Market Structures and Price-Output Determination The various market structures are represented by four basic market models.

These are theoretical frameworks for existing firms and industries in the real world. Such market models describe the characteristics of the various market structures. However, some enterprises do not exactly fit the characteristics of any of the market models. In other words, the market models are not the complete replica of realities. But such market models are imported because they help us understand the real world where the market system is the principal element of the economy. Firms and industries play a vital role in our economy. They always seek ways of reducing costs of production and of improving the quality of their goods and services, especially in a competitive market. However, in the process of interplay between the forces of supply and demand, the happy balance between business profit and consumer satisfaction has always remained a big problem. In most cases, the satisfaction or interest of the consumers has been ignored due to self-interest of producers or sellers, and because of inherent market imperfections. For instance, in case of monopoly the position of the consumers is very weak. The monopolist usually dictates his price. And even in a market situation where there are many producers or sellers, the latter can agree together to forge a common price. Thus eliminating price competition among themselves in order to attain their self-interests -more profits per unit of their output. In view of the scarcity of resources, firms and industries should strive to maximize their employment and production. It is their responsibility to pursue economic efficiency as their objective. Economic efficiency is the relationship between input (factors of production) and output (goods and services produced by the factors of production). However, within the social contest of the economy of the poor countries, economic efficiency is not the main issue. The first and most important goal of the economic system should not be economic efficiency but social equity. This refers to the fair allocation of the productive resources like land, capital and management among the members of society. The market system allocates goods and services through the mechanism of demand and supply. The members of society obtain their goods and services. in the market on the basis of their ability and willingness to buy. Some say that the market system or price system is more efficient than the government in allocating goods and services. But in countries where productive resources are not fairly distributed, only the very few rich get most of the goods and services in the market. Hence, there is a need for the government to participate in allocation function of the market system to protect the interest of the poor. Basic Market Models 1. Perfect/ pure type a. perfect or pure competition b. pure monopoly

2. Imperfect/non-pure type a. monopolistic competition b. oligopoly Market Models Defined Pure competition - is a market situation where there is a large number of independent sellers offering identical products. Pure monopoly - refers to a market situation where there is only one seller or producer supplying unique goods and services. A one-buyer market situation is known as monopsony. Monopolistic competition - pertains to a market situation where there is a relatively large number of a small producer or suppliers selling similar but not identical products. Oligopoly - is associated with a market situation where there are few firms offering standardized or differentiated goods and services. Such definition is not precise because oligopoly includes a wider range of market structures than the other three market models. On the other hand, a few buyer market situation is called oligopsony. Characteristics of Market Models Pure Competition 1. There is a large number of independent sellers. 2. Products are identical or homogeneous. Examples are farm products like rice, corn, fruits, vegetables, etc. 3. No single seller and no single buyer can influence the change in market price of a product. There are thousands of sellers selling millions of identical products. In case a firm or one seller millions of identical products. In case a firm or one seller decides to reduce its supply even up to 99 percent, the total supply in the market is not affected. The supply of one seller is negligible. Therefore, he cannot change the market price. Likewise, if he sells his goods at a lower price than the prevailing market price, his goods are bought in just a few minutes. But the market price remains. On the other hand, if he offers his goods at a higher price than the market price, he cannot sell his goods. The rise or fall of market price is due to changes in total demand or supply. 4. It is easy for new firms or sellers to enter the market and for existing firms or sellers to leave the market. There are no significant barriers like legal, financial, or technical requirements. For example, a vegetable vendor is free to sell in the market. She only pays the market fee. In case, she is no longer interested in her small business, she is also free to leave the market. 5. There is no non-price competition like advertising, sales promotion, or packaging. There is no need for such non-price competition because the products are identical which means they have the same features. For instance, even if the advertise rice, egg plant, pr tomatoes, it has no effect

