FIRST EXAM order to increase aggregate demand;
rather, they emphasize on AS and growth.
Definition of Terms:
11. Gross Domestic Product (GDP).
1. Macroeconomics. A branch of Total Market value of all final goods and
economics that focuses on the behavior services produced in a country within a
and decision-making of an economy as a specific period of time by factors of
whole. production located within the economy.
2. Great Depression. An economic event 12. Gross National Product (GNP). Is
that referrers to the downturn of the the value of all final goods and services
economy. Great depression happened produced by domestically owned factors of
during the 1930s that affects the world production within a given period.
economy.
13. Real GDP. It measures changes in the
3. Classical economist believes that physical output in the economy between
recession (economic downturn) can be different time period by valuing all goods
selfcorrecting with no government produced in the two periods at the same
interventions. As production decline and price from the total GDP.
the demand for labor moves to the left, the
wage rate would decline, thus raising the 14. Nominal GDP. It mmeasures the
amount of labor required by the business value of output in a given period in the
which will employ more employees at the prices of that period, or as sometimes put
new lower wage rate. in current price.
4. Keynesian economist believes 15. Expenditure Approach. It measures
government needs to interfere in the GDP by adding together all final
economy to influence production and expenditures.
employment level.
16. Income Approach. It measures GDP
5. Fiscal Policy. Is one of the policy that by adding together the incomes paid by
government used to affects the economy firms to factors of production and two
through its tax and expenditure decisions. other items – depreciations and net
indirect taxes.
6. Expansionary fiscal policy.
Government should cut taxes and/or raise 17. Production Approach. It measures
spending GDP by summing the value added of each
firm in the economy
7. Contractionary fiscal policy.
Government should raise taxes and/or cut
spending. Topic 1.1: Schools of Thought in
Macroeconomics
8. Monetary Policy. The government
controls the economy through the BSP The Great Depression
(Banco Sentral ng Pilipinas) when The Great Depression decade spurred
government determine the quantity of much of the thinking about
money in the economy. macroeconomic issues that occurred in the
1930’s. In the 1920s the US economy had
9. Income Policy. While monetary and generally been a prosperous year.
fiscal policies are the two key methods Virtually anyone who wanted a job could
used by the government to regulate the get one, income irises considerably, and
economy, there are other instrument prices were stable. Nonetheless, things
available as well. Income policies are the went too quickly turning for the worse
government’s primary efforts to regulate beginning in late 1929. In 1929 there were
prices and wages. .5 million unemployed.
There are two major schools of
macroeconomics, namely; (a) those who
10. Supply-side Policy. Supply-side believes that market was best if they
policy proponents oppose the Keynesian are left to themselves, and (b) those
idea that government should intervene in who believe the government’s
intervention can significantly improve his/her wages until the wage is low
the way the economy operates. enough to attract an offer from some
employer.
a. During 1980’s, the former is led by
Milton Friedman (University of Chicago) b. Anyone with excess supply of goods
called the monetarist while the other will cut prices so as to sell.
group called the Keynesians is led by
Franco Modigliani and James Tobin. c. Flexible adjustment of wages and
prices leaves individual all times in a
b. In the 1970’s the monetarist arguments situation in which they work as much as
are taken over by the New Classical they want, and firms produce as much as
Macroeconomist, and the other side is they want.
replaced by the third generation
Keynesian who may not entirely share d. In NCM, markets are continuously in
many of the beliefs of Keynes but share equilibrium.
the conviction that government policies
will enable the economy to work better.
Topic 1.3: The New Keynesians
The Keynesian Revolution. The New Keynesians emerge in the
One of the most important works in the 1980’s. This group includes; George
economic history was the Keynesian Akerlof and Janet Yallen and David
revolution. In 1936 “John Maynard Ronner of the UC-Barkely; Olivier
Keynes’ General Theory of Employment, Blanchard of MIT, Greg Mankiw and
Interest and Money” was published. Based Larry Summers of Harvard, and Ben
on what was already known about the Mermanke of Princeton. The New
market and its actions, Keynes set out to Keynesians don’t think the market is
construct a theory that would clarify the always clear, but they try to understand
complex economic events of his time and and explain exactly why the market is
the fundamental origin of macroeconomics failing. The New Keynesians arguments
in the work of Keynes. are;
a. Market sometimes do not clear even
Topic 1.2: The New Classical School when individuals are looking out for their
own interest.
