MONETARY, FISCAL, and INTERNATIONAL TRADE POLICY With Taxation and Agrarian Reform MONETARY POLICY Money is a very

important means used in the conduct of economic activities. The primary concern of the government is to maintain a strong and growing economy.

The Significance of Money Before money was invented, barter was the method used in exchanging a good with another good. Under the barter system, the family produces the various goods it needs. Barter was not successful because: 1. The goods offered for barter may not be the ones desired. 2. The parties may find it hard to agree on what quantity of goods to be offered in exchange that will approximate the value of the desired good.

The introduction of money eliminated the disadvantages of the barter system. With money, the exchange of goods became faster, and as a result, the people were provided with the right environment to specialize.

The Disadvantage of Using Objects as Money 1. Objects are perishable. 2. Objects are indivisible. 3.Objects are not easily portable.

MONEY * Is anything that is generally accepted as payment for goods and services. (Hyman) * Anything used to make payment, for a good, a service or a debt obligation. (Cargill) * A generally acceptable medium of exchange. (Kidwell and Peterson)

Money Supply Is a vehicle of economic activities when in circulation. It consists of the following: 1. Coins and Bills in circulation 2. Demand Deposits in Banks 3. Quasi-Money (Savings Deposits, Time Deposits) 4. Deposit Substitutes (deposits in savings banks, savings and loans associations, and credit unions)

Sources of Money Supply 1. Lending operations of the banking system determines the volume of money checks a bank creates.

2. Foreign currency inflows (mostly dollars) are sold to the Central Bank for pesos through commercial banks based on a fixed exchange rate prescribed by the Central Bank. 3. Taxes also change the level of money supply as leakages from the circular flow. These are foregone conclusions and savings which could otherwise be part of currency in circulation and reserves which enable banks to create money checks. 4. The government prints money for circulation when there a depression in the economy.

Money serves the following functions: 1.) as a unit of account when people used engage in barter, the exercise was not always easy to execute. With the coming in of money as the basic means of trade, people were able to determine the relative worth or value of the goods being traded. 2.) as a medium of exchange with the use money, exchange can take place even if there are no coincidences of wants. As exchanges are facilitated with the use of money, trade expansion is expected. 3.) as a store of wealth the use of money gives the person the luxury of time.

Electronic Money: A New Form of Money Money evolves as the requirement for its use become more sophisticated. Advances in technology in technology made possible the introduction of newer forms of money. The first to be developed is electronic money which simply means money stored electronically, and which is also known as E-Money. Electronic money comes in four forms: (1) debit cards, (2) stored value cards, (3) electronic cash, and (4) electronic checks.

The Goals of Monetary Policy 1. High employment the resources of the monetary authorities can be channeled toward the creation of more jobs. The financial system can give liberal financing terms to labor-intensive companies. 2. Economic growth refers to the steady process of increasing productive capacity of the economy, and hence of increasing national income. 3. Stable prices When prices of commodities rise, they bring uncertainty in the economy, and economic growth is placed at a standstill. 4. Interest Rate Stability - This is a desirable feature of a growing economy. When interest rates fluctuate, they create uncertainty among decision-makers, and these people find It hard to decide on which move to make. 5. Stability of financial markets One of the important goals is the promotion of a more stable financial system in which financial crises are avoided. 6. Stability in Foreign Exchange Markets When the value of the peso goes down in relation to other currencies, the prices of commodities tend to increase. Conversely, when the value of the peso rises against foreign currencies, the prices of commodities tend to go down.

BANKO SENTRAL NG PILIPINAS - The BSP is the countrys central monetary authority. It was established on July 3, 1993 by virtue of Sec.2 RA 7653, better known as The New Central Bank Act. - It has an authorized capitalization of P50 billion pesos. - The BSP took over from the Central Bank of the Philippines which was established on January 2, 1949.

As an Organization The Monetary Board is the policymaking body of the Bank. It formulates and reviews monetary and banking policies. Its chairman is the BSP Governor, with 5 full-time members from the private sector and one member from the Cabinet. A deputy governor heads each of the Banks three major operating sectors, that includes 44 departments and offices, 18 of which are offices and branches in the region.

3 Sectors of BSP 1. Banking Services Sector serves the banking needs of all banks such as accepting their deposits, servicing their withdrawals and extending them credit through the rediscounting facility. 2.Supervision and Examination Sector enforces and monitors compliance to banking laws to promote a sound and healthy banking system. 3. Resource and Management Sector serves the human, financial and physical resource needs of the BSP.

ROLES of BSP 1. The Supplier of Money Only BSP can issue the Philippine currency, the peso. The paper notes and coins we use in our economic transactions are fully guaranteed by the government. 2. A Money Manager The BSP sees to it that there is just enough money to meet the financial needs of the economy. 3. The Supervisor of All Banks The BSP regularly monitors and examines the operations of banks, as well as their compliance with banking rules and regulations. 4. The Bank of Banks The BSP does not deal directly with the public. It can only accept deposits from, and grant loans to, banks. 5. The Main Bank of the Government The BSP is the official depository of the government. Some of the tax collections, proceeds of the sale of government securities and foreign loans are deposited with the BSP. Likewise, when the government needs to repay its foreign debts or disburse money to pay expenses, it withdraws its funds from the BSP.

Amando Tetangco Jr. - BSP Governor and Chairman, Monetary Board

THE GOVERNMENT, FISCAL POLICY AND TAXATION

Definition of terms:

INVESTMENT - an amount of money invested in something for the purpose of making a profit.

EXPENDITURE - - an amount of money spent, as a whole or on a particular thing

FISCAL POLICY -Takes off to influence income and consumption and lead the economy toward growth and development where monetary policy left off. -As a tool utilizes government spending and taxation as means to control the economy. - Cannot be easily manipulated; goes hand in hand with monetary policy.

GOVERNMENT -Very important sector of the economy -Makes up for the private sectors deficiency. - Big spender and big borrower

Sources and Uses of Public Funds TAXES - biggest source of government funds.

2 Tax Collecting Agencies: *Bureau of Internal Revenue *Bureau of Customs a. Taxes collected includes: *Income taxes of individuals & businesses *Property taxes *Import taxes *Inheritance taxes *Gift taxes *And other specific taxes b. Non-Tax Revenues -Governments also earns income from. Ex. Collection of fines and fees Licenses and registration charges Profits earned by government-operated and controlled corporations (GOCC)

Borrowing

- Government resorts to when revenues are insufficient to finance growing budget.

Public Debt - Consist of all claims against our government which may have resulted from loans or advances extended to the government or as payment for goods and services rendered to it, for which the existence of indebtedness has been acknowledged by the government.

A government tends to borrow for 3 reasons:

1. Due to political reluctance to raise taxes 2. A sense that some government sponsored capital improvements should be paid for gradually over the life of the investment by those who will be taxpayers while the improvements are providing benefits. 3. A deliberate use of the budget to stimulate the economy

Government borrowing may be undertaken from internal sources such as the Central Bank, or from external sources such as foreign governments.

