, it includes an imputed value to owner-occupied houses.

Net Interest
➔​ Net interest is the interest income received by PH households
and the government minus the interest they paid out.

From NI to GDP
➔​ Net interest is the interest income received by PH
households and the government minus the interest they paid
out.

GDP =
National income
- Income earned from the rest of the world + Income earned by
the rest of the world
+ Indirect business taxes
+ Capital consumption allowance (depreciation)
 FD NECON: APPLIED ECONOMICS

+ Statistical discrepancy ➔​ Economic Growth is measured by increases in Real GDP.

GDP = Income Approach

Business Cycle

1.​ Peak. At the peak of the business cycle, Real GDP is at a

temporary high. In the exhibit, Real GDP is at a temporary
high at Q1.
2.​ Contraction. The contraction phase represents a decline in
Real GDP. According to the standard definition of recession,
two consecutive quarter declines in Real GDP constitute a
recession.
Net Domestic Product 3.​ Trough. The low point in Real GDP, just before it begins to turn
➔​ NDP measures the total value of new goods available in the up, is called the trough of the business cycle.
economy in a given year after worn-out capital goods have been 4.​ Recovery. The recovery is the period when Real GDP is rising.
replaced. It begins at the trough and ends at the initial peak. The
recovery in the exhibit extends from the trough until Real GDP
➔​ Net domestic product (NDP) = GDP – Capital consumption
is again at Q1.
allowance* 5.​ Expansion. The expansion phase refers to increases in Real
*The estimated amount of capital goods used up in production GDP beyond the recovery. In the exhibit, it refers to increases
through natural wear, obsolescence, and accidental destruction. in Real GDP above Q.
6.​ An entire business cycle is measured from peak to peak. The
Personal and Disposable Income typical business cycle is approximately four to five years,
➔​ Personal income = although a few have been shorter and some have been longer.
National income
– Undistributed corporate profits NBER and Recessions
– Social insurance taxes ➔​ The standard definition of a recession is two consecutive
– Corporate profits taxes quarter declines in Real GDP, but this is not the only definition
+ Transfer payments of a recession.
➔​ Disposable income = ➔​ The National Bureau of Economic Research has this to say about
Personal income – Personal taxes a recession.
➔​ A recession is a period between a peak and a trough . . . During
Savings = Investment of the country (economic growth) a recession, a significant decline in economic activity spreads
across the economy and can last from a few months to more
than a year.
Real GDP

➔​ The value of the entire output produced annually within a Term 1: Week 5
country’s borders, adjusted for price changes (inflation).
BASIC MACROECONOMIC RELATIONSHIPS

Real GDP = Σ(Base-year prices X Current-year quantities) Economic Growth: How to get it?
➔​ Increase the level of GDP
➔​ Maintain high levels of employment/Low levels of employment
➔​ Price stability (Low levels of inflation)
➔​ High levels of employment and low inflation are not possible
(there’s a conflict) (Phillip’s curve)
◆​ How do we achieve these goals? The above)
●​ Fiscal Policy
○​ Refers to taxation and spending pattern of
the government (tax and spend) [NEDA]
[Under the umbrella of the Department of
Finance): (BIR. BIC, BOT).
Economic Growth
○​ What should be collected must be spent.
○​ Who is in charge of implementing this:
 FD NECON: APPLIED ECONOMICS
senate & congress (policy-makers), president 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑣𝑖𝑛𝑔
𝑀𝑃𝐶 = 𝑀𝑃𝑆 =
●​ Monetary Policy 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒
○​ Refers to the money supply and interest rates
in circulation in the country.
○​ Who is in charge of implementing this: BSP
(Banko Sentral Pilipinas)

BASIC RELATIONSHIPS
●​ Income and Consumption
○​ y = f(x)

⬆️ ⬆️, Savings⬆️
○​ Consumption = f(income)
○​ Income -> Consumption
●​ Income and Saving
●​ Disposable Income (DI)
●​ 45o line for reference
○​ -C = DI on the Line
●​ S = DI - C
●​ DI = S + C The higher the level of income = consumption increases
●​ DI = PI

