CHAPTER 4: ECONOMIC STRATEGIES/ POLICIES

KEYPOINTS FOR NEXT MEETING: 1) 3 FORMS OF DEMAND FOR MONEY TRANSACTION PRECAUTIONARY SPECULATIVE 2) FISCAL POLICIES TIGHT LOOSE 3) SUPPLY & DEMAND OF MONEY CURRENCY IN CIRCULATION DEMAND DEPOSITS 4) BSP’S TOOLS OF MONETARY POLICIES REQUIRED RESERVES REDISCOUNTING OPEN MARKET OPERATIONS SELECTIVE CREDIT CONTROL MORAL SUASION

ASSIGN/ QUIZ: TOOLS OF FOREIGN TRADE POLICY (ORAL EXAM) 1) Administrative or Exchange Control 2) Exchange Rate Regimes 3 Types of Exchange Rates: FLEXIBLE FIXED MULTIPLE 3) Tariffs & subsidies

Too much outflows of money in our economy will result to deflation. Producers compete more sharply on the fewer pesos in the hands of the consumers Thus, a drop in the price level and a rise in the value of pesos. Too much inflows of money into our economy usually results to inflation. Inflation: a decline in the value of money, with an upward movement of the price level. When the amount of money in circulation increases, people have more money to spend. There will be an increase in demand. Therefore, consumers compete for available goods. They pay more pesos for the goods they want and consequently, an increase in price. Inflation then can be described as too much pesos going after a small number of goods.

MONETARY POLICIES BARTER SYSTEM Products or services are exchanged for other products or services. Is practiced provided that the cost of production is: equal and the participants are willing to trade.

MONEY SUPPLY: CURRENCY IN CIRCULATION & DEMAND DEPOSITS balances in bank accounts that depositors can demand Three forms: Transaction in Demand Precautionary Demand Speculative Demand

SUPPLY & DEMAND OF MONEY: CURRENCY IN CIRCULATION & DEMAND DEPOSITS

FORMS: DEMAND FOR MONEY TRANSACTION DEMAND PRECAUTIONARY DEMAND SPECULATIVE DEMAND

IMPLEMENTS POLICIES PERTAINING TO MONEY SUPPLY CREDIT & BANKING SYSTEM

Bangko Sentral ng Pilipinas The BSP uses monetary policies to: regulate money through credit and banking system in order to attain monetary stability conducive to economic development.

The rule observed by the BSP in relation to credit and money supply when the economy is at intense pace: what happens to credit? it tightens credit When money has been easy for too long such that investment, production and income are exceeding resource limits, tight credit may have to be applied. When it is at a dragging pace (when money has been tightened to long): it loosens credit.

BSP'S TOOLS OF MONETARY POLICY Required Reserves Rediscounting Open Market Operations Selective Credit Control Moral Suasion

LESS MONEY RESERVES = LESS LENDING MORE MONEY RESERVES = MORE LENDING REQUIRED RESERVES LESS MONEY RESERVES = LESS LENDING MORE MONEY RESERVES = MORE LENDING HAVE TO INCREASE THE RESERVES HAVE TO DECREASE THE RESERVES EFFECT: DEFLATION EFFECT: INFLATION CAUSE: INFLATION CAUSE: DEFLATION

Required Reserves When BSP decides that lending behavior should be 80%, the reserves it requires is: 20%.

FROM AN INITIAL DEPOSIT OF p100,000 AND A “REQUIRED RESERVE OF 65%”, A COMMERCIAL BANK CAN INITIALLY LEND A MAXIMUM AMOUNT OF? P 35,000 OR p 65,000

LOW INTEREST RATE = BANKS TEND TO BORROW INCREASE IN MONEY SUPPLY REDISCOUNTING LOW INTEREST RATE = BANKS TEND TO BORROW INCREASE IN MONEY SUPPLY EFFECT: INFLATION

Debt security (obligation) OPEN MARKET OPERATION BONDS? Debt security (obligation) In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due. When you purchase a bond, you are lending a money to the government

BUYING OF BONDS: INCREASES MONEY IN CIRCULATION SELLING OF BONDS: REDUCES MONEY IN CIRCULATION

SELECTIVE CREDIT CONTROL Lending activity is either to production or consumption If priority is production = credit for consumption is lessened More funds given for production

To hold sessions with commercial banks MORAL SUASION persuasive ability of the Chairman of the Monetary Board and the Governor of the BSP. To hold sessions with commercial banks To make suggestions and policies on national development goals

MORAL SUASION Amando M. Tetangco, Jr. assumed office as Governor of the Bangko Sentral ng Pilipinas in July 2005 Took up AB Economics at the Ateneo de Manila University where he graduated cum laude. He took up graduate courses in business administration in the same institution. As a central bank scholar, Mr. Tetangco took up his MA in Public Policy and Administration (concentration in Development Economics) at the University of Wisconsin in Madison, USA.