Government Expenditures -occupies the top position among the various government expenses. -Consists of spending connected with the maintenance of the different government subdivisions and instrumentalities Ex. Salaries of government officials and employees.

2 Types of Budget 1. Deficit Budget -Is being adopted by the government in instances where the private sector is hesitant to spend and the economy needs a boost - Has an expansionary effect since it increases the flow of money into the economy as a result of an increase in government spending, the excess spending being derived from sources other than taxes.

2. Surplus Budget -Is being adopted by the government at times when private spending is excessive and threatens to be inflationary. -Has a contracting effect since not all the taxes collected from the people are channeled back into the economic stream. -Depress economy

Increasing Aggregate Demand

- The effect when there is an increase in government purchases or cutting tax rates.

Decrease Aggregate Demand

-The effect when there is reduced government demand or increasing tax rates.

*A change in the tax rates or in government spending is purely discretionary.

Effects of Budget: -A deficit and balanced budget have an expansionary effect because they increase the flow of money into the economy as a result of increase in government spending. Such excess spending are being derived from public borrowing other than taxes. -Income spent by the government are derived from tax collections. So the excess amount spent are derived from public borrowing. - The surplus budget has a contracting effect since not all tax collections are spent and channeled back into the economy.

TAXATION The act of collecting taxes. This power is vested in the government, whether local or national.

TAXES are compulsory payments associated with income, consumption, or holding of property that individuals and corporations are required to make each year to governments.

THE NEED FOR TAXATION 1. As funds to maintain the various functions of the government, and the different activities it deems important. 2. To sustain viability of the government in providing the necessary services for the people.

REQUISITES OF A VALID TAXATION 1. The tax should be for a public purpose if the funds generated through it is used to support the government, like when it is used to pay for the construction of public buildings. 2. The rule of taxation shall be uniform all taxable articles or kinds of property belonging to the same class or category are taxed at the same rate. 3. The person or property taxed shall be within the jurisdiction of the government levying (imposing) the tax when the state collects taxes on persons, properties, or transactions where it has jurisdiction. 4. The assessment and collection of certain kinds of taxes must provide guarantees against injustices to individuals if there is sufficient notice and opportunity for hearing is provided to individual subjects of taxation.

OBJECTIVES OF TAXATION 1. to raise funds taxation is the chief means for raising funds to support the government

2. to redistribute wealth some individuals amass great wealth during their lifetime, and taxation is one way of redistributing these wealth to the people. Examples are taxes relating to estate and inheritance. 3. to regulate consumption consumption of some goods sometimes reach level that become harmful to the society, so to limit the sale of these goods, taxes are imposed. 4. to protect local industries imported goods sometimes enter our local markets to the detriment (harm, disadvantage) of local producers. If imported goods are sold locally at lower process, the government may impose taxes that will raise its selling price, and in effect, imported goods will be less attractive to domestic consumers.

CLASSES OF TAXES a. According to Subject personal, property, or excise Personal tax one imposed on individuals residing within a specific territory, regardless of property or occupation. Example: Community tax levied by the barangay to its residents. Property tax one levied on property Excise tax one imposed upon goods consumed, sold, or manufactured within a nation. Example: excise tax levied on alcohol and cigarettes b. According to purpose revenue or regulatory Revenue tax is imposed to collect revenues for the general purposes of the government. Example: income tax and sales tax. Regulatory tax is imposed for a special purpose like the protection of local industries from foreign competition. c. According to Authority Imposing Tax national and local taxes National tax one imposed by the national government. Example: income taxes and customs duties Local tax one levied in the municipal, provincial, or barangay governments. Example: real property tax d. According to Determination of Amount specific or ad valorem Specific tax one assessed on the basis of a tax per unit. Ad valorem assessment is based on a percentage of the value of the iteme. According to Who Bears the Burden direct or indirect Direct when the person on whom the tax is imposed absorbs the burden. Example: income tax Indirect when the amount is paid by the person other than the one whom it is legally imposed. Example: VAT paid by the seller but passed on to the buyer of the selling price. f. According to Graduation Rate proportional, progressive or regressive Proportional if it is based on a fixed percentage of the amount of property, income, or other factors. Examples: sales tax and real property tax Progressive when the rate increases as the tax base increases. Example: income tax

Regressive when the effective rate decreases as the tax base increases.

REQUISITES FOR AN IDEAL TAX SYSTEM 1. Adequate adequate to raise money to support the activities of the government 2. Equitable tax system must be fair. It must not benefit some groups or individual at the expense of others. 3. Economically efficient a tax system must be able to support strong, stable economic growth, rather than becoming an impediment (hindrance) to investment and a barrier to economic development. 4. Simple

TAX ON INDIVIDUALS

Individuals, as income taxpayers, fall into two general categories of citizens and aliens. A citizen may be a resident citizen or a non-resident citizen. Alien individuals are classified into resident aliens, and non-resident aliens are in turn classified into those engaged in trade or business or practice of profession, in the Philippines and those not engaged in trade or business, or practice of profession, in the Philippines. An individual is a citizen of the Philippines by definition of the Constitution of the Philippines. Under the Constitution, an individual may be a citizen of the Philippines at birth (i.e. one whose father or mother is a citizen of the Philippines), or may become a citizen of the Philippines sometime after birth (i.e. one who is naturalized in accordance with law). Philippine citizenship may be lost or required in the manner provided by law. Who is a non-resident citizen? He is a citizen who: a. establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein; or 1. leaves the Philippines during the taxable

year to reside abroad; 1. 2. 3. as an immigrant; or for employment on a permanent basis; or for work and derives income from abroad and whose employment thereat requires him to be physically abroad most of the time during the taxable year; or

c. was previously a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines. He shall be considered a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen for the year.

PERSONAL EXEMPTIONS OF CITIZENS AND RESIDENT ALIENS

a. Married person: If only one spouse is deriving taxable income, only said spouse may claim the personal exemption. If a married person is not legally separated from his spouse, his basic personal exemption is P32,000. If legally separated from the spouse, without any dependent, his basic personal exemption is P20,000. If legally separated from the spouse with a dependent, he may qualify as head of the family, with a basic personal exemption of P25,000 and with an additional exemption of P8,000, if the dependent is a child.

b. Head of the Family: Under the National Internal Revenue Code, the term head of the family means an unmarried or legally separated man or woman with one or both parents, or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children, living with and dependent upon him or her for their chief support, where such brothers, sisters or children are not more than twenty-one years of age, unmarried, and not gainfully employed, or where such brothers, sisters or children, regardless of age, are incapable of self-support because of mental or physical defect.

The term chief support means more than one-half of the requirements for support. Thus, if two children contribute equal amounts for the support of a parent, neither one of them may qualify as head of the family.

