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THE NATURE
AND IMPORTANCE
OF ECONOMICS
ECONOMICS
-a social science concerned with using scarce resources to obtain the
maximum satisfaction of the unlimited materials wants of society.
SCARCITY
Refers to the condition wherein most things that people want are
available only in limited supply.
ECONOMIC GOOD
Is anything either a physical commodity or a service, which yields utility
and which could command a price if bought or sold in the market.
UNLIMITED WANTS
A persons desires or preferences for specific ways of satisfying a basic
need.
THE NATURE OF ECONOMIC CHOICE
Forms of Capitalism:
• Pure Capitalism
• Modified Capitalism
Rights of capitalism:
• PRIVATE PROPERTY – people have the right to own property
• PROFITS – people have the rights to earn profits
• BUSINESS DECISIONS – people have the right to engage in
business
• CHOICE – people have the freedom to choose what occupation
to undertake
2. COMMUNISM
Society in which the government owns all the nation’s
resources
3. SOCIALISM
Government owns and operates the basic industries
such as telecommunications, water service, postal
service, transport, banking and selected
manufacturing business. Private individuals are
allowed, however, to own and operate small
businesses.
4. MIXED ECONOMICS
Is one that has elements from more than one economic
system. It contains both private and state enterprises.
THE ECONOMIC RESOURCES
Land
Labor
Capital
Entrepreneurial Ability
ECONOMIC GOALS
Economic Growth
Fall Employment
Economic Efficiency
Price level Stability
Economic freedom
An equitable distribution of income
Economic security
Balance of Trade
DIVISIONS OF ECONOMICS
• MICROECONOMICS – the behavior and
activities of specific economic units –
individuals, households, firms, industries,
and resource owners
• MACROECONOMICS – the behavior of the
economy as a whole with respect to
output, income, the price level, foreign
trade, unemployment, and other
aggregate economic variables.
CHAPTER 2
THE CIRCULAR
FLOW OF
ECONOMIC
ACTIVITY
Two basic activities undertaken in any economy:
Production
Consumption
The firms perform the production function while
households undertaken consumption.
MARKET DEMAND
• Refers to the buyer’s willingness and ability to pay a
sum of money for some amount of a particular good or
service.
DEMAND CURVE – the demand schedule may be
presented in graphic form.
NON PRICE DETERMINANTS OF DEMAND
As much as price is a determinant of demand,
these are other factors that affect demand as well.
They are briefly described as follows:
• Average income of consumers
• Size of the market
• Price and availability of related goods
• Preferences or taste
• Special influences
• Expectations about future economic conditions
MARKET SUPPLY
EQUILIBRIUM PRICE
– Is the price at which demand and supply are
equal. A price above or below the equilibrium
price will create a shortage or a surplus.
CHAPTER 4
Consumer
Behavior
The Concept of Utility
Utility
- is defined as the power of goods and services
to satisfy wants. It refers to the pleasure or
satisfaction associated with having, using,
consuming, or benefiting from goods and
services.
Two ways in measuring utility:
1. Cardinal Utility Approach
2. Ordinal Utility Approach
Cardinal Utility Approach
- refers to the measurement of utility by
assigning numerical values, referred to as utils,
such as 1 util, 12 utils, 140 utils or -35 utils.
Marginal Utility
- the satisfaction an individual
receives from consuming one
additional unit of good or service.
