Module 06: Contemporary Economic Issues Facing the Filipino Entrepreneur

I. LEARNING COMPETENCIES
1. Identify current economic situations within the vicinity.
2. Analyze the effects of contemporary economic issues affecting the Filipino
entrepreneur.
3. Formulate ways to solve or mitigate economic issues.

II. LESSON PRESENTATION

Filipinos can be very enterprising. But it is not new that Filipino entrepreneurs are
challenged by a number of economic issues. In this module we will be looking into those
contemporary economic issues and study how these issues affect Filipino businesses.

Savings, Investment and Interest Rate

Savings and investment are necessary to build the future. Both fuel the growth of the
economy’s productive capacity. But savings calls for giving up the present in order to build up
and, therefore invest for a better future. Savings and investment are not only the concern of
business but also of households and government.
Investment is defined as building up the capital stock for more future production and
consumption. But the cost of investment is savings defined as postponed consumption at
present. Say, a rice farmer wants to produce a surplus and sell it in the marketplace to provide
for his family’s other needs. To realize this, he builds an irrigation canal from the river
(investment) for planting and harvesting even during the dry months. But this form of
investment calls for giving up some weeks of planting resulting in foregone consumption
(savings) in exchange for greater consumption from the production surplus in the future.
However, the use of money as exchange and credit medium can maximize savings and
investment. While one constantly saves money for future use another one spends on
investment even before accumulating savings by borrowing. One can borrow and repay against
future accumulated savings. The credit system through its intermediaries, like banks link savers
and investors who are not the same persons. Thus, this access encourages savings to maximize
its allocation for investment.
Even government borrows the savings of households and businesses to spend on capital
accumulation. Capital takes the basic forms machineries, equipment, and buildings and
construction. While business builds additional factories that also create employment,
household continuously accumulate fixed assets like houses and cars for more services. On the
other hand, government invests in physical infrastructures like roads and bridges to encourage
business activities. All these capital accumulations redound to bigger productive capacity to
sustain household consumption. The economy’s capital formation (investment) has always
been greater than savings since government investment is also financed by taxes and at times,
foreign borrowings.
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20

15

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0
Gross National Capital Formation Gross National Savings
Image 6.1. Savings and Investment as % of Gross Domestic Product 2013 (Source: NSO)
What is interest rate? What is its role in investments?
In economics, interest is used in two ways.
1. It can be the price of the credit, which is often referred to as loanable funds.
2. It can also be the return that the capital earns as an input in the production process.
Loanable Funds - refer to the amount of money lent out by a lender to a borrower, for which
the borrower will pay an interest rate to the lender for the use of that fund.
Interest as the Return on Capital - can be illustrated in the case of a printing press owner who
decides to buy additional equipment which costs Php10,000.
– After a year, he earns Php1,000 for using the equipment in his business. The Php1,000
is equivalent to a 10-percent interest rate on the capital which is the equipment.
– In this case, interest is the return earned by the capital as an input in the production
process.

Rent
The layman's concept of rent is payment for the user of land or buildings belonging to
others. It is the compensation made to the owner of such land or building. From the point of
view of economics, rent refers to a payment made to or for a factor of production over and
above the amount expected by its owner. Economic rent is the positive difference between the
actual payment made for a factor of production (such as land, labor, or capital) to its owner and
the payment level expected by the owner, due to its exclusivity or scarcity. Economic rent exists
due to market imperfections. Without market imperfections, there would be no need for
payment of rent.
The Problem on Housing Rent
The problem of unaffordable decent housing is the problem not so much of the middle
class as the poor due to poverty. Typical middle class household members pitch in to afford
decent housing rental and eventual ownership. But the poor cannot afford decent housing at
all; let alone they are not convincing enough for housing loans without formal employment and
paying capacity. Lacking skills, they are self-employed (e.g., vendors) or not regularly employed
(e.g., construction workers). Thus, they live hand-to-mouth without employment record that
could otherwise entitle them to the social benefits provided by the government. Thus, the poor
squat on other people's lands or rent squatter housing in subhuman living condition they can
only afford.
 The poor spend more than their meager income to make both ends meet (See Image
6.2). Nonetheless, they can hardly provide even for their basic needs, which include housing. A
typical poor family spends mostly on food and practically nothing on housing and other
consumer items (See Image 6.3). Thus, poverty has isolated the poor to live in slum areas
crowding in shanties they do not even own. Even in worst condition are those at the bottom
thirty percent (30%) of family income earners who are the poorest of the poor as they live
below poverty line (See Image 6.4). Much less could they provide even for food consumption
that many live in the streets and other public places. In contrast, even the middle class can
afford some savings and provision for their other needs.

