REPORTER 1: CRISTINE ROYCE BRANDINO & WENCHELOU B.

CENIZA

INTRODUCTION TO BASIC ECONOMIC CONCEPTS

Economic Development

is the process through which economies are transformed from ones in which most people have
very limited resources and choices to ones in which they have much greater resources and choices.

(According to J.R. Behrman, in International Encyclopedia of the Social & Behavioral Sciences, 2001)

Development economics is a branch of economics that focuses on improving fiscal, economic, and social
conditions in developing countries. Development economics considers factors such as health, education,
working conditions, domestic and international policies, and market conditions with a focus on
improving conditions in the world's poorest countries.

Development economics studies the transformation of emerging nations into more prosperous nations.

BASIC CONCEPTS OF ECONOMICS

 Scarcity – the condition that results from the imbalance between unlimited wants and limited
resources

 Opportunity Cost – is the forgone value or benefit of the next best alternarive when scarce
resources are use for one purpose rather than another.

 Factors of Production – refers to input or resources that are needed to produce goods and
services.
-
 Land - Land as a factor of production includes the natural resources used to create a
good or service.
Labor - Labor is the work done by the people in a workforce. It is based on human
capital or skills, knowledge, training or experience.
Capital - Capital as a factor of production refers to capital goods, or man-made
resources, such as tools and infrastructure, used in the production of a good or
services.
Entrepreneurship - Entrepreneurs are the people who combine the other factors of
production – land, labor and capital – to generate profit.

 Monetary Policy – refers to the actions taken by a central bank to manage the money supply
within an economy.

 Fiscal Policy – the use of governement spending and taxation to control a country’s economy.

 Economic Systems – is a means by which societies or governments organize and distribute

available resources, services, and goods across a geographic region or country. Economic
systems regulate the factors of production, including land, capital, labor, and physical resources.
An economic system encompasses many institutions, agencies, entities, decision-making
processes, and patterns of consumption that comprise the economic structure of a given
community.

An economy is a complex system of interrelated production, consumption, and exchange

activities, which ultimately determine how resources are allocated among participants. The
production, consumption, and distribution of goods and services combine to fulfill the needs of
those living and operating within the economy.

Traditional Economy - the traditional economic system is based on goods, services, and
work, all of which follow certain established trends. It relies a lot on people, and there is
very little division of labor or specialization. In essence, the traditional economy is very
basic and the most ancient of the four types.

Some parts of the world still function with a traditional economic system. It is commonly
found in rural settings in second and third world nations, where economic activities are
predominantly farming or other traditional income-generating activities.

Command Economy - In a command system, there is a dominant centralized authority –

usually the government – that controls a significant portion of the economic structure.
Also known as a planned system, the command economic system is common in
communist societies since production decisions are the preserve of the government.

Market Economy - Market economic systems are based on the concept of free markets.
In other words, there is very little government interference. The government exercises
little control over resources, and it does not interfere with important segments of the
economy. Instead, regulation comes from the people and the relationship between
supply and demand.
 The market economic system is mostly theoretical. That is to say, a pure market system
doesn’t really exist. Why? Well, all economic systems are subject to some kind of
interference from a central authority. For instance, most governments enact laws that
regulate fair trade and monopolies.

Mixed Economy - Mixed systems combine the characteristics of the market and
command economic systems. For this reason, mixed systems are also known as dual
systems. Sometimes the term is used to describe a market system under strict
regulatory control.

A mixed economic system accepts private property and permits economic freedom in the
use of capital, but also allows for governments to interfere in economic activities in order to
achieve social aims.

 The production possibility frontier (PPF) – is a curve on a graph that illustrates the possible
quantities that can be produced of two products if both depend upon the same finite resource
for their manufacture. The PPF is also referred to as the production possibility curve.

This model graphically demonstrates scarcity, trade offs, opportunity costs, and efficiency.

Shows the maximum attainable combinations of two products that may be produced if we use
our resources efficiently.

Assumptions:

 A company/economy wants to produce two products.

 There are limited resources.
 All resources are fully and efficiently used.

Example:

OPTION FOODS CLOTHES

A 600 0
B 300 100
C 200 180
D 100 280
E 0 400

 Absolute and Comparative Advantage

Absolute Advantage – is the ability of an individual, company, region, or country to produce a
greater quantity of a good or service with the same quantity of inputs per unit of time, or to
produce the same quantity of a good or service per unit of time using a lesser quantity of inputs,
than its competitors.
 Comparative Advantage – is an economy's ability to produce a particular good or service at a
lower opportunity cost than its trading partners. Comparative advantage is used to explain why
companies, countries, or individuals can benefit from trade.

 Demand and Supply – the relationship between concepts of buying and selling, or the stability
of opportunities amongst sellers (including suppliers) and buyers at a given time and price, is
called demand and supply.
Demand – refers back to the buying process. It represents the customer's desire to
purchase a product at the preferred price.
Demand refers to the quantity of a good or service that consumers are willing and able
to purchase at various prices over a certain period of time. It represents the buyer's side
of the market, emphasising how much of a product people want based on its price.