Table 6
SCHEDULE OF TOTAL AND MARGINAL UTILITY
FOR MARIA SUNGA
Guavas Consumed Total Utility Marginal Utility
(in pieces) (in utils) (in utils)
1 50 50
2 80 30(or 80-50)
5 90 -20(or 90-110)
6 20 -70(or 20-90)
Figure 14
TOTAL UTILITY CURVE
120
100
80
Total Utility
60
(In Utils)
40
20
0
1 2 3 4 5 6
Quantity
(in pieces)
Figure 15
MARGINAL UTILITY CURVE
60
40
Marginal Utility
20
(In Utils)
0
-20
-40
-60
-80
1 2 3 4 5 6
Series 1 50 30 20 10 -20 -70
Quantity
(in pieces)
Consumer Equilibrium
The consumer is faced with the following realities:
Amount of Utility
(in utils)
0 0 0 0 0
1 14 14 9 9
2 22 8 17 8
3 24 2 24 7
4 24 0 27 3
5 21 -3 29 2
6 10 -11 30 1
Utility Maximization
1 1 5 P 95 43
2 2 4 100 49
3 3 2 90 41
4 4 1 95 33
5 5 0 100 21
6 0 6 90 30
Indifference Analysis
- is a technique used in the
analysis of consumer demand which is
based on the notion of ordinal utility.
This means that when the consumer is
faced with a set of alternative
“bundles” of goods, he is able to rank
them all in order of preferences.
Table 9
INDIFFERENCE SHEDULE
Combination Mangoes Guavas
(in pieces) (in pieces)
1 12 2
2 10 4
3 8 6
4 6 8
5 4 10
6 2 12
The Indifference Curve
-When the indifference schedule is
plotted on a graph, the line joining all
points is referred to as the indifference
curve. All points in the curve indicate
their respective combinations of goods
and services which yield equal levels of
satisfaction. A sample indifference curve
is shown in Figure 16.
Figure 16
INDIFFERENCE CURVE
14
12
Indifference
Curve
10
(in pieces)
8
Mango
0
1 2 3 4 5 6 7 8 9 10 11 12
Guavas
(in pieces)
Substitution
C
3
Budget D
2
Line
E
1
F
0
0 1 2 3 4 5 6 7
Chocolate Bar
CHAPTER 5
THE CONCEPT
OF
ELASTICITY
ELASTICITY – it is the measure of the sensitivity or
responsiveness of quantity demanded or quantity
supplied to changes in price (or other factors)
ELASTICITY OF DEMAND
Indicates the extent to which changed in price (or
other factors) causes changes in the quantity
demanded.
Demand elasticity may be classified as follows:
• Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand
IMPLICATIONS OF PRICE ELASTICITY OF
DEMAND
Subsidies
SAVING
The amount that he decides not to spend.
Some reasons for saving:
1. To provide for old age
2. To provide for children’s education
3. To accumulate funds for acquisition of capital goods
4. To accumulate wealth
Total Savings and It’s Components
Total savings is composed of the following:
1. Personal savings – are those made of individual
households for the purpose of future consumption.
2. Business savings – consists of depreciation allowances
And retained earnings.
3. Government savings – achieved when any government
Unit runs a budget surplus.
4. Foreign savings – the net inflow of foreign funds is an
Important source of savings.
SAVING FUNCTION
- refers to the relationship between savings and
income. The saving function shows the amount of saving
that households or a nation will undertake at each level
of income.
Average Propensity to Consume (APC)
- refers to the proportion of income
devoted to consumption.
FORMULA :
APC = CE / DI
Where APC = average propensity to consume
CE = Consumption expenditures
DI = disposable income
Average Propensity to Save ( APS )
APS = S / DI
Where APS = average propensity to save
S = savings
DI = disposable income
MARGINAL PROPENSITY TO CONSUME
- refers to the proportion of a small
increase in income which will be devoted to
increased consumption expenditure.
FORMULA
= 300/500
= 0.60
MPC is expected to be less than one, i.e.,
when there is an increase in income, there will
be a smaller increase in consumption.
MARGINAL PROPENSITY TO SAVE
- the proportion of An increase in
income that is saved.
FORMULA
= 200/500
= 0.40
A series of hypothetical MPS and
incomes is depicted in a schedule in Table 30.
This is followed by the graphical
representation(figure 43) of the same
schedule.