4000

3500

3000

2500

2000
Income
1500 Expenditure

1000

500

0
Bottom 30% of Family Income All Family Income Groups
Groups

Image 6.2. Family Income Expenditure 2012 (Source: NSO)

Sales

Others
31%

Food
Housing 60%
9%

Food Housing Others

Image 6.3. Family Expenditure Distribution 2009 – Bottom 30% of Family Income Groups (Source: NSO)
 Sales

Others Food
42% 42%

Housing
16%

Food Housing Others

Image 6.4. Family Expenditure Distribution 2009 – All Family Income Groups (Source: NSO)

Minimum Wage
The problem of inadequate wage is intertwined with the problem of unemployment.
Both problems stem from the lack of jobs for our large labor force. But relatively few employers
can exploit many who badly need jobs all the more. For this reason, the government mandates
a minimum wage to protect workers. In other words, employers are banned from paying wages
below the minimum standard set by the government. Yet, most wages are still below the
minimum standard due to lack of enforcement (See Image 6.5). On the other hand, total
enforcement may not be possible with the millions of employers the government has to watch
for violations.
500
450
400
350
300
250
200
150
100
50
0
Agriculture Industry Service

Average Wage Minimum Wage

Image 6.5. Daily Average – Minimum Wage Comparison (Source: BLES, DOLE)
In the long run, it is creating more jobs that will empower workers to readily find
employment and demand higher wages. For after all, minimum wage legislation is just
government's control tool to prevent further exploitation of workers.
Taxes
We pay taxes for the government to provide public goods and services that empower
and enable individuals and institutions (e.g., school, business corporation) to pursue their
dreams. One example of a public good is farm access road for farmers to transport their
products to the cities for the needed cash income. Another example is the public school system
to educate children of poor families out of poverty. On the other hand, an example of public
service is restoring peace and order in war-torn areas in Mindanao by the armed forces and
police that all can resume normal life. Another example is the regulation of business permits by
the City Hall to prevent industrial overcrowding, which can dampen the incentive to do
business. In other words, we pay taxes for government to provide a better place where we can
exercise our freedom securely, fairly, and progressively.
But taxes are yet our burden even as we ultimately benefit from the public goods and
services we get in return. Taxes can dampen the incentive to do business for the benefit of
society as they can eat up profit. An example is the usual profit tax that diverts investment from
new and vital products (e.g., cancer drugs) to those we need less of (restaurants). Pioneering
businesses need some tax reliefs in the early stage of market exposure when profit is still lean.
Taxes can also distort savings, investment, and consumption as income earners shift to
substitutes to avoid the tax burden. An example is high tax interest income, which drives
income earners to put their savings instead in individually lucrative but socially unproductive
real assets like jewelries, idle lands, and the like. Ideally, tax benefit is maximized as its burden
is minimized.
The main issue that hobbles the government to maximize tax benefit while minimizing
its burden is the shortfall of tax collections due to corruption. Image 6.6 shows that the
Philippines is one of the lowest in tax collection and thus, government spending (as % of GDP)
even in Asia. As tax collection has even declined through the years, the budget deficit (spending
over tax revenue) has correspondingly worsened as shown in Image 6.7. What is worse is that
government borrows from the public to make up for the deficit and stretch government
spending. Ultimately, repayment of public debts by drawing on the government budget only
crowds out spending especially on the more important public goods and services. Shortfalls of
tax revenues and government spending can mean less road maintenance, books for the public
schools, medical services, and medicines for the poor, to name a few. On top of the shortfalls,
corruption misallocates spending on the not-so-important from the more important public
goods and services (e.g., road beautification instead of free medical services for the poor).
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Korea Singapore Malaysia Thailand Philippines
Image 6.6. Tax Revenues as % of GDP (Source: Data Bank, World Bank)
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2007 2012

-5

Revenue Expenditure Surplus (Deficit)

Image 6.7. Government Budget Performance - % of GDP (Source: Department of Finance)

More Contemporary Economic Issues

Fluctuations in the Exchange Rate
For an import-dependent country like the Philippines, it is difficult to overstate the
impact of currency exchange rates. There is almost no part of the economy that is not affected
by them in some way, particularly because of the country’s import profile; the Philippines
imports virtually all of its fuel, most of its transportation equipment, and a very large
proportion of the raw materials and intermediate goods needed for manufacturing.
Exports and OFW remittances are the two biggest sources of foreign exchange inflows
to the Philippines, while imports and debt servicing are the biggest sources of outflows.
Given that most transactions are denominated in US dollars and the amounts of money
involved are enormous, even a small change in the peso-dollar exchange rate can have a
significant impact on costs, and subsequently on prices.
 Images 6.8-6.9.
Oil Price Increases
Demand for oil is inelastic, therefore the rise in price is good news for producers
because they will see an increase in their revenue. Oil importers, however, will experience
increased costs of purchasing oil. Because oil is the largest traded commodity, the effects are
quite significant. A rising oil price can even shift economic/political power from oil importers to
oil exporters.
A marked rise in oil prices will contribute to a higher inflation level. This is because
transport costs will rise leading to higher prices for many goods. This will be cost-push inflation
which is quite different to inflation caused by rising aggregate demand/excess growth.
Consumers will see a fall in discretionary income. They face higher transport costs, but
don’t have the compensation of rising incomes. Higher oil prices can lead to slower economic
growth – particularly a problem if consumer spending is weak.