Supply – refers to the quantity of goods or services producers are inclined to offer at
given prices. It entails someone or an agency making a decision to provide their
products on the market in any form at a specific price.

Supply, at its core, refers to the quantity of a good or service that producers can offer
for sale at various price points within a given period. It reflects the seller's perspective in
the marketplace, highlighting the relationship between the price of a good and the
amount producers are prepared to sell.

NATIONAL INCOME AND OUTPUT

National Income – is the flow of goods and services by a nation over a period of time, usually a year.

National income measures the total value of final goods and services produced within the
economy over a period of time.

Concept of National Income

Gross Domestic Product (GDP) – is the total money value of all final goods and services produced within
the boundaries of a country in agiven time period.

Formula: GDP = C + G + I + NX

Gross National Product (GNP) – is the total market value of all final goods and services produced bya
country’s residence in a given time period.

Formula: GNP = GDP + (X-M)

X-M = Net Factor Income
 Exports (X) – inward remittances of a country from nationals of thr country abroad.
Imports (M) – outward remittances of a country from foreign nationals inside the country.

Market Price (MP) – refers to the current price in the market through the forces of demand and supply.
Market Prices is the actual price paid by the consumers.

Factor Cost (FC) - is the real prices that is earned by the producers or sellers.

Formula : GDP(FC) = GDP (MP)- Indirect Tax + Subsidies

Net National Product (NNP) – is GNP minus the value of capital consumption or depreciation during the
year. NNP is also referred as National Income at market prices.

National Income (NI) – National Income at factor cost (NI) is defined as the total of all income payments
made to factor of production.

Formula: NNP (MP) = GNP (FC) – Depreciation Value

Or

NI = NNP(MP) + Subsidies – Indirect Taxes

Personal Income (PI)– is the income that is actually received by individuals and households in a nation
during a year.

Disposable Personal Income (DPI) – is the part of the personal income that is left after the payment of
personal direct taxes.

Formula: DPI = PI – Personal Income tax

Measuring Economic Activities

 GDP (Gross Domestic Product)

- Gross domestic product or GDP is the market value of all final goods and services produced in a
year within a country’s borders.
- GDP measures the market value of the final goods and services produced. A country produces
many different final goods and services
Final goods are referred to as those goods which do not require further processing. These goods are also
known as consumer goods and are produced for the purpose of direct consumption by the end
consumer.

Intermediate goods are referred to as those goods that are used by businesses in producing goods or
services. These goods are also known as producer goods.

Capital goods are referred to as the fixed or tangible assets that are purchased by a business in order to
produce finished products or consumer goods.

GDP Components:

 Consumption (C)

– all household purchases of final goods/services in a year.

– consumer goods/services

 Investment (I)

– spending by firms on capital.

– Business good/services.

 Government (G)

– all government expenditure on goods and services.

– government goods/services.

 Net Exports (X-M)

– total value of exports minus imports.

GDP = C + I + G + (X-M)
Nominal (Current) GDP vs Real (Constant) GDP

Nominal GDP (or "Current GDP") = face value of output, without any inflation adjustment

Real GDP (or "Constant GDP") = value of output adjusted for inflation or deflation. It allows us to
determine whether the value of output has changed because more is being produced or simply because
prices have increased.

Example 1:

The year 2020 country produces only 100 cars and sells them for ₱1,000,000 each

Nominal GDP (2020) = 100 × 1,000,000 = ₱100,000,000

In 2025, the same country still produces 100 cars, but due to inflation, the price per car rises to
₱1,250,000.

Nominal GDP (2025) = 100 × 1,250,000 = ₱125,000,000

Even though the number of cars produced did not change, nominal GDP increased because of the
higher prices. However, to accurately compare economic performance, we use real GDP, adjusting for
inflation using 2020 prices:

 Real GDP (2025, adjusted to 2020 prices) = 100 × 1,000,000 = ₱100,000,000

Thus, in real terms, the economy did not grow—only the prices increased. This is why real GDP is a
better measure of true economic growth.

Example 2:

Imagine a country produces only one good: cars.

 In Year 1, the country produces 1,000 cars, and each car costs $20,000.
o Nominal GDP (Year 1) = 1,000 × $20,000 = $20 million

 In Year 2, the country produces 1,100 cars, but due to inflation, the price of each car rises to
$22,000.
o Nominal GDP (Year 2) = 1,100 × $22,000 = $24.2 million
o This increase could be due to both higher production (more cars) and inflation (higher
prices).
To find Real GDP, we adjust for inflation by using Year 1 prices ($20,000 per car) as the base price:

 Real GDP (Year 2) = 1,100 × $20,000 = $22 million

NATIONAL INCOME ACCOUNTING

In a typical economy a large number of economic transactions occur. National income accounting is an
attempt to classify these transactions in a way that is economically meaningful. In simplest terms, an
economy can be thought of as a set of flows.