Income and Consumption

●​ Nonincome determinants of consumption and saving

○​ Wealth
○​ Borrowing (you consume the present over the future)
sacrifice future consumption.
○​ Expectations: expecting that the prices in the future will
increase, then consumption increase
○​ Real interest rates: when people save, they normally
think about interest rates. As interest rates go higher,
Consumption and Saving people tend to consume less and save more.
●​ The consumption schedule ●​ Other important considerations
●​ The saving schedule ○​ Changes along schedules
●​ Break-even income ○​ Switch to real GDP
●​ Average propensity to consume (APC) ○​ Schedule shifts
●​ Average propensity to save (APS) ○​ Stability
○​ Taxation
𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑆𝑎𝑣𝑖𝑛𝑔
𝐴𝑃𝐶 = 𝐼𝑛𝑐𝑜𝑚𝑒
𝐴𝑃𝑆 = 𝐼𝑛𝑐𝑜𝑚𝑒

●​ Marginal propensity to consume (MPC)

⬆️
●​ Marginal propensity to save (MPS)
●​ For every 1,000 , how much goes to consumption and how
much goes to saving?
 FD NECON: APPLIED ECONOMICS

Investment Demand Curve

Interest Rate and Investment

●​ Expected rate of return (r)
●​ The real interest rate (i) Investment Demand
○​ Nominal rate less rate of inflation ●​ Instability of investment
●​ Meaning of r = i ○​ Durability
●​ Investment demand curve ○​ Irregularity of innovation
○​ Variability of profits
Investment Demand Curve ○​ Variability of expectations

Gross Investment Expenditure

Investment Demand Curve

●​ Shifts of the curve
○​ Acquisition, maintenance, and operating costs
○​ Business taxes
○​ Technological change
○​ Stock of capital goods on hand
○​ Planned inventory changes
○​ Expectations
 FD NECON: APPLIED ECONOMICS

The Multiplier and the MPC

Volatility of Investment

The Multiplier Effect

➔​ A phenomenon whereby a given change in a particular input,
such as government spending, causes a larger change in an
output, such as gross domestic product.
FISCAL POLICY, DEFICITS, AND DEBT
➔​ Tourism has the biggest multiplier effect
●​ More spending results in higher GDP Fiscal Policy
●​ Initial change in spending changes GDP by a multiple amount ●​ Economic Advisers (EA)
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 ●​ Discretionary fiscal policy
𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔
○​ Eliminate recessionary or inflationary gap
●​ Causes of the initial change in spending
○​ Countercyclical
○​ Changes in investment
○​ Other changes ●​ Nondiscretionary fiscal policy
●​ Rationale ○​ Passive or automatic
○​ Dollars spent are received as income ●​ Expansionary fiscal policy
○​ Income received is spend (MPC) ○​ Increased spending and/or lower taxes
○​ Initial changes in spending cause a spending chain. ○​ Budget deficit
●​ Contractionary fiscal policy
○​ Lower spending and/or higher taxes
○​ Budget surplus
●​ Policy options?

Expansionary Fiscal Policy

1
𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 1 − 𝑀𝑃𝐶
or
1
𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝑀𝑃𝑆
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Contractionary Fiscal Policy

Term 1: Week 7

MODULE 3: POVERTY, INEQUALITY, AND DEVELOPMENT

Measuring Inequality and Poverty
●​ Measuring Inequality
➔​ Size distributions (quintiles, deciles)
➔​ Lorenz curves
➔​ Gini coefficients and aggregate measures of inequality
➔​ Functional distributions ●​ Measuring Absolute Poverty
➔​ Headcount Index: H/N
◆​ Where H is the number of persons who are poor and N
is the total number of people in the economy.
➔​ Total poverty gap:

◆​ Where Yp is the absolute poverty line; and Yi the

income of the ith poor person.
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toward the maximum

deprivation in the MPI).