DETERMINANTS OF THE LEVEL OF CONSUMPTION
FACTORS :
1. the government
2. business firms
3. private individuals
ROLE OF INVESTMENTS
1. Investment constitutes a major
portion of aggregate demand.
2. Investment paves the way for
increasing the nation’s output
as well as promoting long run
economic growth.
INVESTMENT AND
MULTIPLIER EFFECT
•The ratio of a change in income
to a change in investment is
called the MULTIPLIER.
Types of Investment
1. Tangible capital – structures,
equipment and inventories.
2. Intangible investments –
human capital, research and
development and health.
Determinants of Investment
1. interest rate – When interest rate is high,
investments tend to be low.
2. innovations – When the prospect of
innovation has good financial potentials,
investment on it will be pushed through.
3.profit – When cost are high and revenues
are low, profits will also be low.
4. expectations – When particular segment of
the market is unserved underserved, the
management of a concerned business firm
may decide in favor of investment.
REAL AND NOMINAL INTEREST RATE
CHAPTER 11:
The Business
Firm
Describing the Business Firm
• Business Firm - basic feature of the capitalist economy
• A business firm may engaged in any of the following:
– Production
– Manufacturing’
– Trading
– Provision
– Service
• Service firms:
– Beauty parlors
– Barber shops
– Dental clinics
– Universities
– Bus companies, etc.
Describing the Business Firm
• Vertical integration - firms attempt to make
their positions stronger by acquiring firms that
supply them with their needs.
• Horizontal integration – firms acquiring
competing firm to make its position stronger.
• Conglomerate – a business firm that operates
various plants that produces various types of
goods and services
Forms of Business
Organizations
• Business firms are organized in the following three distinct forms:
– The major forms
– The minor forms
– The modified corporate forms
Major Forms of Business
Organizations
• The major forms of business organization are the
most common and consists of the following:
Sole proprietorship
Partnership
Corporation
Sole Proprietorship
– a business firm owned and operated by a single person.
The sole proprietor hires other people to help him in
operating the business; thus the owner acts as a general
manager though sometimes this is not the case. It is the
most popular form of business organization.
• Advantages:
1. It is easy to organize and the cost of organization is minimal.
2. The owner can keep his moves unknown to the competitors.
3. The sole owner is the sole beneficiary of whatever profits the
business firm makes.
4. The sole owner has the exclusive power to control the business.
5. Government requirements and restrictions on sole proprietorship are
less stringent when compared with other forms of business
organization.
6. The net income of the sole proprietorship is taxed as personal
income of the sole owner.
7. The owner has the option of terminating his business anytime he
wants.
Sole Proprietorship
• Disadvantages:
1. The sole owner may lack the necessary ability and experience.
2. There is difficulty in attracting and keeping quality employees.
3. It is difficult for the sole proprietor to raise bigger amounts of
capital.
4. The business firm’s life is limited.
5. The sole proprietor has an unlimited liability.
Partnership
– form of business organization owned and
operated by two or more persons.
• Types of Partnership:
– General Partnership – an association of two or more
persons who are actively involved in the business and
all of which have unlimited liabilities.
– Limited Partnership – an agreement whereby the
liability of one or more partners is limited to the
amount invested in the business. It is requirement,
however, that there must be at least one partner with
unlimited liability.
Partnership
• Advantages:
1. Partnerships are also easy to organize.
2. The knowledge and skills of the partners may be pooled
together to the advantage of the firm.
3. The combined resources of the partners provide a bigger source
of funding.
4. The partnership is in better position to attract and retain
quality employees.
5. The income of the partners derived from the partnership is not
taxed separately from the net income of the partnership.
• Disadvantages:
1. Unlimited liability is also a disadvantage.
2. The life of partnership is limited.
3. Conflict among partners is always a possibility.
4. Dissolving a partnership is difficult.
Corporation
• Corporation – a business firm owned by individuals or other
corporations.
• Stockholders – owners of the corporation having limited liability.
