national trade and economy
TRANSCRIPT
National Trade and Economy
Prepared by:Prof: SeyedAli
Fallahchay
Money
• Is anything with value that is widely acceptable for
payment of goods and services without questioning
the integrity of the person offering it.
• Primary function of money is to facilitate the process
of exchange.
Functions of Money
Primary Functions Secondary Functions
Medium of exchange
Standard of Value
Store of Value
Standard of Deferred Payments
Kinds of money
1. Commodity money
2. Credit money
3. Fiat money
4. Legal tender money
Monetary Standard
• Refers to the currency system adopted by a
country to provide a stable medium of exchange.
There are two types of monetary standard:
1. Commodity standard
2. Fiat standard
Commodity standard
• It is a monetary system in which the purchasing power or value of the monetary unit is equal to the value of designated quantity of a particular commodity or set of commodities. With a commodity standard, the monetary unit is defined in terms of a specific commodity.
• in most commodity standard ,paper currency articulate as a money but can be converted into a specific commodity.
Fiat standard
• Refers to a monetary system in which the face
value of the monetary unit is very much higher
than that the value of the material used as money.
• The fiat money is made full legal tender and all
the other money issued by the government are
redeemable in the standard fiat money.
• The Philippines has been on fiat standard.
• The major components of the money supply
consisted of debts of Bangko Sentral ng
Pilipinas or Commercial Banks.
• With this fiat standard existing in our country,
coins and paper currency are liabilities of the
government. There is no specific assets
“backing” the money supply.
The quantity theory of money
Equation: MV = PQ
• The quantity theory of money shows the relationship
among:
• Money supply (M)
• Velocity of money (V)
• Price (P)
• Quantity (Q)
Money supply changes when there are changes in:
1. The level of dollar reserves
2. The level of domestic credits granted by the
BSP to government and other banks
3. The level of domestic credits granted by banks
to business and government
Monetary Policy
• These are measures employed by the government to
influence economic activity, specifically by
manipulating money supply and interest rate.
• To achieve certain goals, monetary measures are
frequently used in tandem with fiscal policy to
achieve certain goals.
• The usual goals of both monetary and fiscal policy are to
achieve or to maintain full-employment, to achieve or
maintain a high rate of economic growth and to stabilize
prices and wages.
• Monetary policy is the domain of the nation’s central
bank.
• The deliberate control of the money supply and credit
conditions for the purpose of achieving macroeconomic
goals.
Tools of Monetary Policy
The Bangko Sentral ng Pilipinas (BSP) has three
tools of monetary control used in altering the
reserves of commercial banks.
Open-market operation
Reserve ratio
Discount rate
Easy money & Tight money
Easy Money Tight Money
Buying securities Selling securities
Lowering the reserve ratio
Increasing the reserve ratio
Lowering the discount rate
Rising the discount rate
Central Bank (Bangko Sentral ng Pilipinas)
• It is the Central monetary authority which provides
policy direction in the areas of money, credit and
banking.
• It also supervises the operation of banks an regulates
the activities of non-bank financial institutions or
intermediaries.
Objectives of BSP
1. To maintain monetary stability and price stability in
the Philippines.
2. To preserve the international value of the peso and
the convertibility of the peso into other freely
convertible currencies; and
3. To promote a rising level of production,
employment, and real income in the Philippines.
Fiscal PolicyIt is an Economic policy, which in concerned with rising of resources through taxation, borrowing, and deciding on the level and pattern of expenditures.• Refers to government policy that attempts to influence the
direction of the economy through changes in government spending or taxes
• To obtain funds for their operation, government units generally collect some from of taxes
• The expenditures of these funds not only provides goods and services for constituents, but has a direct impact on the economy
• John Maynard Keyenes thought fiscal policy could be an automatic stabilizer for the economy because it automatically responds to changes in economic activity.