Education Two indicators with equal weight - whether no

household
member completed 5 years of schooling and
whether any school-aged child
is out of school for grades 1 through 8 (each
counts one-sixth toward the
MPI).
➔​ Average poverty gap (APG):
Standard of Equal weight on 6 deprivations (each counts as
Living 1/18
toward the maximum): lack of electricity;
insufficiently safe drinking water;
inadequate sanitation; inadequate flooring;
◆​ Where N is number of persons in the economy. unimproved cooking fuel; lack of
◆​ TPG is total poverty gap. more than one of 5 assets – telephone, radio, TV,
◆​ Note: normalized poverty gap, NPG = APG/Yp bicycle, and motorbike.

➔​ Average Income Shortfall (AIS):

Interactions of the deprivations?

●​ Building the index from household measures up to the

aggregate measure (rather than using already-aggregated
statistics), MPI approach takes account of multiplied or
◆​ Where H is number of poor persons
interactive harm (complementarity) done when multiple
◆​ TPG is total poverty gap
deprivations are experienced by the same individual or
◆​ Note: Normalized income shortfall, NIS = AIS/Yp
family
●​ The MPI approach assumes an individual’s lack of capability
➔​ The Foster-Greer-Thorbecke (FGT) index:
in one area can only to a degree be made up by other
capabilities – capabilities are treated as substitutes up to a
point but then as complements.

Computing the MPI

◆​ N is the number of persons, H is the number of poor
persons, and α ≥0 is a parameter.
●​ The MPI for the country (or region or group) is then
◆​ When α=0, we get the headcount index measure.
computed.
◆​ When α=2, we get the “P2” measure.
●​ A convenient way to express the resulting value is H*A, i.e.,
●​ The product of the headcount ratio H (the percent of people
➔​ The Newly Introduced Multidimensional Poverty Index
living in multidimensional poverty), and the average intensity
(MPI):
of deprivation A (the percent of weighted indicators for
◆​ Identification of poverty status through a dual cutoff:
which poor households are deprived on average).
◆​ First, cutoff levels within each dimension (analogous to
●​ The adjusted headcount ratio HA is readily calculated.
falling below a poverty line for example $1.25 per day
●​ HA satisfies some desirable properties. Important example -
for income poverty);
○​ Dimensional monotonicity: If a person already
◆​ Second, cutoff in the number of dimensions in which a
identified as poor becomes deprived in another
person must be deprived (below a line) to be deemed
indicator she is measured as even poorer - not the case
multidimensionally poor.
using a simple headcount ratio.
◆​ MPI focuses on deprivations in health, education, and
standard of living; and each receives equal (that is
one-third of the overall total) weight.

MPI Indicators

Health Two indicators with equal weight - whether any

child has died in the
family, and whether any adult or child in the
family is malnourished –
weighted equally (each counts as one-sixth
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●​ Kuznets’ Inverted-U Hypothesis

Multidimensional poverty tells a different story

than income poverty

●​ The results showed that knowing income poverty is not

enough if our concern is with multidimensional poverty.
●​ Multidimensionally, Bangladesh is substantially less poor -
but Pakistan substantially poorer - than would be predicted
by income poverty.
●​ Ethiopia is far more multidimensionally poor, and Tanzania
much less so, than predicted by income poverty.
●​ Most Latin American countries e.g. Brazil rank worse on
multidimensional poverty than on income poverty; but
Colombia’s income and MPI poverty ranks are about same.
Poverty, Inequality, and Social Welfare
●​ What’s So Bad about Extreme Inequality?
➔​ Crimes may exist if there is a vast inequality between
classes.
●​ Dualistic Development and Shifting Lorenz Curves: Some
Stylized Typologies
➔​ Traditional sector enrichment (see Figure 5.7)
➔​ Modern sector enrichment (see Figure 5.8)
➔​ Modern sector enlargement (see Figure 5.9)
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●​ Growth and Inequality

Absolute Poverty: Extent and Magnitude

●​ Progress on Extreme Poverty
➔​ Clear progress on $1.25-a-day headcount.
➔​ Less clear progress on $2.00-per-day headcount (see
Figure 5.14).
➔​ Incidence of extreme poverty is uneven.
●​ Relationship between Growth and Poverty
➔​ Association between growth and poverty reduction.
➔​ When it is inclusive, growth reduces poverty.
➔​ Lower extreme poverty may also lead to higher growth.
https://www.gapminder.org/

Economic Characteristics of High-Poverty Groups

●​ Rural poverty
●​ Women and poverty
●​ Ethnic minorities, indigenous populations, and poverty
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●​ Policies designed to build capabilities and human and social
capital of the poor.