In the 1980s the New Classical
Macroeconomics that was established in b. Information problems and cost of
the 1970s remained influential. changing prices lead to some price
Proponents of the New Classical rigidities, which help cause
Macroeconomics share the idea of macroeconomic fluctuations in output and
Freedman, the leader of the group employment.
includes Robert Lucas, Thomas
Sergeant, Robert Barro and Edward It is argued that firm are reducing wages
Prescott and Nail Wallows of the on the labor market not only to reduce
University of Minnesota. The NCM argues labor cost, but are also likely to eliminate
that interventions is likely to make low quality of labor.
things worse for the government.
Topic 1.4: The Role of Government in The
Macroeconomy
NCM has three main working theories.
Fiscal Policy.
a. Economic agents maximize One of the major ways in which the
b. Expectations are rational government uses to influence the economy
c. Market clear through tax and expenditure decisions.
The government collects taxes from both
What are the implications of these households and firms and spends it
assumptions? through various item such as purchasing
missiles, building parks, providing social
a. There is no possibility of involuntary security payments and building highways.
unemployment. Any unemployed person Both the magnitude and composition of
who really wants a job will offer to cut
these taxes and expenditures have a major
effect on the economy. Supply-side Policy.
Advocates of supply-side policies rejects
The purpose of Fiscal Policy the Keynesian notion that the
government should act to improve
Stimulate economic growth in a period aggregate demand; instead, they
of a recession. concentrate on AS and increasing
Keep inflation low. production. In fact, the tax system has
Fiscal policy aims to stabilise economic been the key tool of supplyside policy.
growth, avoiding a boom and bust (Supply-side policy in this context is just a
economic cycle. special case of fiscal policy). Personal
taxes are reduced to increase labor
Expansionary (or loose) fiscal policy. supply by increasing the incentive to work
This involves increasing AD. Therefore, and the supply of capital by increasing the
the government will increase spending incentive to save. It could take the form of
(G) and cut taxes (T). Lower taxes will reduced business taxes to provide extra
increase consumers spending because incentives to stimulate investment.
they have more disposable income (C). Proponents of these policies argued that
This will tend to worsen the government stimulating the supply of labor and capital
budget deficit, and the government will and increasing investment was best way to
need to increase borrowing. increase the supply of goods and services.
Monetary Policy. Supply side policies are government
Taxes and expenditure aren’t the only way policies which seek to increase the
that the government control the economy. productivity and efficiency of the
The government controls the quantity of economy. Supply side policies aim to
money in the economy through the BSP. increase long term competitiveness
and productivity, and in the long run
Economic statistics such as gross supply side policies can help increase the
domestic product (GDP), the rate of level of employment in an economy as
inflation, and industry and sector- firms expand and grow.
specific growth rates influence monetary
policy strategy.
A central bank may revise the interest
rates it charges to loan money to the
nation's banks. As rates rise or fall,
financial institutions adjust rates for their
customers such as businesses or home Topic 1.5: The Components of The
buyers. Macroeconomy
Additionally, it may buy or sell government Macroeconomics focuses on four economic
bonds, target foreign exchange rates, and groups; household, government (public
revise the amount of cash that the banks sector), business (private sector), and the
are required to maintain as reserves. rest of the world (foreign sector).
Income Policy. The Circular Flow Diagram
Even though monetary and fiscal policies A useful way to examine the economic
are the two main tools used by the relations between the four sectors of the
government to regulate the economy, economy is by analyzing the circular flow
there are also other instruments available. diagram showing the revenue earned and
Income policies are direct attempts by payments made by each sector .
the government to control prices and
wages.
Topic 1.6: The Three Market Arena
Incomes policies in economics are
economy-wide wage and price controls, Goods and Services Market.
most commonly instituted as a response On this market, household and the
to inflation, and usually seeking to government purchase goods and
establish wages and prices below free services from firms in the goods and
market level. services market. In this market, firms buy
goods and services from each other. Firms
supply to the goods and services market.
Household, the government and firms
demand from this market.
Labor Market.