Impact of fiscal policy on the economy• Keynes advocates the use of the government's fiscal
policy to offset imbalances in the economy• According to keynes, a government should use fiscal
policy to stimulate and economy slowed by a recession by running a deficit, that is, by spending more than it takes from the economy in taxes
• On the other hand, to slow down an economy that is threatened by inflationary pressures, keynes urged increasing taxes or cutting spending to create a budget surplus that would act as a drag on the economy.
Fiscal policy is generally divided into three categories:
1. Policies concerning government purchases of
goods and services
2. Policies concerning taxes
3. Policies concerning transfer payment (such as
unemployment compensation, social security
benefits, welfare payments, veterans’ benefits)
Economic effects of fiscal policy• It helps offset imbalances in the economy
• It can help moderate the extremes of the business
cycle
• It stimulate aggregate demand
• Fiscal policy is used by governments to influence
the level of aggregate demand in the economy, in an
effort to achieve economic objectives of price
stability, full employment and economic growth.
• In case of a government running a budget
deficit, funds will need to come from public
borrowing (issue of government bonds),
overseas borrowing or the printing of new money
Objectives of fiscal policy
Provision of social goods
Equitable distribution of wealth and income
Maintain high employment
Ensure price stability
Sustain a satisfactory rate of economic growth
Budget Deficit• It is the amount by which an individual,
business, or government’s income falls short of the expectations set forth in its budget over a given time period.
• A budget deficit occurs when an entity (often a government) spends more money than it takes in.
• Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock.
Why do deficits occur?• Deficits occur because cash is not available to cover
expenses.
• Deficit may be the result of delays in collections on sales
or a capital expenditure that was not planned, like the
purchase of a new piece of equipment.
• Deficits could also result when sales are worse than the
forecast due to a downturn in the economy or lost sales
to competitors.
What should the government do to solve
budget deficits?
• Source of cash might include collections
• The sale of assets
• Investment income
• Receipts from planned long term financing
Government Debt
• (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government
• As the government represents the people, government debt can be seen as an indirect debt of the taxpayers
• An accumulated deficit over several years(or centuries) is referred to as the government debt
• Government debt is usually financed by borrowing,
although if a government’s debt is denominated in its
own currency it can print new currency to pay debts.
• Monetizing debts, however, can cause rapid inflation if
done on a large scale
• Governments can also sell assets to pay off debt
• Most governments finance their debts by issuing long -
term government bonds or shorter term notes and bills
• Governments usually must pay interest on what they
have borrowed
• Governments reduce debt when their revenues
exceed their current expenditures and interest
costs
• According to keynesian economic theories,
running a fiscal deficit and increasing
government debt can stimulate economic activity
Two types of government debt
1. Internal debt – owed to lenders within the country
2. External debt – owed to foreign lenders
Differences between monetary policy and fiscal policy
Fiscal Policy Monetary PolicyHigher taxes Selling treasury
securities
Lower taxes Buying treasury securities
Higher government spending
Increasing the reserve ratio
Lower government spending
Increasing the discount rate
Measuring National Income
Gross Domestic Product (GDP)
• It is the total market value of a country’s output.
• It is the market value of all final goods and services
produced within a given period of time by factors of
production located within a country.
• GDP measures two things at once: the total income of
everyone in the economy and the total expenditure on
the economy’s output of goods and services.
Goods and services can be classified for the
purpose of measuring GDP as:
• Final goods
• Intermediate goods
Intermediate Goods
Intermediate goods or producer goods or semi-
finished products are goods, such as partly
finished goods, used as inputs in the production of
other goods including final goods.
• EX. The components parts such as tires,
batteries & etc. sold to the car manufacturer are
intermediate goods.
Note
Intermediate goods are not counted in a
country’s GDP, as that would mean double
counting, as the final product only should be
counted, and the value of the intermediate
good is included in the value of final good.
Gross National Product
• It measures the size of the nation’s economy
• It is the total value of the final goods and services
produced in a year by a country’s nationals (including
profits from capital held abroad).
• GNP reflects the output of domestically owned
enterprises both within and outside national borders.
• It is also referred to as Gross National Income (GNI)
GNP Vs. GDP
GDP is the value of goods and services
made in the Philippines.