Effects of Contemporary Economic Issues on the Purchasing Power of the People

Purchasing power of people is always affected in a community with a contemporary
issues. Situations are constantly changing, sometimes for the good, but oftentimes unfair
especially for the masses. For people with the means of living, they often go for panic buying,
hoarding goods they don't even need in their entire life. For people with the little means of
living, they will also adjust their spending. They will look forward to any opportunity of help
from others, limiting their purchasing power like never before. Lastly for people having no
means at all, they will ever become more aggressive as they always feel that they are being
harassed and stripped off from coming opportunities in life.
All of these realities are creeping in our society. This could mean a bad fate for the
economy of our country.

III. SUMMARY OF LESSON

 Investment is defined as building up the capital stock for more future production and
consumption.
 Savings defined as postponed consumption at present.
 Rent refers to a payment made to or for a factor of production over and above the amount
expected by its owner.
 Taxes are collected for the government to provide public goods and services that empower
and enable individuals and institutions to pursue their dreams.
 Even a small change in the peso-dollar exchange rate can have a significant impact on costs,
and subsequently on prices.
 Rise in oil prices will contribute to a higher inflation level.

IV. ENGAGEMENT ACTIVITY

I, The Entrepreneur
Direction: Imagine you are an entrepreneur. Think of a business/enterprise that you want to
engage to. Then answer the following questions. Answer on a separate sheet.
1. What business/enterprise are you going to engage to? (3 pts.)
2. What market structure will your business/enterprise be at? (2 pts.)
3. How are you going to compete in the market? How are you going to beat your competitor/s?
Explain thoroughly. (10 pts.; 7 - Quality of Ideas, 3 - Organization of Ideas)
4. What economic issues will your business/enterprise be facing? How are you going to solve or
work around the issues? Explain thoroughly. (10 pts.; 7 - Quality of Ideas, 3 - Organization of
Ideas)

V. ENRICHMENT
Direction: Answer thoroughly on a separate sheet.
a. Identify one business/establishment in your locality that has closed down or that is not doing
well due to the current crisis. Describe its current situation. (10 pts.; 7 - Quality of Ideas, 3 -
Organization of Ideas)
b. Then suppose you are part of the management of such business/establishment: What
could've been done or should be done in order to save the business from falling? Point out
some strategies. (10 pts.; 7 - Quality of Ideas, 3 - Organization of Ideas)

VI. EVALUATION
A. True or False
Direction: Write TRUE if the statement is correct and FALSE if incorrect. Answer on a separate
sheet. (2 pts. each)
1. Returns on investment is not always certain so might as well do not engage to it.
2. Rent is an operating expense.
3. Minimum wage legislation is just government's control tool to prevent further exploitation of
workers, thus, employers need not give minimum wage.
4. Tax incentives lure new markets and and vital products.
5. An increase in US Dollar Exchange wouldn't affect prices.

B. Multiple Choice
Direction: Choose the letter of the best answer. Answer on a separate sheet. (2 pts. each)
1. Another factor that drives up a business operating expenses.
a. building
b. machinery
c. land
d. wages
2. Lowest wage per hour that a worker may be paid as mandated by the government.
 a. marginal wage
b. maximum wage
c. minimum wage
d. wage
3. Compulsory contribution to state revenue, levied by the government on workers income and
business profits.
a. tax
b. wage
c. profit
d. fine
4. Purchase of goods that are not consumed today but are used in the future to create wealth.
a. savings
b. assets
c. stocks
d. investment
5. The interest rates rise, the opportunity cost of the investment __________
a. drops
b. rises
c. no effect
d. fails

C. Essay
Direction: Answer the following question briefly. Answer on a separate sheet. (10 pts.; 7 -
Quality of Ideas, 3 - Organization of Ideas)
How does oil price hike affect prices?

VII. RESOURCES
Dela Cruz et al. DepEd Applied Economics Module. Division of City Schools Manila.
slideshare.net
https://www.manilatimes.net/2014/08/12/business/impact-exchange-rates/118508/
https://www.economicshelp.org/blog/1919/oil/effect-of-higher-oil-prices/
https://brainly.ph/question/1201864
https://quizlet.com/