HUMAN CAPITAL: EDUCATION AND HEALTH IN ECONOMIC

DEVELOPMENT
Some Key “Capabilities”
●​ Some Important “Beings” and “Doings” in Capability to
Function:
○​ Being able to live long
○​ Being well-nourished
○​ Being healthy
○​ Being literate
○​ Being well-clothed
○​ Being mobile
○​ Being able to take part in the life of the community
○​ Being happy – as a state of being - may be valued as a
functioning

The Central Roles of Education and Health

●​ Health and education are important objectives of development,
as reflected in Amartya Sen’s capability approach, and in the
core values of economic development.
●​ Health and education are also important components of growth
and development – inputs in the aggregate production function.
●​ The more educated -> the more innovation in the economy.
Policy Options on Income Inequality and Poverty: Some Basic
Education and Health as Joint Investments for Development
Considerations
●​ These are investments in the same individual.
●​ Areas of Intervention
●​ Greater health capital may improve the returns to investments
➔​ Altering the functional distribution
in education.
➔​ Mitigating the size distribution
●​ Health is a factor in school attendance.
➔​ Moderating (reducing) the size distribution at upper levels
●​ Healthier students learn more effectively.
➔​ Moderating (increasing) the size distribution at lower
●​ A longer life raises the rate of return to education.
levels
●​ Healthier people have lower depreciation of education capital.
●​ Policy Options
●​ Greater education capital may improve the returns to
➔​ Changing relative factor prices
investments in health.
➔​ Progressive redistribution of asset ownership
●​ Public health programs need knowledge learned in school.
➔​ Progressive taxation
●​ Basic hygiene and sanitation may be taught in school.
➔​ Transfer payments and public provision of goods and
●​ Education needed in training of health personnel.
services
Improving Health and Education: Why Increasing Incomes Is Not
Summary and Conclusions: The Need for a Package of Policies
Sufficient
●​ Policies to correct factor price distortions.
●​ Increases in income often do not lead to substantial increases in
●​ Policies to change the distribution of assets, power, and access
investment in children’s education and health.
to education and associated employment opportunities.
●​ But better educated mothers tend to have healthier children at
●​ Policies of progressive taxation and directed transfer payments.
 FD NECON: APPLIED ECONOMICS
any income level. ●​ Child labor is a widespread phenomenon.
●​ Significant market failures in education and health require ●​ The problem may be modeled using the “multiple equilibria”
policy action. approach.
●​ Government intervention may be called for to move to a
Investing in Education and Health: The Human Capital Approach ‘better’ equilibrium.
●​ Initial investments in health or education leads to a stream of ●​ Sometimes this shift can be self-enforcing, so active
higher future income. intervention is only needed at first.
●​ The present discounted value of this stream of future income is
compared to the costs of the investment. Assumptions of the Child Labor Multiple Equilibria Model
●​ Private returns to education are high, and may be higher than ●​ Luxury Axiom: A household with sufficiently high income would
social returns, especially at higher educational levels. not send its children to work.
●​ Substitution Axiom: Adult and child labor are substitutes
(perfect substitutes in this model), in which the quantity of
output by a child is a given fraction of that of an adult: QC =
γQA, 0 < γ < 1.

Other approaches to child labor policy

●​ Get more children into school (as in Millennium Development
Goals), e.g. new village schools; and enrollment incentives for
parents such as in Progresa/ Oportunidades.
●​ Consider child labor an expression of poverty, so emphasize
ending poverty generally (a traditional World Bank approach,
now modified).
●​ If child labor is inevitable in the short run, regulate it to prevent
abuse and provide support services for working children
(UNICEF approach).
●​ Ban child labor; or if impossible, ban child labor in its most
abusive forms (ILO strategy; “Worst Forms of Child Labor
Convention”).
●​ Activist approach: trade sanctions. Concerns: could backfire
when children shift to informal sector; and if modern sector
growth slows.