GNP is the value of goods and services
made by Filipino.
GDP = Market value of
goods and services
produced by residents
in country plus
incomes earned in the
country by foreigners.
GNP = Market value of domestically produced goods and services plus incomes earned by the residents of a country in foreign countries minus incomes earned by the foreigners in the country.
Items not included in GDP and GNP
• Quality of the goods and services produced
• Leisure time
• Housewives’ services
• Resale (resold or transfer goods)
• Transfer payments (ex. pension payments, gifts,
grants etc.)
• Security (buying and selling stocks and bonds)
Calculating Gross Domestic Product (GDP) and Gross National Product (GNP)
Methods used to measure GNP
• Expenditure methods or flow of production approach
• Income method or earnings and cost of production
• Industrial origin approach
• Value added approach
Expenditure approach• Measures the total amount spent on all final
goods and services during a given period.
Four(4)main categories of Expenditures
1. Personal Consumption expenditures (C)
Household spending on consumer goods
The largest part of GDP (due to the consumer
expenditures)
Expenditures by consumers on goods and
services
Three (3) main categories of consumer expenditures
Durable goods, automobiles, furniture’s and
household appliances
Non-durable goods, foods, clothing, gasoline
and cigarettes
Services things we buy that do not involve
production of physical
2. Gross private domestic investment (I)
Spending by firms and households on new
capital, that is, plant, equipment, inventory and
new residential structures.
Investment in capital - that is the purchase of
new housing, plants, equipment and inventory
by the private (or nongovernment) sector.
Gross private domestic investment (I)
Non – residential investment
Residential investment
Change in business inventories
3. Government consumption and gross
investment (G)
Expenditures of national and local government for
final goods and services.
Final goods – (military equipments, pencils,
school buildings).
Services – (military salaries, school teachers’
salaries, congressional salaries)
4. Net export (X - M): net spending by the rest of the
world, or exports (X) minus imports (M)
• The difference between exports (selling produced
goods and services across the borders) and
imports (Philippines purchases goods and services
from abroad).
• The figure can be negative or positive.
GDP = C+Ig+G+Xn (in an open economy)
GDP = C+Ig+G (in a closed economy)
Income ApproachThis approach calculates National Income (NI). NI is the sum of the following components:•Compensation of employeesIncludes wages, salaries, and various supplements employer contributions to social insurance and pension funds.•Proprietors incomeThe income of unincorporated business•Rental incomeThe income received by the property owners in the form of rent
• Corporate profits
The income of corporations
• Net interest
The interest paid by business
• Indirect business taxes, minus subsidies
Includes taxes such as sales taxes, customs duties, and
license fees less subsidies that the government pays
for which it receives no goods or services in return.
• Net business transfer payments
Net transfer payment by businesses to others
• Surplus of government enterprises
Income of government enterprises
Industrial Origin Approach
• This approach measures the sum of the market
value of the total production of all the major
industries comprising the economy.
• It is broken down into four sectors: Agriculture,
fishery, and Forestry, Industry and services.
Value Added Method Approach• This method measures the value of the goods
and services produced based on the value added at each stage of production or distribution and included in the cost to the ultimate consumer.
• Value added is the difference between the cost of material/goods and the value of sales of goods.
• For example, if a firm buys materials for P100 and produces from them a product while sells for P250, the value added by the firm is P150.
Other national accounts• Net Nation Product (NNP)Gross national product less capital consumption
allowances (depreciation).NNP = GNP – depreciation
• Personal Income (PI)Payments of income to individuals such as rents paid
to owner of the land, salaries and wages paid to laborers, and interest paid to the owners of capital.
PI = NI – (SSS contributions + corporate income taxes + undistributed corporate profits) + transfer payments
• Personal Disposable Income (DI)Income left after deducting personal income taxes,
which the individual has at his disposal to spend or to save.
DI = PI – personal income taxes• Personal Savings (S)Refers to income not spent for consumption
S = DI – COr if there is interest paid by consumers
S = DI – (C + interest paid by consumers)