• Advantages:
– The liability of the owners are limited.
– Expansion is easily facilitated in corporation.
– The ownership of a corporation is easily transferable.
– Corporations are more stable.
– Corporation has greater ability to hire specialized managers.
• Disadvantages:
– Corporations are more expensive and complicated to organize.
– Incomes derived from corporations are taxed twice.
– Corporations are subject to more extensive government
restrictions and reporting requirements.
– Employees lack personal identification and commitment with
the company.
Minor Forms of Business
Organization
Two Forms:
Common Law Form
Statutory Form
• Common Law Form:
– Capital is divided into shares which may be
transferred by the owner to other persons without the
consent of the other members.
– The company is managed by a board of directors
– Death or incapacity of any member does not dissolve
the company
– It has more members than partnership, not
necessarily acquainted with one another, and
membership can change without the consent of the
members.
• Statutory Form:
– No legal personality
– Mutual agreement governs the relationship between
the members
– Liability of members is unlimited unless otherwise
authorized by statute
Joint Venture
– A partnership established for a specific project
or for a limited time.
– Formed when a foreign company finds a local
partner to share the costs and operation of
the business.
– Prevalent among business engaged in
producing movies or concerts, marketing of
cars, oil and mining exploration, construction
of major projects like dams or airports and
even the underwriting and selling of
securities.
Business Trust
– Legal form of business organization where a
trustee is appointed to manage the business
and its operations through a trust
relationship.
– If a person or a company is not capable of
managing a property, securities, or other
assets, these are assets to a trustee and a
business trust is formed.
– The trust company can be a trustee, receiver
guardian, or executor of property or estate.
Modified Corporate Form
• The corporate form of ownership was modified to suit
special requirements.
• Two Forms:
–Cooperatives is a firm owned by a group of
people who have a common objective and who
collectively bear the risks of the enterprise and share
its profits. These are formed to make their members
individually profitable or to save money.
–Mutual Companies a financial service firm
(such as an insurance company or a savings and loan
association) owned by its policyholders and
depositors.
Cooperatives
• Kinds of Cooperatives:
– Credit union – one that accepts deposits from its
members and lends money, also to its members, at
reasonable rates.
– Producer’s Cooperative – organized by members to
mutually assist one another in the procurement of
raw materials, machinery, equipment, and other
needs of the producers.
– Marketing Cooperative – organized to assist its
members in the marketing of their products
– Consumer’s Cooperative – purpose of this firm is to
provide members with quality goods and services at
reasonable prices.
– Service cooperative – this firm is organized to make
services readily available to its members at a lower
cost.
Mutual Companies
Two types:
– Mutual savings bank – firms owned by
depositors and which specialize in savings and
mortgage loans. Profits are remitted to
depositors.
– Mutual insurance company – cooperative
corporation organized and owned by the
policyholders. Voting control is in the hands of
the insured. Profits can be used to pay policy
dividends to policyholders and to strengthen the
company by building its surplus.
Financing the Business Firm
Corporate Stock
• The total capital stock of a corporation is
divided into shares and are sold to the public.
• Stock certificate – proof of ownership of a
corporation
• Classes of Corporate Stock
– Common stocks – entitles its holder to vote at
stockholders meetings and to participate in the
election of directors
– Preferred Stocks – conveys no voting rights but gives
a prior claim on dividends at a fixed rate, regardless
of the profit level.
Classes of Debt Instruments
• Classes of Debt Instruments
Bonds – are long-term debts of a firm set
forth in writing and made under seal.
Promissory note – a document stating that
someone promises to pay an amount of
money on a certain date.
It is very important to know the
role played by human resources in the
development of the economy. Natural
resources cannot be made to
contribute their share unless people
with right skills tap them.
Example:
• Fishes in the waters will
remain potential commodities
until enterprising people bring
them to the market.
Labor – refers to the exertion
of human effort to acquire an
income.