The Gender Gap: Discrimination in Education and Health

●​ Young females receive less education than young males in
nearly every low and lower-middle income developing country.
●​ Closing the educational gender gap is important because:
○​ The social rate of return on women’s education is higher
than that of men in developing countries.
○​ Education for women increases productivity, lowers
fertility.
○​ Educated mothers have a multiplier impact on future
generations.
○​ Education can break the vicious cycle of poverty and
inadequate schooling for women.
*the benefits exceed the cost
○​ Good news: SDGoals on parity being approached, progress
*direct cost of education = tuition fee
in every developing region.
*indirect cost of education = miscellaneous fees (books, allowance,
etc.)

Child Labor
The Gender Gap: Discrimination in Education and Health (cont’d)
 FD NECON: APPLIED ECONOMICS
●​ Consequences of gender bias in health and education.
○​ Economic incentives and their cultural setting.
○​ “Missing Women” mystery in Asia.
●​ Increase in family income does not always lead to better health
and education.

Educational Systems and Development (cont’d)

●​ Educational supply and demand: the relationship between
employment opportunities and educational demands.
●​ Social versus private benefits and costs.
●​ Distribution of education.
Educational Systems and Development ●​ Education, inequality, and poverty.
●​ The Political Economy of Educational Supply and Demand: The ●​ Education, Internal Migration, and the Brain Drain.
Relationship between Employment Opportunities and
Educational Demands. Health Measurement and Distribution
●​ Social versus Private Benefits and Costs. ●​ World Health Organization (WHO): The key United Nations
agency concerned with global health matters.

●​ Distribution of Education
○​ Lorenz curves for the distribution of education
●​ Education, Inequality, and Poverty
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Health, Productivity, and Policy

●​ Productivity
○​ Is there a connection?
●​ Health Systems Policy
○​ Great variability in the performance of health systems at
each income level

Disease Burden
●​ HIV/AIDS
●​ Malaria
●​ Parasitic Worms and Other “Neglected Tropical Disease.
 FD NECON: APPLIED ECONOMICS

AGRICULTURAL TRANSFORMATION AND RURAL DEVELOPMENT

The Imperative of Agricultural Progress and Rural Development
●​ The heavy emphasis in the past on rapid industrialization may
have been misplaced.
●​ Agricultural development is now seen as an important part of *If prices of cereal increases, then there would be famine in some
any development strategy. regions in Africa because there was a cut in the cereal supply chain.
●​ Three complementary elements of an agriculture - and
employment-based strategy. Agricultural Growth: Past Progress and Current Challenges (cont’d)
○​ Accelerated output growth. ●​ Malnutrition and famine inspire calls for a new green revolution
○​ Rising domestic demand for agricultural output. focuses on Africa.
○​ Non-agricultural rural labor-intensive rural development ●​ Food price spike of 2007-2008 partly due to short term factors
activities that are supported by the farming community. but long term factors may herald return to persistently higher
food prices in the years ahead.
Agricultural Growth: Past Progress and Current Challenges ●​ New upward spike of prices by early 2011.
●​ Although agriculture employs the majority of the developing ●​ The presence of market failures - and poverty alleviation goals -
country labor force, it accounts for a much lower share of total create need for constructive government role in agriculture.
output.
●​ Agricultural production is rising but evenly. Roles of Government in Agricultural Development
●​ Environmental externalities
●​ Agricultural research and extension services
●​ Economies of scale in marketing
●​ Informational asymmetries in product quality
●​ Providing institutions and infrastructure
●​ Ensure shared growth in agriculture sector
●​ Addressing poverty traps.