Labor market interaction occurs when the
government buys labor from the
household and household supply labor
in the market while business and
government demand labor. Business are
usually the main labor demanders,
although government is also a major
employer of labor in the market. The
overall labor supply in the market will be
based on the decision made by
households. Household members must
determine whether to be a part of the
workforce and how many hours they going
to render for work. The rest of the world
also demands labor.
Money Market.
Household purchase stocks and bonds
from the firms in the capital market,
or sometimes referred to as the financial
market. Household supplied funds the
money market with the intention of
receiving extra revenue in the form of
stock dividends and bond interest. Topic 1.7.2: Measuring GDP
Households often need (borrow)
money from this market to fund Expenditure approach.
various purchases and activities of the The expenditure approach measures GDP
household. Business borrow money from by adding together all final
the money market to fund the building of expenditures; private final
new buildings, in the expectation of consumption expenditure (C), private
gaining more in the future. The gross fixed capital expenditure plus the
government borrows by bonds issuance. increase in stocks or investment (I),
The rest of the world is borrowing from government final consumption
financial market, and even lending to the expenditure plus public gross fixed
financial market as well. Most of the capital expenditure (G) and
lending and borrowing is managed by export of goods and services less import
financial institutions – commercial banks, of goods and services or net export (NX).
savings and loan institutions, insurance
firms and the like. These financial Thus, GDP = C + I + G + NX where; NX
institutions are taking deposits from one = (exports – imports)
group and lending it to another.
The statistical discrepancy is the
Topic 1.7.1: The Circular Flow of GDP difference between GDP as measured by
the expenditure approach and the GDP as
GDP is the overall market value of all measured by the income approach.
final products and services produced Because they use data from different
in a country within a specified period of sources, these two approaches do not
time by factors of production located usually give the same numerical estimate
within the country. It includes houses, all of GDP, and discrepancy arises. The
goods, value of services, airplane rides, discrepancy is included on the expenditure
lecture of professors, etc. side simply because of convention and
does not necessarily imply that the income
approach is more accurate than the
expenditure approach. The discrepancy is
usually small relative to the aggregated
being measured.
The Income Approach.
The income approach measures GDP by
adding together the incomes paid by
firms to factors of production and two
other items – depreciations and net
indirect taxes. All these income items,
taken together represent the cost of
producing GDP. To use the factor income
approach to measure GDP, we need to add
indirect taxes to total GDP at factor
cost and subtract subsidies.
The Production Approach.
The production approach measures GDP
by summing the value added of each
firm in the economy.
Topic 1.7.3: Problem in Measuring GDP
a. Sometime output are not valued
correctly as it is traded on the market.
This include volunteer work, do it yourself
and government activities and services.
b. The changes in the price of products
are difficult to account for. Computers,
for example, improved tremendously as
their prices decreases.
c. Some activities measured as adding to
GDP is fact represent the use of resources
to avoid or contain “bad” such as crime or
risk to national security.
d. The underground economy output is
difficult to measure.
e. Gross Domestic Products disregard
all activities in which money or goods
change hands but in which there were no
new goods and services are being
produced. GDP is concerned only with
new, or current, production. Old output
produced will not be counted because it
was already accounted back at the time it
was produced.
Examples: selling of used cars, resold
house.
f. GDP excludes output produced
abroad by domestically owned factors
of production.
Definition of terms: A cross-border business is very different
from one that involves a single country.
1. Countries are sovereign states that have The main feature of such businesses is
definite geographical regions and have that they operate on very large scales and
distinct cultures, languages, and people. involve multiple jurisdictions.
2. Global is an adjective which means Challenges of International Business
concerning the entire earth and not just
one or two regions. It is synonymous to Because nation-state have specific
worldwide and universal and it also means structure of government, laws and
unlimited, unbounded, general and regulations, taxes, duties, currencies,
comprehensive. culture and traditions. International
business is definitely more complex than
3. International is an adjective which business that exclusively operates in the
means “concerning two or more nations.” domestic economy.
4. International Business comprises the
impact of the above practices on the
domestic and international markets,
economies, states, companies and
individuals.
Topic 2.1: Global vs. International
Countries are sovereign states with
definite geographical regions and have
distinct cultures, languages, and
individuals. They are politically organized,
distinct and separate from each other.
They communicate with each other on an
regional or global level, through trade and
other activities.