A parent, brother, or sister may qualify the taxpayer as head of the family, entitled to the basic personal exemption of P25,000, but not entitled to additional exemption.

c. Dependent A dependent, for whom a head of family or a married person may claim an additional exemption of P8,000, is a legitimate, illegitimate or legally adopted child, chiefly dependent upon and living with the taxpayer, if such dependent is not more than twenty-one years of age, unmarried and not gainfully employed, or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect

d. Single individual, widow/widower or married individual judicially decreed as legally separated with no qualified dependent has a basic personal exemption of P20,000.

* Marginal Income Earner refers to individuals not deriving compensation as an employee under an employeremployee relationship but who are self-employed and deriving gross sales/receipts not exceeding P100,000 during any 12month period. They shall file this return reflecting herein the net income from business.

When to File The Returns of the taxpayers shall be filed on or before the 15th day of April of each year covering income for the proceeding year. Agrarian Reform Program

Events that paved the Way for Agrarian Reform

Land one of the factors of production * When one wants to engage in production, he must find some land, apply the necessary materials and labor inputs, and wait for the outputs to start pouring in, if he wants to be of Service to the nation (and to himself). * Securing land for production purposes constitutes the BIGGEST barrier to economic growth. * Prior to 1963, big land estates were owned by a small % of the population. * hacienderos - landlords made decisions on what to do with their lands. * 1946-50s rebellion of the poor peasant farmers of Central Luzon. - Rebellion, however is economically disruptive because the production of goods and services is hampered by hostile actions between the landlords and the tenant-rebels. - Rebellion is the effect of concentration of land ownership in the hands of a few. The dispersal of land ownership has therefore become an important issue; even Gen. Douglas Mac Arthur recognized land reform as an important requisite for economic development.

THE COMPREHENSIVE AGRARIAN REFORM PROGRAM - otherwise known as R.A. 6657 - was signed by Pres. Corazon Aquino on June 10, 1988 - In its declaration of Principles and Policies, the program stated that it is the policy of the state to pursue CARP. - The welfare of the Landless Farmers and Farm Workers will receive the Highest consideration: 1. To promote Social Justice 1. 2. To move the nation toward Sound Rural Development and Industrialization Establishment of Owner Cultivatorship of Economic-sized farms as a basis of Philippine agriculture.

* turning over 26, 000 hectares of farmland to some 20, 000 Mindanao farmers. Farmlands- formerly owned by MNCs were given to the workers cooperatives of DOLE Phils., Del Monte and the National Development Corporation.

What is LAND REFORM? Limiting ownership of land by the landlords.

HISTORICAL BACKGROUND:

Land Reform has been with us for thousands of years. Rome is acknowledged as one of the worlds greatest empires, but still its rulers found it necessary to pass a law that limited the amount of land one person could hold. But even with such a law, the aristocrats (or the patricians) gained control of public lands. This made it necessary for Tiberius and Gaius Gracchus to secure new but short-lived laws for land reform during the 2nd century B.C. During the middle ages, feudalism became the norm. the feudal lords owned the lands worked by the serfs who were provided with food and protection. This arrangement made the life of the serfs, and later of the tenants, miserable throughout the centuries and way up to the 1900s. The feudal lords were able to own huge estates that became too large for efficiency. The tenants relationship with the feudal lord was not permanent, and profits derived from tilling the land were not shared with the tenants. Because of this, the tenants were not motivated to exert their utmost efforts to make the lands productive. On the other hand, the landowners were not also motivated to invest in the lands because they were not sure that the tenants will make good use of them. As such, society was pressed for a solution that will make the lands more productive. The problem, of course, was how to motivate the tillers of the soil. By the 1800s, there were several measures adapted in Europe and in the United States to make land reform a factor for economic growth. In the community economy of prehistoric Philippines, land ownership was not much of a problem because unsettled land belonged to the individual who planted it with coconut, fruit trees, and abaca. When a community settles in a place, the land is divided among its members. Every family is, thus, provided with a plot of land to cultivate. The coming of the Spaniards changed many aspects of the economic life of the early inhabitants of the Philippines. The Spaniards brought with them the system of feudalism. The conquerors divided among themselves all available lands, turning these into large encomiendas. This condition continued for more than three centuries of hardship for farmers who were allowed to till the land of the encomenderos. These big landholdings were later converted into haciendas. The end of the Spanish rule in the Philippines also marked the beginning of some attempts at land reform. These are as follows: 1. the confiscation of friar lands by General Emilio Aguinaldo during the Phil. Revolution of 1896; 1. 2. 3. the institution of systematic land registration and public land disposition during the American occupation; the social justice program of Pres. Quezon during the commonwealth period; the land-for-the-landless program of Pres. Ramon Magsaysay during his term; and

4.

the land reform pilot projects during the administration of Pres. Diosdado Macapagal. These attempts were considered limited in scope, and for one reason or another, were not able to improve the lot of the masses and eliminate feudalism.

A more radical measure was the enactment of Pres. Decree No. 27, otherwise known as the Tenants Emancipation Act. This decree emancipated the tenants from the bondage of the soil, transferred to them the ownership of the land they till and provided the instruments and mechanisms to support its objectives.

CARP (Comprehensive Agrarian Reform Program) this was a more ambitious means of improving the life of many Filipino it is embodied in the Comprehensive Agrarian Reform Law (R.A. no. 6657, approved June 10, 1988) this is an act that was instituted to promote social justice and industrialization, providing the mechanism for its

implementation and for other purposes.

The CARPs Program of Implementation

The three phases of implementation are as follows: PHASE 1 (1988-1992) 1. 2. 3. 4. 5. 6. 7. rice and corn lands covered by P.D. no. 27, all idle or abandoned lands all private lands voluntarily offered by owners for agrarian reform, all lands foreclosed by government financial institutions, all lands acquired by the Presidential Commission on Good Governance, Lands operated by multinational companies, and All other lands owned by the government devoted to or suitable for agricultural purposes

PHASE 2 (1988-1992) 1. 2. 3. 4. all alienable and disposable public agricultural lands, all arable public agricultural lands under agri-forest, pasture and agricultural leases already cultivated and planted to crops in accordance with Sec. 6, Art, VIII, 1987 Constitution all public lands which are to be opened for new development and resettlement, and all private agricultural lands in excess of fifty hectares

PHASE 3 1. 2. landholdings above twenty four hectares up to fifty hectares (1992-1995) landholdings with areas between 5.1 and 24 hectares (1994-1998)

Coverage of the Program: 1. Public Health Programs

2. Family Planning 3. Education and training of farmers 4. Reorganization of land reform agencies 5. application of labor laws to agricultural workers 6. construction of infrastructure facilities as feeder roads, irrigation system and establishment of rural electrification 7. organization of different types of voluntary association 8. providing employment opportunities 9. other services of community development

Reasons for the Failure of the Program in the early stages of Implementation 1. 2. 3. 4. Program stopped at land distribution. The farmers were not prepared to take over the responsibilities given them. The haphazard planning on the part of the government. The tenants squatting on the land.