Human effort includes:
(1.) Physical
(2.) Mental exertion
Many people use their brawn and
muscles to earn a living. These people
sell an important resource they have:
labor.
However, the physical effort
expended in exercising does not
contribute labor, but when a person is
exercising in front of a television
camera and is paid for doing it, he is
performing labor.
In the same light, the mental effort
exerted in solving a crossword puzzle does not
contribute labor. When a person, however,
creates crossword puzzles and receives weekly
payments for the effort, he is actually
performing labor.
nominal wage
Thus, if the nominal wage rate is P210 per day and index
number is 1.05 (or 1.0 plus inflation rate)
Then,
Real Wage Rate = P210/1.05 = P200
The Labor Demand Curve
Labor is a factor that is bought just
like any commodity. It has a price, and
the quantity demanded depends on the
price. To the business firms buying this
factor, the price is the real wage. When
the real wage increase. The quantity
demanded of labor decreases, and vice
versa.
Real Wage Quantity of
Rate Labor
(1995 pesos Demanded
per day) (millions of
days per year)
a 250 1
b 220 1.25
c 190 1.5
d 160 1.75
e 130 2
f 100 2.25
Table 37
a
250
225 b
200 c
175 d
150 e
125 f
100
Figure 51
Labor is a very important factor of
production, but is affected by some
problems that deserve serious
consideration. The problem area
concerning labor as follows:
1. unemployment and underemployment
2. inadequate wages
3. industrial and labor-management conflict
4. economic insecurities
Unemployment
Unemployment occurs when a person who is of
working age (at least 15 years old), is willing and able
to work but cannot find work. Willingness to work is an
important requisite for unemployment to be properly
recognized. This is so because the are some persons who
would not want to work even if jobs are offered to
them.
Unemployment is an economic problem with
undesirable social consequences. When unemployment
is high, society prays a high price in the form of the
following:
1. lost output and income
2. depreciation of human capital
3. increases in crime
4. loss of human dignity
Output and Income Lost
When willing and able workers do not find
employment, they are deprived of income and the
economy does not benefit from the output they could
have produced. This is especially disturbing when there
are available jobs, and business firms could hardly cope
with the demand for their product.
Human Dignity
When persons suffer loss of employment for long
periods, most of them lost their self-esteem as well.
When this happens, it will be very hard for the person to
do anything productive even given the opportunity.
Most often, he becomes bitter and very hard to relate
with. They become real burdens to the society.
Underemployment
Underemployment occurs when a person works either
part-time or full-time but which of both cases receive
very little pay. Underemployed persons are not fully
utilized by the society.
Causes of unemployment
1. rapid growth of population
2. slow growth of economy
3. technology used
4. lack of skills
Types of Unemployment
Unemployment may be classified into the following types:
1. seasonal unemployment
2. frictional unemployment
3. structural unemployment
4. cyclical unemployment
Inadequate Wages
Inadequate wages have become a perennial
problem of labor. Wage is inadequate if it
fails to meet the basic needs of the worker’s
family.
The possible causes of inadequate wages are
as follows:
1. inflation
2. lack of skills
3. too many dependents
Industrial and Labor
Management Conflict
Strikes and lockouts are actions that bring misery
to both the employer and workers. In both cases,
the worker is deprived of wages and employers
of profits.
Economic Insecurities
Workers worry about having a permanent
source of income. They are much concerned
about layoffs and dismissals, illness, accidents
and even death. They need funds to take care
of their need when such things happen to
them and their family.
