Application of Macroeconomics Theory as a Basis for Understanding

the Key Economic Variables Affecting the Business

OBJECTIVES

 Understand the significance of macroeconomic theory as it impacts the operations of a

business
 Explain the flow of goods and services in the economy
 Know how the various measures of economic output, employment, inflation,
trade/surpluses/deficits impact the major segment of the economy such as the
consumers, business and government.
 Explain aggregate demand and supply as they affect GDP
 Understand the inputs of production namely labor, capital, land, intermediate inputs and
business know-how.
 Understand the nature of monetary policies and their effect in economy.
 Enumerate the various monetary policy tools that the BSP can use to achieve its
objectives.
What is Macro Economics?

 It is the study of national economy and the determination of national income

 It involves the major sectors of the national economy like households, business firms,
government and foreign sector.

Significance of Macroeconomics
Macroeconomics looks at the economy as a whole. It focus on measures of economic output,
employment, inflation and trade surpluses ad deficits. It also examines the spending of the three
major segments of the economy, consumers, business and government

 Nominal gross domestic product (GDP) – The price of all goods and services produced by
a domestic economy for a year at current market prices.
 Real GDP – The price of all goods and services produced by a domestic economy at price
level adjusted (constant) prices. Price level adjustment eliminates the effect of inflation
on the measure.
 Potential GDP – the maximum amount of production that could take place in an
economy without putting pressure on the general level of prices. The difference
between potential GDP and Real GDP is called the GDP gap.
 Net Domestic Product (NDP) – GDP - Depreciation
 Gross National Product (GNP) – the price of all goods and services produced by labor
and property supplied by the nations residence.
Calculation of GDP

 Income (output) Approach – adds up all income earned in the production of final goods
and services such as wages, interest, rents, dividends and so forth.
 Expenditure (input) Approach – adds up all expenditures to purchase final goods and
services by households businesses and the government.
Aggregate Demand
Several reasons how price levels affects aggregate demand

 Effect of Change in Interest rate – as price level increases (due to inflation), nominal
interest rate increases.
 Effect of Change in Wealth – when price level increases the market value of certain
financial assets decreases.
 Effect of Change in International Purchasing Power – when domestic price level
increases relative to foreign currencies foreign products become cheaper, causing an
increase in imported goods and decrease in exported goods
Aggregate Supply
Equilibrium GDP
Multiplier

Production

 Labor – refers to the inputs supplied by the various types of workers that enable a
business to function
  Capital – is another name for all the long-live physical equipment, software and
structures a businesses use in its production process
 Land – is the actual ground use by a business
 Intermediate Inputs – refer to any goods and services purchase from other businesses
and used up in production
 Business Know-How – includes all the knowledge and technology necessary for the
production process.

Short Term Profit Maximization – focuses on achieving the highest profit assuming that fixed
cost are constant and cannot be change.

Long Term Decision - assumes that a business can vary all its inputs even going as far as
shutting down.

Business Cycle – is a fluctuation in aggregate economic output that last for several years

 Peak – is the date on which a recession start – that is when the economy hits a high
points and starts heading downward
 Recession – period of negative GDP growth
 Trough – is the date on which the recession ends and the economy starts heading up
again
 Expansion – is the time from the trough, to recovery and all the way to the next peak

Impact of recession on business

 Employment
 Retail Sales
 Home Construction
 Household income
 Business Profits
 Business Investments
 Industrial Production
 Tax Revenues

Fiscal Policies: Their Nature and Effect to Economy

 Fiscal Policy – refers to decisions about government spending, taxes and debt in both
the short run and long run.
 Fiscal Stimulus
 Keynesian Approach
 Marginal Propensity to consume
 Amount of Overseas Leakage
Impacts of Fiscal Policy

 Increase government spending

 Lower Taxes
 Accept wider budget deficit

Monetary Policies: Their Nature and Effect to Economy

Goals of monetary policies:

 Controlling Inflation
o Demand-pull inflation
o Cost-push Inflation
 Smoothing out the business cycle
 Ensuring financial stability

Monetary Policy vs. Fiscal Policy

Long Term effect of Monetary Policy
Monetary Policy Tools

 Control over short-term interest rates

 The discount window
 The reserve requirement and Other Regulations

Supply Side Policies