Not over P 10,000 5%

over P 10,000 but not over P 30,000 P 500 + 10% of the excess over P10,000 over P 30,000 but not over P 70,000 P 2,500 + 15% of the excess over P 30,000 over P 70,000 but not over P 140,000 P 8,500 + 20% of the excess over P 70,000 over P 140,000 but not over P 250,000 P 22,500 + 25% of the excess over P 140,000 over P 250,000

but not over P 500,000 P50,000 + 30% of the excess over P 250,000 over P 500,000

P 125,000 + 34% of the excess over P500,000

Mr. Robert de Castro Individual Income Tax Return December 31, 2025

Gross Compensation Income Less: Exemptions: a. Married b. children 4x8000 Taxable Income 32,000 32,000

P 375,000.00

64,000.00 P 311,000.00 =========

Tax Due a. Basic Rate b. Excess (311,000 250,000) 61,000 x 30% Tax Due Less: Tax withheld Tax refundable/payable 18,300.00 68,300.00 68,300.00 -----0----50,000.00

* If the tax withheld is equal to the tax due.

Mr. Robert de Castro Individual Income Tax Return December 31, 2025

Gross Compensation Income Less: Exemptions: a. Married b. children 4x8000 Taxable Income 32,000 32,000

P 375,000.00

64,000.00 P 311,000.00 ========

Tax Due a. Basic Rate b. Excess (311,000 250,000) 61,000 x 30% Tax Due Less: Tax withheld Tax refundable 18,300.00 68,300.00 110,000.00 (41,300.00) ======= * If the tax withheld is greater than the tax due, you have a refund 50,000.00

INTERNATIONAL TRADE

- The Phoenicians pioneered in the seagoing trade, followed later by the Greeks and the Romans. - Some Traders went as far as India and China. - 13th century, Italian cities of Genoa, Pisa and Venice dominated international trade. - Period of discovery, feats of explorers like Columbus and Magellan led to the further development in international trade involving Spain, Portugal, France, and England. These nations became the centers of trading influence around the world.

Reasons for International trade:

1. 2. Globalization Export and Import

Basis for International Trade:

1. 2. 3. Specialization absolute advantage a country that can produce a good with fewer resources than can other countries. comparative advantage a country that can produce a product or service at lower opportunity costs than another country.

International Trade Barriers:

1. A. tariffs a tax to be paid for importing or exporting goods. 1. Export tariff one that is collected by the exporting country 2. Transit tariff one that is collected by the country through which the goods have passed 3. Import tariff one that is collected by the importing country.

A tariff may be assessed as follows: 1. specific duty assessment on the basis of a tax per unit. 2. ad valorem duty assessment as percentage of the value of the item 3. compound duty a combination of specific and ad valorem duties.

Import tariffs are imposed for the following purposes: 1. 2. 3. 4. 5. 6. for raising revenues; to reduce the overall level of imports by making them more expensive than the locally produced substitute, with the aim of eliminating a balance of payments deficit; to counter dumping by raising the price of the dumped commodity; to retaliate against restrictive measures imposed by other countries; to protect an infant industry until it has grown and is able to compete with the more developed industries of other countries; and to protect vital industries such as agriculture.

1.

B.

Non-tariff barriers

1.

Direct Price Influences - One way of controlling trade is to influence the price of commodities that are imported or exported. 1. Subsidies are direct or indirect governmental assistance to companies, to make their goods more competitive with imports. 2. Customs valuation refers to the authority granted to custom officials in determining the value of an imported commodity. 3. Other direct price influences

i. ii. iii.

Special fees Requiring the advanced placement of customs deposit before shipment is made Requiring minimum selling prices of goods after customs clearance have been made

1.

Quantity Controls another was of controlling trade is the use of some means of effectively limit the quantity of goods trades between countries. 1. Quotas are limits placed on the quantity of specified products allowed to be imported into or exported out of a country. 2. Buy-local legislations - are those designed by the government to give preference to the locally made goods. 3. Standards refers to classifications, labeling, and testing set by a country. 4. Specific permission requirements- are forms controlling trade whereby the country requires permission from the government before engaging in foreign trade 5. Administrative delays 6. Reciprocal arrangements require exporters to accept merchandise as payment for the exported goods. 7. Restriction on services refer to arrangements whereby an importer or exporter is required to use services of domestic companies in moving goods from one country to another.

MGWA NI: P 20 manuel l quezon Declaration of Filipino as the national language, Malacaang Palace Banaue Rice Terraces; Paradoxurus hermaphroditus philippinensis , Palm civet; Cordilleras weave design 50 Red Sergio Osmea, First Philippine Assembly,Leyte Landing Taal Lake in Batangas; Catanx ignobilis,maliputo (Giant trevally); Batangas embroidery design

100 Bluish Violet Manuel A. Roxas, Old BSP building inIntramuros, Manila, Inauguration of the Third Philippine Republic Mayon Volcano in Albay; Rhincodon typus, whale shark; Bicol textile design 200 Green Diosdado P. Macapagal, EDSA People Power 2001, Aguinaldo Shrine in Kawit, Cavite,Barasoain Church in Malolos, Bulacan Chocolate Hills in Bohol; Tarsius syrichta, Philippine tarsier; Visayas weave design 500 Golden yellow Corazon C. Aquino, Benigno S. Aquino, Jr.,EDSA People Power I, Benigno Aquino monument in Makati City Subterranean Underground River in Puerto Princesa, Palawan; Tanygnathus lucionensis, blue-naped parrot; Southern Philippines cloth design 1000 Blue Tubbataha Reefs Natural Park in Sulu Sea;Pinctada maxima, South Sea pearl; Mindanao design for Tinalak (Ikat-dyed abaca)

----------------------------------------------------------------------------------------------------------------------------- -------------MARKET STRUCTURES MARKET A market exists when buyers wishing to exchange money for a good or service are in contact with sellers wishing to exchange goods and services for money. It may be confined to a specific geographical area like a certain town where buyers and sellers meet. KINDS OF MARKET STRUCTURES PURE OR PERFECT COMPETITION Products of firms in the industry are standardized. The buyer and the seller are without power to change the going market price of the product. Absence of restraints of any kind is an important feature. Buyers, sellers and resource owners have perfect knowledge of market conditions. This is a creation of theory. KINDS OF MARKET STRUCTURES PURE OR PERFECT MONOPOLY only one producer of a product Examples are firms that supply water and electricity. The price is set by the sole seller or the monopolist.