To attain acceptable levels of employment,
efforts are undertaken to improve human
capital. This is done in two ways:
education
training
1. prosperity phase
2. crisis (or contraction or recession)
3. depression phase
4. recovery (or expansion) phase
Prosperity Phase
The prosperity phase is that part of the business
cycle characterized by the following:
1. high prices and great business activity
2. large profits for business firms
3. production is at full capacity
4. increasing demand for many commodities
5. increasing demand for labor
6. increasing volume of sales
7. increasing volume of credit extensions by
lenders
8. large demand for credit
9. rising interest rates
Figure 53
THE PROSPERITY PHASE
Higher Outputs
Great Business Higher Sales
resulting to Higher Profits
Activity
Business
Firms
Higher Wages
Higher Rent
Higher Interest
Rates
Great Higher prices of
Demand resulting to Materials and
Supplies
Raw Materials
Labor and other Capital Land
commodities
Crisis or Recession Phase
This phase has the following features:
1. the demand for goods decreases;
2. the margin of profits gradually shrinks;
3. the volume of sales decreases;
4. trading slows down;
5. the production of goods is reduced;
6. the demand for labor, capital, and land
decreases;
7. prices go down;
8. the ability of business firms to meet their
financial obligations is impaired;
9. unemployment begins to bother labor;
10. no further extensions of credit or renewals of
old loans are made by banks
Depression Phase
This phase is characterized by the following:
1. many business have ceased operations;
2. profits are minimal, if it is still possible to
make some;
3. banks have plenty of idle funds;
4. banks gradually reduce interest rates;
5. credit starts to become available;
6. unemployment is at the highest level;
7.many unemployed persons are willing to
work at lower wages;
8. the prices of raw materials and supplies are
low
Figure 54
THE CRISIS OR RECESSION PHASE
Reduced decreasing outputs
Business resulting to Sales, and profits
Activity
Business
Firms
decreasing wages,
rent, interest rates,
prices of raw
Reduced materials and
Demand resulting to supplies
Raw Materials
Labor and other
commodities
Capital Land
Figure 55
THE DEPRESSION PHASE
Greatly
Reduced Minimal output,
resulting to sales, and profits
Business
Activity
Reduced
Number of
Firms Still
Operating
low wages, rent,
interest rates; low
Very prices of raw
Low materials and
Deman resulting to supplies
d
Raw Materials
Labor and other
commodities
Capital Land
Recovery Phase
As the prices of the various economic resources
are low, some business firms that have previously
ceased operations will attempt to operate again.
As this happens, the following will be noted:
1. as the supply of commodities in the
market gets exhausted, demand for these begin to
be felt;
2. optimism among businessmen slowly develops,
prodding them to increase business activity;
3. the demand for labor increases, resulting to a
decrease in unemployment;
4. the purchasing power of the people rises;
5. the low rates of interest will attract business
borrowings;
2. optimism among businessmen slowly
develops, prodding them to increase
business activity;
3. the demand for labor increases,
resulting to a decrease in unemployment;
4. the purchasing power of the people
rises;
5. the low rates of interest will attract
business borrowings;
6. prices slowly rise;
7.there is an increase in production
output;
8.idle plants are used and plans for
construction of new ones are
considered.
Figure 56
THE RECOVERY PHASE
Increasing increased
outputs,
Business resulting to Sales, and
Activity profits
Business
Firms
increased
wages, rent
interest rates,
Increasing
prices of
Demand resulting to
materials and
supplies
Raw
Materials
Labor and other Capital Land
commodities
THE BUSINESS CYCLE CURVE
When the phases of the business cycle are
plotted in a graph, the business cycle curve
takes shape.
the highest point in the cycle is the prosperity
phase.
Trend Line
Prosperity
Real GNP
Depression
Depression
Time
DIFFERENCES BETWEEN BUSINESS CYCLES
Business cycles, as has been mentioned, are
only similar on matters of the various phases
and their characteristics, otherwise, business
cycles are different from one another.
Monetary Readjustment
To effectively implement the plan of readjusting the
monetary standard, the following requisites must be
present:
1. a mechanism that provides a reliable index
number of prices;
2. the gold standard is used where the
monetary unit contains a fixed weight in gold.
Payment of High Wages
Only a business firm that is well managed can
afford to pay high wages and maintain its
workforce even during times of emergency.