on buyers. They just purchase such products even from one who has not advertised. Pure Monopoly 1. There is only one producer or seller. 2. Products are unique in the sense that there are no good or close substitute available. Most public utilities supplying water, electric and telephone service are monopolists. Example, MERALCO, PLDT and MWSS. 3. The monopolist makes the price. Since he is the only supplier, he can reduce his output in order to increase his price. Or he can increase his supply if this means an increase in his total profit. 4. It is extremely difficult for new firms to enter the market. There are several formidable barriers like very big capital and very keen competition. The existing monopolist is an established giant in the industry. There are also natural monopolies which refer to existing goods or services in which competition is not practical or profitable. Most public utilities enjoy natural monopolies. These are granted exclusive franchises by the government. For example, it is not practical and convenient for several electric, water, or telephone companies to operate at the same time in a community. There would be many electric wires and posts and diggings. In Metro Manila, we have only one water supply company, and yet we are greatly inconveniences by its endless diggings. PRODUCTION What is Production? In the ordinary language, the term "production" means raising of crops or making of a physical goods in factories. For example, if you make ice cream, you will say that you have produced ice-cream (a goods). But from the point of view of Economincs, you have not produced any new thing in the form of ice-cream, rather, you have changed the form of milk, sugar, cream, etc., and thus have created the utility. According to Marshall, "Man does not produce physical (material) goods; but when it is said that he produces material goods, in fact, he only creates the utility. Even the scientist also agree that " Matter can neither be created nor destroyed." Thus in Economics, the word "production" is used to imply creation or increasing the utility of a good so that its value is increased. Definition (1) "Production may be defined as the creation of utiities " - Anatol Murad (2) "Production is the process that creates utility in goods."-A.H. Smith (3) "Production is the creation of value in commodity."- Thomas (4) "Production is the creation of economic utility"- Ely (5) "Production means an increase in the value of a commodity"- Nicholson (6) "Production is any actitvity which adds to the value of a nation's supply of goods and services."- M.J Ulmer (7) "Prodcution may be defined as the process by which inputs may be transformed into output." -Robert Awh.

Difference between Consumption and Production Generally, production and consumption are considered to be altogether contrary and different activities. Consumption is the use of utility whereas production is creation of utility. In fact, their difference is not so fundamental. Both these are two different aspects of the same activity. For example, when a carpenter makes a chair, he performs an act of production by increasing the utility of log of wood. But at the same time, he has also consumed the log of wood by using its utility. Thus, two aspects of the same activity are production and consumption. According to Prof. Mehta., "When the utility of a good is used for the direct satisfaction of want, it is called consumption, and its use for the indirect satisfactions of want is called production. Methods of Creation of Utility Production or creation of utility can be made by the following methods: (1) Form Utility : If by changing the form of a good, capacity to satisfy wants is created in it, it is called the form utility. Changing of wheat in the form of biscuit, changing of wood into furniture are the examples of the form utility. Rebisco or Jacinto Steel Company or factories changing the raw materials into goods create the form utility. (2) Place Utility: Utility is also created by changing the place of goods. It is also called place utility. Collecting of the sand from the river-bank and transporting it to the construction site or, transporting the coal to different parts of the country from the coal-mines are the examples of place utility. A transporter, railways, shipping companies, and airways create place utility. So, the function of transporting companies is called production. (3) Time Utility: If by an act of storage for a good for some time its utility increases, it is called time utility. Storing oranges, apples and other fruits in the cold storages until their crop season is over and their prices increase, is the example of time utility. Thus the activities of traders, who make the stock of a commodity, can also be called production. (4) Service Utility: If the service of a man satisfies our want, it is called service utility. A professor's teaching in a class, a lwayers pleading a case, a tailors stitching a shirt, is the examples of the creation of service utility. Therefore, a professor, lawyer or a tailor is also the producers. (5) Possession Utility: If the change of possession of a good increases its utility, it is called the possession utility. The utility of a sewing machine is not so great for a dealer in sewing machines as it is for a tailor. The utility of the machine increases by this change of possession. It will be called possession utility. Since traders or retailers are the creators of this utility, their activity is also called production. (6) Knowledge Utility : When the utility of a good increases by increasing people's knowledge about that goods, it is called knowledge utility. For example, we come to know about the qualities of Samsung LED, Cream Silk conditioner or Colgate toothpaste through advertisements. We make greater demand for these goods. Thus, advertisers also help production by creating knowledge utility.

Thus, in order to know whether a man is a producer or not, it is to ensure whether an increase in utility or value is made by the work done by that man or not. It is essential that the work-done by anyone must create or increase utility. Factors of Production You want to produce wheat. For the production of wheat, you require land, workers, tractor, tube well, seeds, pesticides, favorable climatic conditions and fertilizers, etc. All these are called the means of production or inputs. With the help of these, we get the output or production. " The sources of services which enter into the process of production are called factors of production. The factors are broadly classified as land, labor, capital and entrepreneur."- M.J. Ulmer. 1. Land- is an original gift of nature. It includes the soil, rivers, lakes, ocean, mountains, forests, mineral resources, and climate. 2. Labor - is an exertion of physical and mental effort of individuals. This applies not only to workers, famers, or laborers but also to professionals like accountants, economist, or scientists. 3. Capital - is a finished product which is used to produced other goods. Examples of capital goods are machines as far as economics is concerned. In finance and to laymen, capital refers to money. However, money is a medium of exchange. It cannot produce goods. It can only buy goods. This is just an exchange between money and the corresponding units of goods. 4. Entrepreneur- is the organizer and coordinator of the land. labor and capital. Agents of production and their Income In economic, the agents of production are those persons who are owners of these factors or resources. In other words, these are the persons by whom the supply of factors is made. Agents of production are also four (i) Landlord : He is the owner of land. His income is called rent. (ii) Labourer: he is the owner of labour. His income is also wages. (iii) Capitalist: he is the owner of capital. His income is called Interest. (iv) Organizer or Entrepreneur. He is the owner of organization. His income is called wages or salary or profit. Agents of production also be different persons, and at the same time, one man can also be the master of several resources; for example, a carpenter who makes furniture himself as his own shop, investing his own capital, will be called landlord, laborer, capitalist, organizer, organizer and entrepreneur-- all in one. Importance of Production Production has great importance for every man or country. The Mangoes and Bananas are from among the rich people of Philippines because they make a lot of production. America or Japan are from among the richest countries of the world and are known as Big producers of a good number of items in the world. So, the economic progress of a country and the economic welfare of the people depend upon the volume composition and price of production and its distribution. The importance of production can be judged by the following facts:

Basis of Consumption: For the satisfaction of our wants, all of us wish to consumer goods like ice cream, shirt, television, scooter, etc., and other services. The quantity, quality and variety of consumption goods is made possible only when their production is made available and at moderate prices. Thus, the major basis of the consumption of the people of a country is the production of various goods and services in that country. Basis of Economic Development We will be able to make the economic development of our country at a faster rate when the production of producer-goods, such as, machines, electricity, raw material, chemicals, etc., is made on a large scale. More production of machines and raw material, etc., will lead to more production of the consumer goods, like cloth, sugar, scooter, etc., Increase in the quantity of production will provide employment to more people, create income and remove unemployment in the process of economic development. Basis of Economic Welfare : Increase in the economic welfare of a country takes place when people's standard of living improves; there is an increase in per capita income; almost all the people of the country get more necessaries of a superior quality than before and at a fair price. Thus, the quantity and quality of production and their availability to all are the major basis of economic welfare. Basis for Economic Planning: The main basis of the formation of economic plans, such as the Five Year Plans of India is the fixation of the targets of production of different goods. The success of failure of a plan is assessed on the basis of the achievement compared to its production targets. Basis of Trade: The volume of the internal and external trade of every country depends only on the volume of its production. If the production is high, greater increase in the volume of trade will take place. Basis of Government's Income: A major basis of the income of the government of every country; e.g: Philippines, is the taxation on production. These taxes are in the form of Sales Tax, Customs Duty, Excise Duty, etc. If the production is high, the income received through these taxes will also be high. The government should use this income for the economic and social progress of the public. Production Function Production is the creation of goods and services to satisfy human wants. The factors of production are called the inputs of production, and the goods and services that have been created by the inputs are called outputs of production. The factors of production are classified as fixed factors (fixed input) and variable factor (variable

input).A fixed factor remains constant regardless of the volume of production. This means whether you produce or not, the factor of production is unchanged. Examples are land capital. For instance, in a one hectare rice field, you can employ 24, or 6 farmers to cultivate it. One hectare of land is still one hectare whether only 20 cavans or 40 cavans of palay are harvested. In the case of a machine - let us say hollow block machine - it can produce 10 units or 50 units of hollow blocks a day. Still, it is one machine. In fact, even if there is no production, the machine is still there. In the case of a variable factor, it changes in accordance with the volume of production. No production means no variable factor. More production means more variable factors. Example is labor and entrepreneur. More laborers are needed when there are more works to do. If there is no job to perform, a laborer is not needed. The process of transforming both fixed and variable inputs into finished goods and services is called theory of production. The quantity and quality of goods and services being produced depend on the state of technology. Obviously, modern techniques of production are more efficient than primitive technology. For example, the United States and Japan apply modern technology in rice farming. As a result, they can harvest about 300 cavans of palay per hectare. The underdeveloped countries can only harvest an average of 40 cavans. Such technical relationship between the application of inputs (factors of production) and the resulting maximum obtainable output is known as production function. Law of Diminishing Returns The law of diminishing returns is also known as the law of diminishing marginal productivity. It is a basic law of economics and technology. The law states that when successive units of a variable input (like farmers) work with a fixed input (like one hectare of land), beyond a certain point the additional product (output) produced by each additional unit of a variable, input decreases. The validity of the law of diminishing returns is based on two assumptions. The successive units of a variable input should be identical, and the same technology is applied . For example, the case of 10 farmers who work in a 1 hectare rice field, they should have the same efficiency. That is, they are all industrious and strong. Also, they use the same type of technology. If the first 5 farmers applied primitive technology while the remaining ones used modern technology, naturally additional products do not decrease. In the same manner, if the first 5 farmers are lazy while the remaining ones are very industrious, then additional products produced by the latter do not decline. In fact, there would be an increase. It is noted that in the work combination of variable input and fixed input, total output and additional output (or marginal product) increase up to a certain point. Beyond this point, the rate of increase of total product declines, and later on total product decreases as more units of a variable factor are employed. In the case of marginal product, it also diminishes beyond a certain point until it reaches negative returns as more variable inputs are added.