KINDS OF MARKET STRUCTURES MONOPOLISTIC COMPETITION There are a large number of sellers that produce similar products, but the products are perceived by the buyers as different. Examples: rice, tomatoes, milk, shoes, fastfood, etc The firms are actually in competition. KINDS OF MARKET STRUCTURES OLIGOPOLY There are a limited number of firms competing for a given industry. Products are homogenous or identical. Examples are: gasoline, cement, steel, automobiles and cigarettes. High initial investment, technical know-how, patent rights, etc Output and Price Under Pure Competition The price of the product in a pure competition cannot be influenced by any seller or buyer. Because the quantity held by an individual seller is only a small fraction of the total quantity produced, changing his price will not be a cause for retaliation from competitors. In pure competition, the actual market price is determined by a combination of the independent actions of the sellers and buyers. Output and Price Under Monopoly Since the monopolist is the sole seller in the market, his demand curve is also the industrys demand curve. When he raises his prices, the quantity he disposes will be reduced. When he lowers his price, the reverse happens. Fixing the Monopoly Price Output and Price Under Oligopoly If the oligopolist cuts his price, competitors will retaliate and he will not gain anything, but short-term profits from his initial move. His long-run profits (and that of his competitors) will be reduced. If he raises his price, his customers will move to his competitors. His sales volume and consequently his sales revenue will decline. Output and Price Under Monopolistic Competition Firms in this market structure, strives to differentiate its products from that of its competitors. If it is successful in maintaining a sizable group of loyal customers, it will attempt to maximize profits, observing the law of supply and demand. Measuring National Output and Income This is the measure of the money value of the total flow of goods and services produced in an economy over a specified period of time. A useful tool in determining the capabilities of an economy Measuring National Output and Income

Owners of economic resources are engaged in earning incomes by allowing their resources to be used in producing goods and services. Changes in the incomes they receive indicate changes in the level of economic activity. When taken in aggregate figures, income becomes a very powerful means of measuring economic performance. Measuring National Output and Income National income consists of: Wage or salary those generated by labor Interest those generated by lenders of funds Rent those generated by owners of real estate Profit those generated by the entrepreneurs Net factor income from abroad Important terms used in measuring National Income Gross Domestic Product Measure of the total flow of goods and services produced by the economy over a particular period of time. Factors of production must be located in the domestic economy regardless of who owns these factors. Important terms used in measuring National Income Gross National Product Is a measure of the market value of the final goods and services produced by nationals or citizens of a country in a particular time period. This includes production within and outside of the country under consideration. Important terms used in measuring National Income Market value Refers to the current price of goods and services in the economy. Important terms used in measuring National Income Consumption Expenditure by consumers on final goods and services. The total amount spent by consumers on newly produced goods and services (excluding purchases of new homes, which are considered investment goods.) Important terms used in measuring National Income Investment Is an activity that uses resources now in such a way that they allow for greater production in the future, and hence, greater consumption in the future. It includes output of capital goods, net change in business inventories, and residential construction. 2 types of investments: Fixed a good that is purchased to be used in order to make other goods and services.

Inventory are those used to increase the amount of inventories of finished products. Important terms used in measuring National Income Consumer durables Are consumer goods such as appliances and furniture, that usually last for several years. Expenditures on consumer durables are meant not for current but for future satisfaction. Important terms used in measuring National Income Government expenditures Refers to the sum of government payrolls and purchases, which is the cost of government output. Such expenditures are used for the day-to-day operations and projects of the government. Important terms used in measuring National Income Net factor income from abroad This is the difference between the income earned by citizens who own resources used in the production process abroad and the income of foreigners who own resources used in the production process here in the Philippines.

TAXATION The act of collecting taxes.

This power is vested in the government, whether local or national. TAXES are compulsory payments associated with income, consumption, or holding of property that individuals and corporations are required to make each year. THE NEED FOR TAXATION 1. As funds to maintain the various functions of the government, and the different activities it deems important. THE NEED FOR TAXATION

2. To sustain viability of the government in providing the necessary services for the people.

OBJECTIVES OF TAXATION

1. to raise funds 2. to redistribute wealth 3. to regulate consumption 4. to protect local industries

INCOME TAX TAX ON INDIVIDUALS Individuals, as income taxpayers, fall into two general categories: a. citizens b. aliens INCOME TAX A citizen may be a resident citizen or a non-resident citizen.

INCOME TAX Alien individuals 1. are classified into resident aliens, and non-resident aliens. 2. are in turn classified into a. those engaged in trade, business or practice of profession in the Philippines and b. those not engaged in trade, business or practice of profession, in the Philippines. An individual is a citizen of the Philippines by definition of the Constitution of the Philippines.

Under the Constitution, a. an individual may be a citizen of the Philippines at birth (i.e. one whose father or mother is a citizen of the Philippines), b. or may become a citizen of the Philippines sometime after birth (i.e. one who is naturalized in accordance with law).

Philippine citizenship may be lost or required in the manner provided by law.

A non-resident citizen is a citizen who: a. establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein; or

b. leaves the Philippines during the taxable year to reside abroad; 1. as an immigrant; or 2. for employment on a permanent basis; or 3. for work and derives income from abroad and whose employment thereafter requires him/her to be physically abroad most of the time during the taxable year; or

c. was previously a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.

He shall be considered a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen for the year. b. Head of the Family: (Under the National Internal Revenue Code) An unmarried or legally separated man or woman with: a. one of both parents, b. or both parents,

c. or with one or more brothers or sisters, d. or with one or more legitimate, recognized natural or legally adopted children,

Living with and dependent upon him or her: a. for their chief support, b. where such brothers, sisters or children are not more than twenty-one

years of age, unmarried, and not gainfully employed, c. or where such brothers, sisters or children, regardless of age, are incapable of self-support because of mental or physical defect.

The term chief support means more than one-half of the requirements for support. Thus, if two children contribute equal amounts for the support of a parent, neither one of them may qualify as head of the family. As a taxpayer, a parent, brother, or sister may qualify for head of the family, and is entitled to the basic personal exemption of P25,000, but not entitled to additional exemption.

d. Single individual, widow/widower or married individual judicially decreed as legally separated with no qualified dependent has a basic personal exemption of P20,000. Marginal Income Earner refers to individuals: 1. not deriving compensation as an employee under an employer-employee relationship 2. but who are self-employed and deriving gross sales/receipts not exceeding P100,000 during any 12month period. They shall file this return reflecting herein the net income from business. When to File

The Returns of the taxpayers shall be filed on or before the 15th day of April of each year covering income for the proceeding year. Mr. Robert de Castro

Individual Income Tax Return December 31, 2025 Gross Compensation Income Less: Exemptions: a. Married b. children 4x25000 150,000.00 Taxable Income Tax Due a. Basic Rate b. Excess (225,000 140,000) 22,500.00 P 225,000.00 100,000 50,000 P 375,000.00

85,000 x 25% Tax Due Less: Tax withheld Tax refundable/payable 43,750.00 30,000.00 13,750.00

21,250.00

* If the tax withheld is equal to the tax due then there is no tax refund or payable.