The Structure of Agrarian Systems in the Developing World

●​ Three systems of agriculture.
●​ Agriculture based countries, often subsistence, but agriculture
makes up large part of growth.
●​ Transforming countries, most of world’s rural people, large % of
poverty incidence found there, low contribution of agriculture
to growth.
●​ Urabnized countries, hald or more even of the poor found in
urban areas.
●​ The trend is from agriculture-based, to transforming, to
*The share of labor and agriculture tends to decline overtime, onti
urbanized economies as illustrated with the cases of India,
na lang natitira sa rural areas (mostly only farm owners or farmer
China, Indonesia, and Brazil in Fig. 9.3.
workers left).
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The rural share of poor are lower in Brazil, Russia, Ukraine (these are
countries that are big and produce so much agriculture) compared to
in other countries that are many in the rural area and their growth as The Structure of Agrarian Systems in the Developing World (cont’d)
well. Sharing the fact that there are many people who are poor in ●​ Transforming Economies: Problems of Fragmentation and
agricultural areas across the world but there are also poor in rural Subdivision of Peasant Land in Asia.
areas that are trying to produce more. Rural-ubran migration ○​ Impact of colonial rule in strengthening land tenure
problem. systems of private property rights and the consequent rise
of moneylenders.
○​ Contemporary landlordism in India and Pakistan involves
absentee landlordism and the persistence of
sharecroppers and tenant farmers.
○​ Rapid population growth resulted in more fragmentation
and peasant impoverishment.
●​ Agrarian Patterns in Latin America: Progress and Remaining
Poverty Challenges
○​ Apart from latinfundios (large holdings) and
minifundios (small farms) much production
occurs on family farms and medium sized farms.
○​ Latifundios (traditional ones, especially) are
relatively inefficient; landlords/owners are
sometimes less focused on the —---
●​ Subsistence Agriculture and Extensive Cultivation in Africa
○​ Low productivity due to lac of technology.
The Structure of Agrarian Systems in the Developing World (cont’d)
○​ Shifting cultivation
●​ Peasant Agricultural in Latin America, Asia, and Africa
○​ Seasonal demand for labor depending on rainy
○​ Latin America and Asia: similarities and differences.
season.
○​ The Latifundo-Minifundo dualistic pattern in Latin
○​ High dependence on unimprove seeds sown on
America.
unfertilized, rain-fed fields.
○​ The fragmented and heavily congested dwarf land
○​ Relatively high fraction of underutilized land.
holdings in Asia.
○​ High concern about climate change impact.
○​ Africa: extensive cultivation patterns.
○​ Need for an African new green revolution, there
are hopeful signs that it is getting underway.

The Important Role of Women

●​ Women provide 60% to 80% of agricultural labor in Africa and
Asia, and 40% in Latin America.
●​ Women work longer hours than men.
●​ Government assistance programs tend to reach men, not
women.
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●​ More than two commodities
○​ Internal ranking—multi-industry care
INTERNATIONAL TRADE AND DEVELOPMENT
○​ Examples from U.S. Trade
Why Nations Trade? ■​ Iron and steel
●​ The Principle of Comparative Advantage ■​ Autos
●​ Comparative Opportunity Cost ■​ High Technology
●​ Absolute Advantage and Wage Rates
●​ Summary of Policy Implications Summary of Policy Implications
●​ Dynamic Gains from International Trade ●​ Improved resource use efficiency, raised real income
●​ Comparative advantage ranking and exchange rate determine
Principle of Comparative Advantage trade
●​ Gains from Trade ●​ Rank—distorting policies allocate resources inefficiently and
○​ Maximized profits reduce income to community
○​ Relative cost-price positions determined by comparative ●​ Gainers—industries in which the country has comparative
advantage advantage
○​ Comparative Advantage, inverse of comparative cost ●​ Losers—industries in which the country has comparative
○​ Absolute advantage disadvantage
○​ Resource or opportunity cost ●​ Policy debates result from gainers vs. losers disputes
○​ Direction of trade ●​ Gains outweigh losses
●​ Demand Considerations ●​ Inflation reduction
○​ Supply conditions provide trade limits ●​ Government helps losers adjust (financial assistance, retraining)
○​ Reciprocal demand determines exchange ratio
○​ Terms of Trade (export price divided by import price) Dynamic Gains from International Trade
○​ Commodity gain ratio vs. utility ratio ●​ Static effects—reallocation of resources
○​ Differentiated Products ●​ Dynamic benefits—additional resources available
●​ Higher income from more efficient use of resources
Additional Insights: Why Complete Specialization? ●​ Increased savings, more resources available for investment
●​ Constant costs not real-world scenario ●​ Technological spillover
●​ Increasing cost situations force prices in two trading countries ●​ Increased size of national market
to converge ●​ Economies of scale and benefits to economy at large
●​ No trade inducement ○​ Competitive pressure on prices
●​ Prices can easily equalize before complete specialization is ○​ Product improvement
reached ○​ Technological advancement
○​ Increased labor pool
Comparative Opportunity Cost ○​ Infrastructure development
●​ Who Exports What? ○​ Inflation dampening
○​ Necessary to measure joint productivity of all factors (in
monetary value). Sources of International Commodity Trade Data
○​ Unit production cost = aggregate resources used in ●​ Standard International Trade Classification (SITC)
production of one output unit ○​ Commodity Trade Statistics
●​ Limits to Mutually Beneficial Exchange ○​ Main Economic Indicators
●​ U.S. Census Bureau report of exports and imports
○​ United States Commodity Imports and Exports as Related
to Output