Cost Categories The burden sustained in order to perform a certain activity, to carry out a certain production, to achieve certain goals. In a balance sheet, costs raise commercial liabilities to be settled. They should not be confused with money outflows. By contrast, in economics, most formal models ignore this distinction between costs and payments. 1. Actual costs refer to real transactions, whereas opportunity costs refer to the alternative taken into consideration by decision makers who might want to choose the line of activity which minimize the costs. From an external point of view, it is difficult to ascertain which are the alternatives considered. Discretionary costs are not strictly necessary for current production but correspond to strategic goals (e.g. improving the firm's image through an advertising institutional campaign). 2. Production costs Given a specific product version, production costs are usually classified according to their responsiveness to different levels of production attained. Fixed costs are simply not responsive to production levels. If there are only fixed costs, the total costs follow this rule: Variable costs grow with higher levels of production (proportionally or not). If there are only variable costs, at zero production the total costs will be zero. Total costs will follow for instance this rule: 3. Total costs are the sum of all costs. By dividing the total costs by the quantity produces, one gets the average costs: how much a unit of production costs ("unit cost"). Average costs can be directly compared with price to compute profitability: if the price is higher than average cost, the production is profitable. Total profits will be given by multiplying the average profit with the quantity produced and sold. Identically, total profits can be obtained as total revenues less total costs. The relationship between total revenue and total costs depending on the production level is analyzed by the so-called "break-even analysis". 4. Average cost - This is also called unit cost. It is equivalent to total cost divided by quantity. AC = TC/Q 5. Marginal cost - is the additional or extra cost brought about by producing one additional unit. It is obtained by dividing change in total cost by change in quantity MC = TC/Q 6. Explicit cost - This is also called expenditure cost. These are payments to the owners of the factors of production like wages, interests, electric bills, and so forth. 7. Implicit cost - Another term for this cost in non-expenditure cost. The factors of production belong to the users. So, they do not pay. You do not pay rent to your own land. 8. Opportunity cost - Is a foregone opportunity or alternative benefit. For example, the superpowers are spending more than $1 trillion dollars a year for the arms race. Such amount is more than enough to erase global poverty from the face of the earth.

Major Forms of Business Organizations 1.1 Single or sole proprietorship. It is a form of business organization which is owned by one person. The owner personally manages his business. Most of our business operations (including those which are not registered) belong to single proprietorship. Examples are retailers, market vendors, barber, tailors, and so forth. The advantages of single proprietorship are: 1. It is easy to organize. Financial capital is small, and registrations requirements are not difficult do not even bother to apply for a license. 2. The single proprietor is the boss. He makes the decisions, and enjoys substantial freedom of action. Possibilities of conflicts or quarrels are minimized. 3 . The owner acquires all the profits from his business This gives him more incentives to make his business grow. On the other hand, the disadvantages of a single proprietorship are: 1. In general, the financial resources of a single proprietorship are not enough to transform the business into a large-scale enterprise. Considering its small asses and high mortality rate, banks are reluctant to grant big loans to single proprietorship type of business organizations. 2. Benefits of specializations in business management are not present in small-scale proprietorship. There is only one manager. In not a few cases, the owner is the only employee. 3. The owner has unlimited liability. This means the owner of the business risks not only the assets of his small enterprise, but also his other personal assets like his piece of land, bank deposits, and other personal properties which are not part of his business. In case of loss, such assets are subject to financial claims by creditors. 1.2 Partnership It is a form of business organization in which two or more persons agree to own and operate a business. The partners agree to combine their resources (money. materials and management). They also share their profits and losses. However, there are "silent" partners. They only provide the financial capital but they do not participate in the management. There is also the "industrial" partner. He does not contribute money to the business organizations but he is responsible for the management. The advantages of partnership are: 1. It is also easy to organize like the single proprietorship. Legal red tape is connection with its registration is not much. 2. Better management because of the presence of more participants in the operations of the business. 3. Possibility of bigger resources than the single proprietorship exists. Financial institutions may extend bigger loans to such business organization considering the combined resources of the partners. The disadvantages of partnership are: 1. Conflicts or quarrels between or among the partners regarding the management or policies of the business are likely to crop up. In fact, under Filipino style, some partners cheat their other partners in matters of profits or expenses.