Mr. Robert de Castro

Individual Income Tax Return December 31, 2025 Gross Compensation Income Less: Exemptions: a. Married b. children 4x25000 150,000.00 Taxable Income Tax Due a. Basic Rate b. Excess (225,000 140,000) 85,000 x 25% Tax Due Less: Tax withheld Tax refundable/payable 43,750.00 50,000.00 6,250.00 21,250.00 22,500.00 P 225,000.00 100,000 50,000 P 375,000.00

* If the tax withheld is equal to the tax due then there is no tax refund or payable. n The Government, Fiscal Policy & Taxation n Investment n An amount of money invested in something for the purpose of making a profit n Expenditure - An amount of money spent as a whole or an a particular thing n Fiscal Policy n Takes off to influence income and consumption and lead the economy toward growth and development where monetary policy left off. n As a tool utilizes government spending and taxation as means to control the economy. n Cannot be easily manipulated; goes hand in hand with monetary policy. n Government n Very important sector of the economy

n Makes up for the private schools deficiency n Big spender and big borrower n Sources and Uses of Public Funds n Taxes - Biggest source of government funds. n 2 tax collecting agencies: n Bureau of Internal Revenue n Bureau of Customs n a. Taxes collected includes: n Income taxes of individuals & businesses n Property taxes n Import taxes n Inheritance taxes n Gift taxes n And other specific taxes n b. Non-tax Revenues n Governments also earns income from Ex. Collection of fines and fees Licenses and registration charges Profits earned by government-operated and controlled corporations (GOCC) n Borrowing - Government resorts to when revenues are insufficient to finance growing budget. n Public Debt - Consist of all claims against our government which may have resulted from loans or advancesextended to the government or as payment for goods and services rendered to it, for which the existence of indebtedness has been acknowledged by the government. n A government tends to borrow for 3 reasons: 1. Due to political reluctance to raise taxes 2. A sense that some government sponsored capital improvements should be paid for gradually over the life of the investment by those who will be taxpayers while the improvements are providing benefits. 3. A deliberate use of the budget to stimulate the economy n Government Expenditures: n occupies the top position among the various government expenses. n Consists of spending connected with the maintenance of the different government subdivisions and instrumentalities Ex. Salaries of government officials and employees. n 3 Types of Budget:

1. Deficit Budget - Is being adopted by the government in hesitant to spend and the economy instances where the private sector is needs a boost increases the flow of money into the economy as a other than

- Has an expansionary effect since it result of an increase in taxes. n 2 Types of Budget: 2. Surplus Budget - Is being adopted by the government at excessive and threatens to be inflationary.

government spending, the excess

spending being derived from sources

times when private spending is

- Has a contracting effect since not all the channeled back into the economic - Depress economy n Increasing Aggregate Demand stream.

taxes collected from the people are

- The effect when there is an increase in government purchases or cutting tax rates. n Decrease Aggregate Demand -The effect when there is reduced government demand or increasing tax rates. n Effects of a Budget: n A deficit and balanced budget have an expansionary effect because they increase the flow of money into the economy as a result of increase in government spending. Such excess spending are being derived from public borrowing other than taxes. n Income spent by the government are derived from tax collections. So the excess amount spent are derived from public borrowing. n The surplus budget has a contracting effect since not all tax collections are spent and channeled back into the economy. n Taxation n The act of collecting taxes. This power is vested in the government, whether local or national. n Taxes n are compulsory payments associated with income, consumption, or holding of property that individuals and corporations are required to make each year to governments. n The need for taxation 1. As funds to maintain the various functions of the government, and the different activities it deems important. 2. To sustain viability of the government in providing the necessary services for the people. n REQUISITES OF A VALID TAXATION n The tax should be for a public purpose if the funds generated government, like when it is used to n REQUISITES OF A VALID TAXATION through it is used to support the buildings.

pay for the construction of public

n The rule of taxation shall be uniform all taxable articles or kinds class or category are taxed at the n REQUISITES OF A VALID TAXATION same rate.

of property belonging to the same

n The person or property taxed shall be within the jurisdiction of the government levying (imposing) the tax when the state collects taxes on where it has jurisdiction. n REQUISITES OF A VALID TAXATION n The assessment and collection of certain kinds of taxes must provide guarantees against injustices to individuals if there is hearing is provided to individual sufficient notice and subjects of taxation. opportunity for persons, properties, or transactions

n OBJECTIVES OF TAXATION 1. to raise funds taxation is the chief means for raising funds to support the government 2. to redistribute wealth some individuals amass great wealth during their lifetime, and taxation is one way of redistributing these wealth to the people. Examples are taxes relating to estate and inheritance. n OBJECTIVES OF TAXATION 3. to regulate consumption consumption of some goods sometimes reach level that become harmful to the society, so to limit the sale of these goods, taxes are imposed. 4. to protect local industries imported goods sometimes enter our local markets to the detriment (harm, disadvantage) of local producers. If imported goods are sold locally at lower process, the government may impose taxes that will raise its selling price, and in effect, imported goods will be less attractive to domestic consumers. n Classes of Taxes: n a. According to Subject personal, property, or Personal tax one imposed on excise individuals

residing within a specific territory, regardless of property or occupation. Example: Community tax levied by the barangay to its residents. Property tax one levied on property Excise tax one imposed upon goods consumed, sold, or manufactured within a nation. Example: excise tax levied on alcohol and cigarettes n Classes of Taxes: n b. According to purpose revenue or regulatory

Revenue tax is imposed to collect revenues for the general purposes of the government. Example: income tax and sales tax. Regulatory tax is imposed for a special purpose like the protection of local industries from foreign competition. n Classes of Taxes: n c. According to Authority Imposing Tax national and local taxes national income taxes and customs duties Local tax one levied in the municipal, provincial, or barangay governments. Example: real property tax n Classes of Taxes: n d. According to Determination of Amount Specific tax one assessed on the basis of a tax per unit. Ad valorem assessment is based on a of the value of the item n Classes of Taxes: n e. According to Who Bears the Burden direct or indirect percentage specific or ad valorem

National tax one imposed by the government. Example:

Direct when the person on whom the tax is imposed absorbs the burden. Example: income tax Indirect when the amount is paid by the person other than the one whom it is legally imposed. Example: VAT paid by the seller but passed on to the price. n Classes of Taxes: n f. According to Graduation Rate proportional, progressive or regressive buyer of the selling

Proportional if it is based on a fixed percentage of the amount of property, income, or other factors. Examples: sales tax and real property tax Progressive when the rate increases as the tax base increases. Example: income tax Regressive when the effective rate decreases as the tax base increases. n REQUISITES FOR AN IDEAL TAX SYSTEM: n Adequate adequate to raise money to activities of the government n Equitable tax system must be fair. It groups or n Economically efficient a tax system must be economic growth, rather than becoming an impediment (hindrance) to investment and a barrier to economic development. n Simple PRODUCTION and COST THE CONCEPT OF PRODUCTION PRODUCTION The creation of any good or service for the purpose of selling to buyers. It covers the creation of outputs by business firms by government agencies, and by nonprofit institutions like schools and hospitals. Examples of Production Activities: The farmer producing vegetables The psychiatrist producing specialized service The songwriter producing a new song The Department of Public Highways producing roads A mother producing meals for her children Suzuki Corp. producing motorcycles PRODUCTION in general is any activity that creates value. TRANSFORMING INPUTS INTO OUTPUTS Production is an activity where inputs are transformed into outputs. must not benefit some individual at the expense of others. able to support strong, stable support the

It requires: 1. 2. Assembling the necessary inputs Transforming the inputs through a recipe and technological process into outputs of goods and services.