Economic Planning
Economic planning refers to “planning the
future financial state of the country for the
government”
BASIC TERMS RELATED TO INFLATION
• price level – used to indicate how high or low
prices are in certain year compared to the
average of prices in a certain base period
• market basket – representative group of goods
and services
• price index – the index number that shows the
average price of a bundle of goods has
changed over a period of time
• inflation – refers to a rise in the average level of
prices
• deflation – refers to a decline in the average
level of prices
TYPES OF INFLATION
Cost-push inflation is one characterized
by continual decrease in the aggregate
supply, resulting to increases in the cost
of production.
Demand pull inflation is one caused by
increases in aggregate demand.
Inertial inflation is that “steady inflation
that occurs when inflation is expected to
persist and the ongoing rate of inflation is
built into contracts and people’s
expectations”.
MEASURING INFLATION
The formula is as follows:
where:
CPI = consumer price index
year X = year under consideration
year Y= year immediately preceding year X
Thus, if CPI for year X = 130; and
CPI for year Y = 120;
Therefore:
Money
SIGNIFICANCE OF MONEY
The exchange of goods became faster and as a
result, the people were provided with the right
environment to specialize.
“Anything that is generally accepted as payments of goods
and services.”
HYMAN DEFINES MONEY:
“Anything used to make payment, for a good, a service or
a debt obligation.”
ACCORDING TO CARGILL:
“A generally acceptable medium of exchange.”
FROM KIDWELL AND
PETERSON:
FROM KIDWELL AND
PETERSON:
CREDIT MONEY
Refers to a money that is backed by a
promised to pay. Its worth as a commodity is
negligible resulting to its very little intrinsic
value.
MEASURES OF MONEY
DETERMINING MONEY SUPPLY
The money supplied may be determined by using four
alternative means.
M1
Consisting of currency, demand deposits at
commercial banks, other checkable deposits at banks,
credit unions, and thrift institutions (negotiable order of
withdrawal, automatic transfer from savings, and share-
draft accounts), and traveler’s check outstanding.
M2
M1 plus non-checkable savings accounts and
small demonition time deposits at depository
institutions, money-market deposit accounts , shares
in money market mutual funds, and retail repurchase
agreements.
M3
M2 plus large – demonition time deposits at
depository institution, shares in institutions-only money
market funds, and large demonition repurchase
agreements.
L
M3 plus other liquid financial assets such as
banker’s acceptances, commercial paper, short-term
treasury securities, and savings bonds.
1. High employment
2. Economic growth
3. Stable prices
4. Interest rate stability
5. Stability of financial markets
6. Stability in foreign exchange markets.
TOOLS OF MONETARY POLICY
1. Open market operations
Refers to the central bank’s activity of buying or selling of
government securities in the open market.
2. Discount policy
The central bank lends money to depository institutions.
The interest rate charged to the borrowers is called the
discount policy.
1. Specialization
2. Absolute advantage
3. Comparative advantage
Specialization
1. Tarrifs
2. Nontarrifs barriers
a. direct price influence
1. subsidies
2. customs valuation
3. other direct price influence
b. Quantity controls
1. quotas
2. “buy-local” legislation
3. standards
4. specific permission
requirements
5. administrative delay
6. reciprocal requirements
7. restrictions or services
Tariffs
A tariff is a tax to be paid for importing or
exporting goods.
It may be classified into three types:
1. Export tariff
2. Transit tariff
3. Import tariff
A tariff may be assessed using an of the following
bases:
1. Specific duty
2. Ad valorem duty
3. Compound duty
Important tariff are imposed for the following
purposes:
1. For raising revenue
2. To reduce overall level of imports by making them
more expensive than the locally produced substitute,
with the aim of eliminating a balance of payments
deficit
3. To counter dumping by raising the price of the
dumped commodity
4. To retaliate against restrictive measures imposed
by other countries