Summary
●​ Comparative advantage determines trade
●​ Exchange ratio, determined by demand
●​ Mutual benefit of trade
●​ Ranking and limits to sustainable exchange rate
●​ Absolute advantage and wage rates
●​ Anti-inflationary
●​ Increased GDP
●​ Introduction of goods, inputs, technology
●​ Increased market size

Additional Insights: Limits to Sustainable Exchange Rates

●​ Exchange rate limits can be translated from commodities to
money by assigning to each commodity the price it commands
in producing country.
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●​ WTO negotiation participation
○​ Trade-creation effect
○​ Trade-diversion effect

The Generalized System of Preferences

●​ Introduced by Japan, Western Europe, 1971-1972
●​ Preferential access to industrial markets granted, but limited by
each country’s restrictions
●​ U.S. scheme
●​ EU scheme
●​ Japanese scheme
●​ Effect of Tokyo and Uruguay rounds on GSP

Regional Integration Among Developing Nations

●​ Mercusor
●​ ASEAN
●​ West African Common Market
●​ Central American Common Market
●​ Trade diversion, trade creation effects on LDCs
SELECTED TRADE PROBLEMS OF DEVELOPING COUNTRIES ●​ Polarization of economic activity
Overview ●​ Lack of adequate transportation facilities
●​ Alternative Trade Approaches to Development
●​ U.N. Conference on Trade and Development Summary
●​ Generalized System of Preferences ●​ Selected trade problems of developing countries
●​ Regional Integration Among Developing Nations ●​ Import substitution
●​ Export promotion
Important Concepts ●​ Reforms involve less government intervention in economy,
●​ Import substitution promote integration into global economy
●​ Export promotion ●​ UNCTAD: buffer stocks schemes demanded for stabilization of
●​ U.N. Conference on Trade and development (UNCTAD) 18 primary commodity prices
●​ Short-run commodity price fluctuations ●​ GSP, restrictions
●​ Integrated Commodity Program (Common Fund) ●​ LDC’s interested in regional integration to expand market size
●​ Donor country
●​ Generalized System of Preferences (GSP)
●​ Rules of origin
●​ Polarization

Alternative Trade Approaches to Development

●​ Import substitution—discriminates in favor of
import-competing, against export industries.
○​ Harms agriculture, rural income; develops excess capacity.
○​ Widens internal market.
○​ Tendency to use capital intensive techniques regardless of
factor endowments.
○​ Capital flows don’t generate export earnings, aggravate
debt-servicing problem.
●​ Export promotion—stimulates investment, employment, GDP
growth
○​ Duty-free processing zones
○​ Maquiladoras
○​ India, 1991-2001
○​ Access to developed countries’ markets for LDCs

U.N. Conference on Trade and Development

●​ Forum for LDCs to press demands in trade and
●​ development
●​ Demands concerning primary products
○​ Violent short-run price fluctuations in exports
○​ Integrated Commodity Program
■​ Buffer stock agreements
■​ IMF compensatory finance facility, STABEX of EU
●​ Manufactured products