Various Inputs in Production Capital including raw material ingredients, supplies, tools, machinery, equipment, and physical facilities. Labor which combines and process the various materials. Land where the space allotted for processing is located. Entrepreneurial or managerial talent which performs functions like supervision, planning, control, coordination and leadership. Categories of Production Activities 1. Unique product production

This type of production activity has its output made-to-order products and services. Each product is more or less distinct like the satellite disc, the space station, the tailor-made dress, the services of a public relations firm or a movie. High demand on skill and craftsmanship typify this type of production. Low volume of production is not uncommon but high volume can be achieved by increasing the size of the workforce. Production activity starts when an order comes in.

Categories of Production Activities 2. Rigid Mass Production

This production activity involves the manufacture of uniform products in large quantity using a well-defined, proven, and usually inflexible technology. The tools, materials, and parts used are standardized, which make movements and outcomes highly economical. Standardization makes the tools (as well as materials and parts) interchangeable which minimizes disruptions in processing. This makes possible mass production in short periods of time.

Categories of Production Activities 3. Flexible Mass Production

This type of production activity, processing is done in two stages.

First stage - involves mass production of standardized components Second stage the components are assembled into final products that appear different from one another.

In the manufacture of refrigerators for example, a company produces standardized parts and assembles them into different sizes and models that will suit different consumer requirements.

Flexible mass production clearly has the cost efficiency advantage in addition to its ability to cater to consumer needs.
Categories of Production Activities

 4. Process or Flow Production Its feature is a continuous flow of output Integrated technology is employed to move a continuous flow of raw material inputs through the system. This production activity is highly automated and mechanized, resulting to high production efficiency when operated at capacity or near capacity 24 hours a day and 7 days a week. The lower the unit costs, the more facilities are used. Productions Functions Out put of a production process will depend on the quality and quantity of inputs used. Various combinations of inputs will result to different quantities and qualities of output. Production Function

Example To produce 100 cavans of palay, The use of a certain farming technology on a given hectare of land with certain characteristics, The use of certain quantity and quality of seeds A given number of bags of fertilizer The use of specified tools and machinery, and the application of a certain amount of labor will all be a part of the requirements.
Production Function The relationship between the amount of inputs required and the amount of output that can be obtained. Productions Functions A schedule (a table or mathematical equation) showing the maximum amount of outputs that can be produced from any specified set of inputs given the existing technology. A catalog of output possibilities. Analysis of the Production Process The classes of inputs Fixed input is one whose quantity cannot be readily changed when market conditions indicate that a change in output is desirable Example: Fixed inputs are buildings, major pieces of machinery and management personnel Cannot be readily increased or decreased. Analysis of the Production Process The classes of inputs Variable input is one whose quantity can be readily changed when a change in output is desired. Example: Direct labor, raw materials and supplies. Analysis of the Production Process

 The time frame references Short-run refers to that time frame in which the input of one or more productive agents is fixed. Any time period not long enough to allow the full effects of some changes to have operated. Change can be done through changes in variable inputs. Analysis of the Production Process The time frame references Long run is that period of time in which all inputs are variable. This is because when fixed inputs need adjustment, it can be done when given sufficient time. PRODUCTION WITH ONE VARIABLE INPUT The number of inputs in any production process varies from 1 100. Assume that there is only one variable input which can be combined in different proportions with fixed inputs to produce various quantities of output. TOTAL, AVERAGE and MARGINAL Products Total Output Refers to the total amount of output produced in physical units such as bags of fertilizers, bottles of vinegar or pairs of shoes. Production with ONE Variable Total output total amount of output produced in physical units such as bags of fertilizers, bottles of vinegar, or pairs of shoes. Average product refers to the total output divided by the quantity of the variable inputs under consideration. Marginal product is the additional out put attributed to the increase in the quantity of the variable inputs under consideration. Total, Average, and Marginal Product of a Soap Manufacturer Law of Diminishing Returns Assuming that the amount of the other inputs required in the production process are kept constant, as more of the same input is employed in the production of a particular good, the corresponding increase in total output tends to become smaller and smaller. Costs of Production Short-run costs Total cost refers to the sum of all the expenditures in producing goods and services. It may be used for national accounts as well as that of the level of the firm. Fixed cost is that portion of the total cost which remains unchanged even if the level of output changes. (e.g. RENT) Variable cost is that part of total cost that do not vary with the amount of output produced. (e.g. Wages and raw materials)

i Consumption The total expenditure in an economy on goods and services by individuals or a nation during a given period. Refers to direct consumption of human wants. Includes not only the use of consumer goods and services but also the use of raw materials and other inputs in the production process. Consumption Function Refers to the relationship between consumption expenditure in the economy, and total consumers income. Introduced by Keynes, this relationship indicates that as the disposable income of the consumers rises, consumption expenditures will also rise but not at the same rate as the rise in the income. Consumption Patterns When there is a change in income, there is also a change in consumption behavior. As income increases, the consumption of lower priority goods is felt but only after basic necessities are sufficiently covered. With lower income, expenditures for necessities like food predominates. Increase in income, expenditures on certain goods like automobiles and transportation begin to appear. Further increase in income give way to spending in medical care, education, recreation and others. As families are able to take care of basic needs and luxury goods, the saving option begins to take shape. Consumption may be categorized into the following: 1. durable goods

Motor vehicles Household equipment Others

2. nondurable goods

Food Clothing and apparel Energy Others

Saving A portion of the consumers income that is not spent in consumption.

Reasons for saving:

To provide for old age To provide for childrens education To accumulate funds for acquisition of capital goods To accumulate wealth Savings is simply a postponement of consumption. Saving Saving is an act more identified with rich people.

The needs of the rich are more than sufficiently covered by their incomes. The poor are not able to save because their incomes are inadequate to meet even their basic needs. Dissaving-means borrowing or drawing down wealth and is oftentimes attributed to poor people.