2. It lacks stability. The death or withdrawal of one partners dissolves the partnership. To continue its operation, a complete reorganization is needed. 3. Like the single proprietor, the partners are also subject to unlimited liability, except the limited partners. Such partners liabilities are only confined to their share of capital contribution in the form of cash or property. 1.3 Corporation. It is a legal entity, distinct and separate from the individuals (stockholders) who own it. The Corporation Code states "Corporation is an artificial being created by operation of the law, having the right succession and the powers, attributes, and properties expressed authorized by law or incident to its existence." Only natural persons are qualified to be incorporators. They must not be less than 5 but not more than 15, all of legal age, and a majority of whom are residents of the Philippines. Each incorporator of a stock corporation must be an owner of at least one share of the capital stock. The advantages of corporations are: 1) A member has a limited liability. In case the corporation becomes bankrupt, only the capital contributions of the members are affected. The other personal properties of the stockholders of a corporation are excluded from financial claims of creditors of the corporation. 2) It has the most effective means of raising money capital for its operations, by selling stocks and bonds. Stocks are certificates of ownership while bonds are certificates of indebtedness. There are financial institutions which specialize in helping a corporations sells its securities (stock and bonds). 3) It has a permanent existence. The life-span of a corporation is 50 years, and subject to renewal for another 50 years. The death or withdrawal of some officers and members does not affect the existence of the corporation. The corporation can easily get officers or managers from inside or outside the organization. Transfer of corporate ownership may take place anytime through the sale of stocks. The disadvantage/s of a corporations are: 1) Corporations face one major disadvantage: The government levies an extra tax on corporate profits. For an unincorporated business, any income after expenses is taxed as ordinary personal income. The larger corporation is treated differently in that some of its income is doubly taxed- first as corporate profits and then as individual income on dividend. 2) There is a sharp division between those who own the corporation and those who are involved in its business operations. There is potential for conflict between owners, who want a fair return on their investment, and management, which is concerned with using profits to maintain or upgrade production facilities. There is a greater potential for conflict between workers and management, as each looks to its own self-interest in the workplace. 3) Specialized decision making is sometimes a time-consuming and complex process as proposals, changes in policies, and so on pass through layers of management. 4) Corporations are the most difficult type of business to form. A corporation must form a board of directors, draft its articles of incorporation, adhere to strict guideline in the issuance of stock, and so on. The rules and regulations for forming

corporations vary from state to state, but most follow the provisions outlined in the Model Business Corporation Act. 5) Corporations are subject to a double taxation of corporate profits. Corporate profits are first subject to the corporate income tax, a progressive tax on corporate profits. Multinational Corporations Among Filipino corporations, family corporations are still dominant. The other corporations are owned mostly by very close friends. It has been noted that many of these Filipino corporations are conservative in their business operations. This means they are not very responsive to innovations, and they are not risk-takers like the American, European and Japanese corporations. However, the whole Philippine economy has been dominated by giant corporations which do not belong to Filipino citizens. Such situation exist in many other less developed countries like those in Africa and Latino America. The most famous of these big corporations. They control production, financing, processing, and marketing of all essential goods all over the world. Examples of their products are oil, drugs, fertilizers, soft drinks, beauty soaps, cars, toothpastes, insecticides, veterinary medicines, and so forth. International business was primarily an international trade at the start. That is, industrial countries imported raw materials from the agricultural countries, and then exported the finished products to the agricultural countries. Some years later, international finance and investment developed. The rich countries granted financial loans to the poor countries. Such investments were strictly financial in nature, and involved the flow of funds through banks, investment companies, and governments. Emergence of Big International Companies As the start of the 20th century (1900), some big companies emerged in international business. Their subsidiaries managed overseas operations. Such subsidiaries were treated as appendages to the parent company, and functioned chiefly as export agencies. The headquarters of these subsidiaries were located (and still at present) in the home country like the United States, Great Britain, or France. The warehouses, service offices, and sales agencies have been located in foreign countries like the Philippines, Brazil or Nigeria. Shortly after the last global war, the management of international companies was restructured in response to the needs of international business operations. Vice -presidents for international operations were appointed. They performed liaison works with the various subsidiaries engaged in international manufacture and trade. During the 1960s , a global corporation evolved. Its foreign operations were integrated into a single organizational structure. This is the multinational or transnational corporation. It is a corporation which maintains its headquarters in one country (rich country) but performs productions, marketing, finance, and personal functions within many other countries (mostly poor countries). 1.4 Cooperative. Presidential Decree No. 175 defines a cooperative as "only organizations composed primarily of small producers and consumers who voluntarily join together to form business enterprise which they themselves own, control and patronize." A small