Topic 2.2: International Business
Foreign or international business activities
take place in different picture such as :
• The movement of goods from country to
another (exporting, importing, trade)
• Contractual agreements that allow
foreign firms to use products, services,
and processes from other nations
(licensing, franchising)
• The formation and operations of sales,
manufacturing, research and
development, and distribution facilities in
foreign markets
International business studies includes
understanding the impact of the above
practice on domestic and international
markets, economies, states, firms and
individuals. Successful multinational
business understand the world
marketplace’s complexity and are able to
deal with the challenges and threats of
doing business in a rapidly evolving global
market environment.
Features of International Business
Definition of terms: the brand names, gathering of data
through interviews, advertising and the
1. Political and Legal Differences. Each conduct of business relationship.
nation possess different political and legal
environment practices that differed from 13. Education. Education refers to the
the domestic economy of the foreign level of completed educational attainment
market. in a region that can be an indicator of the
quality and potential work force and the
2. Cultural Differences. In international status of consumers.
business cultural differences is considered
to be one of the most challenging problem 14. Religion. Religion is consider to be the
into international marketing. major cultural influencer that can affect
the life of individuals.
3. Economic Differences. Economic
environment in international business can 15. Ethics and values. Ethics and values
vary from country to country. influence on international business,
especially on the conduct of business into
4. Differences in The Currency Unit. In another country.
international business activities, currency
unit plays an important role that varies 16. Social organization. Social
from one nation to another and sometimes organization are composed of family and
may cause problems such as currency groups, the prevalence of special-interest
convertibility and also the problems of groups and attitude toward them.
exchange rate fluctuations.
5. Differences in The Language.
Differences in language is one of the
common problem that an international
marketer often encounter
6. Differences in The Marketing
Infrastructure. Different countries may
vary widely on the availability of its
marketing facilities and its nature.
7. Trade Restrictions. In international
business activities, trade restriction or
barriers particularly import control
become a very important problem face by
international marketer.
8. High Costs of Distance. Distance is one
the factor considered in international
business that contribute additional cost
when the markets are far located from
each other.
9. Differences in Trade Practices. Every
nation’s trading practices and customs 1. Political and Legal Differences. Each
differ from nations to another. nation possess different political and legal
environment practices that differed from
10. Material culture. Material culture the domestic economy of the foreign
discuss about technological goods being market. Generally, the complexity of the
utilized by most of the population. political and legal environment increases
the number of companies that does
11. Cultural preferences. Preferences for business on other countries. It should be
products, foods, product quality level and remembered that the political and legal
brands my differed in every international environment in all the provinces of many
market. markets is not homogeneous. In the
United States, for instance, the political
12. Languages. The Languages used in a and legal system is not the same as all
country affects the marketing activities, other states in the US.
2. Cultural Differences. In international
business cultural differences is considered Determinant of Culture
to be one of the most challenging problem
in international marketing. Thus, domestic It is important that companies take into
market however are not excuse from account the lifestyles and culture of
cultural diversity. countries to which they are considering
exporting. Such information can be used
3. Economic Differences. In international to decide whether a products or service in
business, economic environment may vary a target market will be considered
from country to country. important, valuable, luxurious or even
undesirable. You might even find certain
4. Differences in The Currency Unit. In products and services culturally
international business activities, currency unacceptable
unit plays an important role that varies
from one nation to another and sometimes
may cause problems such as currency
convertibility and also the problems of
exchange rate fluctuations. The monetary
system and regulations also vary from one
nation to another.
5. Differences in The Language.
Differences in language is one of the
common problem that an international
marketer often encounter. There are
instances when the same language (words
and terms) is used in different countries
but it gives different meaning. Challenge
on language differences, however, is not
something peculiar to the international
marketing like for example, India has
multiplicity of languages.
6. Differences in The Marketing
Infrastructure. Different countries may
vary widely on the availability of its
marketing facilities and its nature. For
instance, an advertising medium could be
very effective in one market and may not
be available or not yet developed in the
other market.
7. Trade Restrictions. In international
business activities, trade restriction or
barriers particularly import control
become a very important problem face by
international marketer.
8. High Costs of Distance. Distance is one
the factor considered in international
business that contribute additional cost
when the markets are far located from
each other. Transportation cost and the
time required affects the delivery that
tends to become longer. Distance tends to
increase certain cost of each products.
9. Differences in Trade Practices. The
trade practices of every nation and
customs vary from nation to another.