Total Savings and Its Components

1. Personal savings made by individual households for the purpose of future consumption. 2. Business savings consists of depreciation allowances and retained earnings. 3. Government saving is achieved when any government unit runs a budget surplus. 4. Foreign savings when foreign investments in our country are bigger than our countrys investments abroad, we have investment surplus. Savings Function Relationship between savings and income. When drawn in a schedule, the saving function shows the amount of saving the households or a nation will undertake at each level of income. Average Propensity to Consume (APC) Refers t the proportion of income devoted to consumption. If the APC for the entire economy is to be determined, the total value of expenditure on consumption of goods and services is divided by the value of national income. Average Propensity to Save (APS) Refers to the proportion of income (of an individual or the whole economy) which is not spent on consumption of goods or services. This amount is deemed saved and complements the average propensity to consume. Marginal Propensity to Consume (MPC) Refers to the proportion of a small increase in income which will be devoted to increased consumption expenditure. MPC is measured by the ratio of the change in consumption and the change in disposable income. Marginal Propensity to Save (MPS) Refers to the proportion of an increase in income that is saved. Those who received additional incomes have three (3) options:

1. to spend the entire amount on consumption 2.to save the entire amount 3. to save a part for consumption and to save the remaining amount.

Determinants of the level of Consumption 1. Distribution of national income

When the large portion of the national income goes to a small segment of the entire population, there is an uneven

distribution of purchasing power.

2. Rate of Interest

When interest rates are high, people are motivated to save more and thus consume less. When interest rates are

lower than the earning capapcity of some assets, these assets are acquired thereby reducing savings.

Determinants of the level of Consumption 3. The Desire to Hold Cash

Some persons anticipate future needs that will require some amount of cash. Because of this, they will hold on to

whatever cash they have. Examples of these situations are the need to spend for weddings, the purchase of house and lot, or trips abroad. They reduced consumption to save money.

Determinants of the level of Consumption 4. Price Level

The prices of goods and services sometimes move upward and downward. Where there is an increase in the price level, consumption tends to decrease, and when there is decrease,

consumption tends to increase.

5. Population

When everything is equal, a bigger number of people will consume more than a smaller number of people.

Determinants of the level of Consumption 6. Income

Regarded as a major factor in consumption. People with higher incomes tend to consume more than those with

lower incomes.

7. Taxes

Taxes reduce the money available for consumption. Less tax would mean more money for consumption and more

taxes means less money for consumption.

Determinants of the level of Consumption 8. Attitudes and Values

Peoples attitudes and values differ. These reflect on their consumption expenditures.

The Investment Function Sources and Uses of Investment Funds

2 Sources

Public Sector refers to government units whether national or local. Private Sector consists of private individuals and organizations.

The investment fund is a result of any or both of the following:

Savings the individual, business firm or the government may accumulate capital by saving a part of its income Borrowings-may be made through banks or from abroad. Investments are undertaken by the following: 1. the government mainly for public works 2. the business firms for machineries and equipment 3. private individuals for construction Role of Investments 1. Constitutes a major portion of aggregate demand. 2. Paves the way for increasing the nations output as well as promoting long run economic growth.

Investment and the Multiplier Effect An increase in investments generally give rise to an increase in income, a number of times larger than the original investment. The multiplier effect is the ratio of a change in income to a change in investment. Types of Investment Tangible capital such as those classified as structures, equipment and inventories. Intangible investments such as those for education or human capital, research and development and health. Determinants of Investment 1. Interest rates when interest rates are high, investments are low. 2.Innovations refers to introduction of new products or production processes. 3. Profit business firms invest in the hope of making profits. 4. Expectations investment decision of the prospective investors will be based on expectations of future income and sales rather than current income levels. Real and Nominal Interest Rates Investors are influenced more by the real rather than nominal interest rates. The difference between the two rates is how inflation is regarded. Inflation is not considered under nominal interest rates. When determining real interest rates, inflation is taken into account. Business Cycles and Inflation Nature of Business Cycles Cycles are important feature of nature. The expansion and contraction of activities betrays the existence of business cycles. Phases of the Business Cycle The prosperity phase The crisis (the contraction or recession) phase The depression phase The recovery phase Prosperity phase A period where continuous expansion of economic activity happens. Characteristics: High prices and great business activity Large profits for business firms Production is at full capacity Increasing demand for many commodities Increasing demand for labor Increasing volume of sales Increasing volume of credit extensions by lenders Large demand for credit Rising interest rates Crisis or Recession Phase When the economy has reached the peak of expansion and contraction begins to take shape. Characteristics: The demand for good decreases The margin of profits gradually shrinks The volume of sales decreases Trading slows down The production of goods is reduced The demand for labor, capital, and land decreases Prices go down The ability of business firms to meet their financial obligations is impaired Unemployment begins to bother labor No further extensions of credit or renewals of old loans are made by banks Depression phase When contraction of economic activities which has began in the recession phase has reached its lowest level.

Characteristics: Many business have ceased operations Profits are minimal, if it is still possible to make some Banks have plenty of idle funds Banks gradually reduce interest rates Credit starts to become available Unemployment is at its highest level Many unemployed persons are willing to work at lower wages The prices of raw materials and supplies are low Recovery phase Depression phase cannot continue indefinitely. Prices of various economic resources are low, some business firms that have previously ceased operations will attempt to operate again Characteristics: As the supply of commodities in the market gets exhausted, demand for these begin to be felt; Optimism among business men slowly develops, prodding them to increase business activity; The demand for labor increases, resulting to a decrease in unemployment; The purchasing power of the people rises; The low rates of interest will attract business borrowings; Prices slowly rise; There is an increase in production output; Idle plants are used and plans for construction of new ones are considered. The Business Cycle curve When plotted in a graph:

Highest point in the cycle is the prosperity phase or the Peak period. Lowest point is the depression or the Trough period) Descending line represents the recession or the contraction Ascending line represents the recovery or expansion phase. Trend line a general trend on the series of business cycles.

Common measures to control business cycles The stabilization of business Control of credit Control of public works Business forecasting Monetary readjustments Payment of high wages Economic planning Basic terms related to inflation

Price level
period. Used to indicate how high or low prices are in a certain year compared to the average of prices in a certain base

Basic terms related to inflation

Market basket
Representative group of goods and services chosen by the government to gather information of all commodities.

Basic terms related to inflation

Price index
The index number that shows how the average price of a bundle of goods has changed over a period of time.

Basic terms related to inflation

Inflation
A rise in the average level of prices

Basic terms related to inflation

Deflation
A decline in the average level of prices

Types of Inflation

Cost-push inflation
Continual decrease in the aggregate supply resulting to increase in cost of production.

Types of Inflation

Demand-pull inflation
Increase in aggregate demand, thus prices tend to go up.

Types of Inflation

Inertial inflation
steady inflation that occurs when inflation is built into contracts and peoples expectations