producer is an individual who provides (or together with his family) the primary labor requirements of his business enterprise, or one who earns at least fifty percent of his gross income from his labor. The government in its effort to promote the organization of more cooperative throughout the country has extended several power and privileges (like tax exemptions) to cooperatives. Such business organizations have become famous in Europe, United States, Japan, Canada, Israel and other progressive countries. Cooperative has been very effective in improving the social and economic conditions of the poor people are in said countries. In the Philippines, the most successful community credit union is found in San Dionisio, Paranaque, Metro Manila. It is the biggest of its kind on Asia. It started in 1961 with only 28 members and P380 capita. Today, it has more than P60 million assets and about 15,000 members (including special depositors who are the minor children of the members). Similarities between a cooperative and a corporation are: 1. Factors of production are privately owned and managed. 2. Both depend on business efficiency to survive in a competitive market. 3. Their activities and operations are both regulated and supervised by the government. 4. Both enjoy a reasonable degree of economic freedoms. Differences between a cooperative and a corporation are: 1. A cooperative is for service while a corporation is for profit. 2. Membership in a cooperative is open and voluntary while in a corporation membership is only for wealthy relatives and friends. 3. Government in a cooperative is democratic. It is one man one vote and no proxy voting. In the case of a corporation, it is one share one vote, and more shares more votes. It is the rule of the minority (richer members). 4. Savings or nets profits are refunded to the members of a cooperative on the basis of their individual patronage while in a corporation, profits are distributed to the stockholders on the basis of number of their shares. Macroeconomics Every time we read a newspaper. we encounter terms like the inflation rate, Gross Domestics Product(GDP), GDP growth rate, unemployment rate, interest rate, foreign debt, budget deficit, exchange rate, balance of payments, and the like. Quite often, writer describe the trends in these in theses variables and attempt to explain how observations of these variables came about. This type of analysis falls within that branch of economics known as macroeconomics. Macroeconomics is the study of the economy in the aggregate. It examines how economic agents as a whole respond to changes in the economic environment. It also studies how their actions feedback on the economy. Macroeconomics is concerned with three broad questions. These are: a) How do we explain changes in the inflation rate? b) How do we explain changes in the aggregate output? c) How do we explain unemployment?

With these questions, we are concerned with the identifying the determinants of these important variables. We are also interested in explaining how these variables are linked to each other. While the questions above seem simple enough, the answers are not. In fact, there are quite a number of, sometimes conflicting, answers to these questions. Perhaps, it is in, macroeconomics that the old adage asking ten economists yields eleven different answers" fits perfects. Perhaps, the existence of competing explanations in macroeconomics lies in the fact that we still know very little about how an economy as a whole operates. National Income The income of the nation is measured by the total earnings of the factors of production owned by its citizens of by the total market value of all final goods and services produced by its citizens. Such earnings or market value of final goods and services are estimated on a yearly basis. Such measurements reflect the performance of the economy. These indicate whether the national economy is progressing or regressing. For instance, if the national income is bigger this year than in the previous year and that last year's national income was bigger in the previous years, then it can than be said that the economic performance of the country has been improving during the last few years. However, if it is a reverse situation, then the national income has been experienced by many poor countries. Their population growth rate is greater than their production rate. Furthermore, the numerous civil wars and droughts in Africa have brought a plunge to the national economies of not a few African countries. Countries usually show their achievements by economic indicators like gross national product (GNP), per capita income (PCI), or per capita(GNP) .Such measurements also classify the economic class of countries whether these are highly developed, intermediate, or less developed. The reference point is the per capita (GNP) or per capita income (PCI) of the United States. All countries, whose national income or PCI are withing the range of the PCI of the United States, are classified as highly developed countries, Those whose incomes are far below that of the United States are considered less developed countries. Definition of Terms Gross national product (GNP)- is the total market value of all final goods and services produced by citizens in one year. National Income - is the total income of the factors of productions in one year or the total payments received by citizens in one year. GNP has greater value than national income because the latter is equivalent to total cost of production. Per capita income (PCI) - is income per head. PCI = National income _____________ Population Per capita GNP = Gross national product __________________ Population

Gross domestic product - is the total market value of all final goods and services produced within the territories of a country in one year. Incomes derived from investments or wealth in foreign countries are excluded. In the case of GNP, the incomes of the citizens earned from abroad are included. In a country whose economy is dominated by multinational corporations or foreigners, the GDP is bigger than GNP. This is the actual situation in many less developed countries. Money GNP- is the value of GNP at current price or market price. Real GNP - is the value of GNP in terms of the number of goods and services produced. Real GNP = Money GNP _________ Price Index x 100 Final goods and services - are those which are sold for the last time, and these are not for further processing or manufacturing. Example is bread. Flour is not a final product. It is used for making bread. It is referred as intermediate product. Disposable income - is personal income less personal taxes. Ways of Calculating National Income Income approach Wages +Rents +Interest +Profits ____________ = National income + Indirect taxes less subsidies + Depreciation _____________ = GNP Product or Expenditure Approach Household consumption expenditures + Government purchases of goods and services + Gross domestic investment of business firms + Net exports (if value of imports is greater than exports , it is minus) ________________________________ = Gross national product = Capital consumption allowances (depreciation) = Net national product = Indirect business taxes = National income Industrial Origin Approach Agriculture, fishery and forestry + Industry a. mining