National income accounting refers to the government bookkeeping system that measures the health of
an economy, projected growth, economic activity, and development during a certain period of time. It
helps in assessing the performance of an economy and the flow of money in an economy. The double
entry system principle of accounting is used to prepare the national income accounts.

National Income Accounting Equation

Y = C + I + G + (X-M)

Y – National income

C – Personal consumption expenditure

I – Private investment

G – Government spending

X – Exports

M – Imports
BUSINESS CYCLE

The business cycle depicts the rise and fall in output (production of goods and services), over time.

Each business cycle has four phases:

• EXPANSION

The upswing of the business cycle towards a peak is called an economic expansion.

The upward slope of the business cycle is called economic expansion.

This is a period when economic output increases. That is, more goods and services are being
produced in the economy.

The first phase of the business cycle is expansion. This is a period of economic growth,
characterized by increased production, rising employment, and heightened consumer
confidence.

• PEAK

Following the expansion comes the peak. This is the point where economic activity has reached
its maximum output.

• CONTRACTION

The downswing of the business cycle towards a trough is called an economic contraction.

The downward slope of the business cycle is called economic contraction. This is a period when
economic output declines; the economy produces fewer goods and services than it did before.
When fewer goods and services are produced, fewer resources are used by firms—including
labor.
• TROUGH

Each one reaches a trough, which is the point just before the upward movement begins—like
the low point on a roller coaster run, just before the track turns upward.

• FISCAL POLICY

- The spending and taxing policies used by Congress and the president

- Fiscal policy is a collective term for the taxing and spending actions of governments.

Taxes / Government spending

(decrease) T / (increase) GS – Recession [Expansionary Policy]

(increase) T / (decrease) GS – Boom [Contractionary Policy]

Expansionary Fiscal Policy - tools used to stimulate the economy during a recession: Lowering
taxes or increasing government spending.

Contractionary Fiscal Policy – tools used to stabilize the economy in times of inflation: Increasing
taxes or lowering spending.

• MONETARY POLICY

- The tools used by the Federal Open Market Committee to influence the availability of
credit and the money supply.

- Monetary policy is primarily concerned with the management of interest rates and the
total supply of money in circulation. It is generally carried out by central banks,

Money Supply / Interest Rate

(increase) MS / (decrease) IR – Recession [Expansionary Policy]

(decrease) MS / (increase) IR – Boom [Contractionary Policy]

Expansionary Monetary Policy - tools used to stimulate the economy during a recession: Buying
government securities. Lowering the reserve requirement. Lowering the discount rate. Lowering
interest paid on required and excess reserves.

Contractionary Monetary Policy – tools used to stabilize the economy in times of inflation:
Selling government securities. Increasing reserve requirements. Increasing the discount rate.
Increasing the interest paid on required and excess reserves.
 FOUNDATION OF AGGREGATE DEMAND

Aggregate demand is a measurement of the total amount of demand for all finished goods and services
produced in an economy. Aggregate demand is commonly expressed as the total amount of money
exchanged for those goods and services at a specific price level and point in time.

Aggregate demand is a macroeconomic term and can be compared with the gross domestic product
(GDP). GDP represents the total amount of goods and services produced in an economy while aggregate
demand is the demand or desire for those goods. Aggregate demand and GDP commonly increase or
decrease together.

Aggregate demand is determined by the overall collective spending on products and services by all
economic sectors on the procurement of goods and services by four components:

Consumption Spending

Consumer spending represents the demand by individuals and households within the economy. While
there are several factors in determining consumer demand, the most important is consumer incomes
and the level of taxation.

Investment Spending

Investment spending represents businesses' investment to support current output and increase
production capability. It may include spending on new capital assets such as equipment, facilities, and
raw materials.

Government Spending

Government spending represents the demand produced by government programs, such as

infrastructure spending and public goods. This does not include services such as Medicare or social
security, because these programs simply transfer demand from one group to another.

Net Exports

Net exports represent the demand for foreign goods, as well as the foreign demand for domestic goods.
It is calculated by subtracting the total value of a country's exports from the total value of all imports.

Reasons for downward sloping:

1. Real Wealth Effect – a change in price level, changes the purchasing power of assets causing
consumers to buy more (or less) goods and services.
2. Exchange Rate Effect – a change in price level, changes the amount of savings in the economy,
which changes in the interest rate. This leads to a change in borrowing and investment.
3. Exchange Rate Effect – a the change in price level, change the amount that people from other
countries are willing and able to purchase.
 OPEN MACRO ECONOMY

An open economy is one that interacts freely with other economies around the world.

An open economy interacts with other countries in two ways.

1. It buys and sells goods and services in world product markets.

2. It buys and sells capital assets in world financial markets.

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