b. manufacturing c. construction d. electricity, gas and water + Service sector a. transportation b. trade c. finance d. service = Gross Domestic Product - Factor income from the rest of the world = Gross national product - Net indirect taxes - Depreciation __________________________ = National Income Depreciation and Indirect Business Taxes Depreciation is an allowance for capital goods like machines which have been "consumed" in the process of production. A machine depreciates not only because of the use through time but also as a result of obsolescence or calamities like fire and flood. Such machines loses its value and must be replaced in order to sustain production. In most machines, their useful life is more than one year. Since national income accounting covers a period of one year, the actual expenditures for such machines and their useful life do not have the same length of time. The productive life of the machine maybe 5 or even 10 years but the expenditure in the purchase of the machine has been included in one year national income accounting. Therefore, to avoid understatement of total income during the year of purchase of the machine and overstatement of total income for succeeding years, a depreciation cost is allocated evenly over the useful life of the machine. For example, if the useful life of the machine is 5 years, its costs is P10,000 and its junk value is P200, its yearly depreciation value is computed: 10,000 200 __________ 5 In the case of indirect taxes, these include general sales taxes, excises, business property taxes, license fees, and custom duties. An indirect tax is a tax imposed by the government on products sold by businessmen. To make up for the money that they have to pay to the government, businessmen merely increase the prices of their products. Thus, the burden of the tax is shifted to the buyers of the products. In other words, the businessmen pass on to the consumers the tax imposed on them by the government. Taxes are used to finance the programs and projects of the government. In estimating national income, the services rendered by the government are included. Hence, the

tax element is included in the value of output under government services rendered. Likewise, the value of the products sold by businessmen contains an element of tax in the form of higher price (indirect tax). To restate briefly, tax was included once in the price of goods sold in the market, and again included in the form of government services funded by taxes. In this case in the market, and gain included in the form of government services funded by taxes. In this case , there is double counting in the calculation of national income. To get national income, depreciation and indirect business taxes are deducted from GNP which is the market value of final goods. National income is the factor value of goods which refers to the total cost of production or factor payments like wages, rents, interest and profits. Double Counting The value of goods and services must be counted only once. To avoid double counting, only the value of the final goods and services are included. The value of the intermediate goods which constitute the value of the final products is excluded. For example, the market price of an executive table is P10,000. This is reflected in the GNP as P10,000. The cost of the paint, ply wood, nails, lumber, labor, profit, and other costs that are incurred in the production of the table are excluded. Otherwise, there is double counting. It would be P20,000 which is not true. Nevertheless, there is an alternative way of estimating value of the final product. This is called the value-added method. The value added to the total value of the product at every stage of production is totaled. The result is equal to the value of the final product. However, it is much easier to count only the final products than the intermediate goods like the nails, paint, and so forth. Here is a simple illustration of value-added method: Bread.....................20 centavos Framer....................10 centavos Baker.....................15 centavos Retailer..................20 centavos Farmer....................10 centavos (initial value) Baker......................5 centavos (value added) Retailer...................5 centavos Also nonproductive transactions are excluded like purely financial transactions (social security payments, welfare payments, veterans payments, student's allowance from parents, government subsidies, and the buying and selling of stocks and bonds..Such transactions do not directly involved current production. Some of these incomes were earned some years ago, and the others are just transfer of ownership. Clearly , the beneficiaries do not contribute to current production. To include these in the present GNP accounting would be double counting because such incomes have been included in previous years and others are already counted in the current year. For example, the income of the student's father which is P40,000 is included in 1994 GNP. The sum of P7,000 is the total student's allowance for 1994. If this allowance is counted fir 1994 GNP, then it is an overstatement because such amount came from the income of his father. Another kind of transaction which is not included in the GNP is resale transaction. If the second hand sales are included, then

it is double counting. For example, a hollow-block machine is produced this year. The value of this machine is included in this year's GNP. If this is double counting. Take note that GNP measures all produced in 1994 are measured in the 1994 GNP even if some of these are not sold in the same year. Therefore, such unsold products should not be included in the 1995 GNP. These were not produced in the said year. GNP Record of the Philippines GNP statistics indicate the economic conditions of our country in a given year. Such economic conditions become bad due to several factors, like political instability, natural calamities, rebellion, social problems and other destabilizing elements. For instance, our 1984 GNP posted as negative 6 percent. This was the lowest economic growth rate in the whole Asian and Pacific region. Such negative growth rate was caused by assassination of former Senator Benigno Aquino, Jr. street demonstrations and crony capitalism. Consumption Consumption is the amount of money spent on goods and services which yield direct satisfaction. It is the biggest of the major components of expenditures on output. when we buy food or pay the services of a doctor, it is consumption. However, the purchase of a bond which generates an income in the future does not produce direct satisfaction. Thus, its purchase is not considered consumption. That part of income which is not consumed is called savings. Income = Consumption plus saving Y = C+S s = Y-C Factors Influencing Consumption 1. Distribution of national income. When there is a very uneven distribution, income is largely concentrated in the hands of a very small portion of the population. Individuals with big incomes are proportionately big savers. Hence, savings increase at the expense of consumption. On the other hand, if there is a very even distribution, the concentration of the bulk of aggregate income is in the hands of individuals with moderate incomes. This group does not save much. As a result, consumption tends to be greater than saving. 2. Rate of interest. People tend to save more at a higher interest rate. However, if income-earning assets yield more incomes, then people are encourage to purchase such assets. Thus savings decrease. 3. The desire to hold cash. Such needs for cash for personal or business reasons reduce consumption and raise saving. 4. Price level. When prices are high (inflation), people spend more amounts of money. This decreases saving. 5. Population. More people means more consumption. More people have to buy more goods and services. 6. Income. Higher income results to more consumption. 7. Taxes. More taxes reduce disposable income. This decreases consumption.

8. Attitudes and values. There are individuals who are thrifty or extravagant. Evidently, these factors influence consumption or savings. Consumption Function Consumption function is the functional relationship between income and consumption. The aforementioned factors influencing consumption all contribute to the level of consumption of individual. However, all other things being constant, consumption primarily depends on income. Any change in consumption is due to change in income in most cases. Such relationship between income and consumption is analyzed in two ways, One is the average propensity to consume (APC). This is the fraction of all income spent on consumption. The formula is: C/Y. The other one is the marginal propensity to consume (MPC) This is the ration of the increase in the consumption to to the increase in income that caused it. The formula is: C/Y. In both ways, if consumption is equal to income, the answer is 1(based on the formula). if consumption is less than income, the answer is less than one. But if consumption is greater than income, then it is more than 1. Is it really possible for consumption to exceed income? Note that under the equation of Y = C+S, it appears that C can not be higher than Y. The answer is it it possible, but under the short run consumption function. An individual can spend more than his income by using his past savings or by borrowing. A nation can also do the same. Like the Philippines, it is spending more than what it is getting from taxes and other sources of income. This had been made possible because of foreign loans. However, in the long run, it is no longer possible for a man or nation to consume more than its income because savings are already exhausted, the loans have to be paid. If not, then borrowers also exhaust their credit. Investment Investment is expenditure on new capital goods. Capital goods are produced goods which are used to produce other goods. Investment plays a very vital role in the economy because it creates more employment, production and consumption. Clearly, more investment means more national income or gross national product. Investment is the most fickle component of expenditure. Such behavior is generally assumed to cause economic fluctuations. There are several factors which affect investment. However, the decision to invest is based largely on expected profits. Paradox of Thrift The economy is in equilibrium when saving equals desired investment. According to the classical writers, the economic growth of society depended on capital formation. In order to accumulate capital, it was first necessary for society to save for investment funds. In short, the classical economists believed that more saving was good because more funds would be available for investment. However, John Mynard Keynes disagree with such economic theory. He said the attempt of consumers to save more will reduce saving. This is the paradox of thrift. We have been taught that thrift is always a good virtue. If one individual saves a large part of his income for his future use, it is likely good for him. But if all individuals in a society save, then there is a big decline in consumption. This greatly

reduces the demand for goods and services. So, production is cut down, together with the number of workers. This results to more unemployment and reduction of income. Since aggregate or total income falls, then total saving also falls - or even zero saving. Evidently, what is good for the individuals is not good for all. However, it is good to save during boom and inflation. Being thrifty is likely to reduce the rate of inflation. Likewise, during full employment (when all productive resources are fully used, it is good to save - both from the position of the individual and that of society. Because if we consume all our resources, nothing is left for capital formation. Under condition of unemployment, more savings means less consumption. And this leads to the downfall of the economy - less investment, less employment, less production, and less income. Summary 1. The sum total of all factor payments is the national income. This is the total costs in the production of goods and services by citizens of a country in one year. 2. The total market value of all final goods and services produced within the territory of a country in one year is known as gross domestic product. While those produced by citizens, inside and outside the country, is the gross national product. 3. There are three ways of estimating national income: income approach, product or expenditure approach, and industrial-origin approach. NEDA is responsible for the national accounting. 4. To avoid double counting, only the value of the final goods and services are counted. Non-productive transactions are excluded like students' allowance, pensions and those for resale to avoid double counting. GNP measures all current productions whether the products are sold or not. What is produced during the year is counted for that year. 5. Consumption is the amount of money spent on goods and services which yield direct satisfaction. It is determined by income distribution, rate of interest, price, population, and income, among other things. 6. Investment is expenditure on new capital goods. Its major determinants are ROI and IR. As long as ROI is greater than IR, there is investment. The other determinants are population, price, technology, government policies, and peace and order. 7. When investment is greater than saving, there is an expansion of economic activities. Conversely, there is contraction of economic activities.