FISCAL POLICY the government influences the economy through its revenue and spending TAXES (REVENUE): Inflows for the government which is referred to as revenue Bureau of Internal Revenue (BIR) is the agency responsible for tax collection TARIFFS (REVENUE): Taxes charged on either imported or exported goods Collection of tariffs is undertaken by Bureau of Customs

Tight or loose Fiscal Policy? Will consumers still spend? Corrects inflation or deflation? More gov’t projects/ services or less? WILL CONSUMER DEMAND INCREASE OR DECREASE?

TIGHT & LOOSE FISCAL POLICY TIGHT FISCAL POLICY government levies more taxes and tariffs correct inflation less likely the consumer would spend government also lowers its spending, which then leads to improvement in its budget deficit. LOOSE FISCAL POLICY Lowers taxes and tariffs Resolves recession in business government increases spending. Consumers are also encouraged to spend.

The government can effect a more efficient allocation of resources through taxation of undesirable activities and by giving tax exemptions and subsidies to those activities, which are crucial to continued development.

EFFECTIVE SOLUTION TO INFLATION, SAYS THE LAW? TAXATION

DRAW FUNDS AWAY OR DRAW FUNDS WITHIN THE CIRCULAR FLOW? IMPORTS DRAW FUNDS AWAY OR DRAW FUNDS WITHIN THE CIRCULAR FLOW? INCOME NOT SPENT ON THE CIRCULAR FLOW PRODUCTION & EMPLOYMENT? FOREIGN TRADE POLICY

INTERNATIONAL TRADING 2 ADVANTAGES & WHY COMPARATIVE ADVANTAGE E.G. NURSING OPPORTUNITY COST IS ERRADICATED (diversion of resources: specialization) 2 DISADVANTAGES & WHY BRAIN DRAIN ENVIRONMENTAL (NATURAL RESOURCES)

INTERNATIONAL TRADING As countries develop, specialization: in production of goods and services happens. If countries have comparative advantage over other nations in the production of certain goods and services, they engage in: trade with other countries. Trading has become a helpful means for countries to acquire things they do not have enough of in exchange of things they have in excess.

TOOLS OF FOREIGN TRADE POLICY 1) Administrative or Exchange Control 2) Exchange Rate Regimes 3 Types of Exchange Rates: FLEXIBLE FIXED MULTIPLE 3) Tariffs & subsidies

Developing country has a trade deficit Import > Export

TOOLS OF FOREIGN TRADE POLICY 1) ADMINISTRATIVE OR EXCHANGE CONTROL Government CONTROLS the sales (supply of dollars) CONTROL PERIOD (1948-61): Central Bank was the ONLY seller of dollars TO AVOID DEFICIENCY = RATIONING: to supply dollars to what is considered “PRIORITY” users (COMMON FILIPINOS COULD NOT OBTAIN DOLLARS FROM THE CENTRAL BANK) Priority is determined = under the table deals Resulted to Black Market Individuals will refuse to surrender their dollars to the Central Bank

POSITIVE OR NEGATIVE EFFECT? If $24 billion is needed by the government for social development, quantity demanded for dollars can be reduced to $20 billion by selling it to a much higher price to common users. CHEAPER DOLLARS = there was an increase demand of Entrepreneurs on imported machineries POSITIVE OR NEGATIVE EFFECT? 1) EFFECT = NEGLECT OF LABOR INTENSIVE INDUSTRIES INCREASE IN UNEMPLOYMENT RATE 2) OVERVALUED PESOS = DECREASE IN EXPORTS EVERY DOLLAR EARNED = SHORTCHANGED ($1 =P2)

1ST TERM: 1948-49 2ND TERM: 1949-53 1ST TERM: 1953-57 1ST TERM: 1957-61 CONTROL PERIOD: 1948 -61

Economy of the Philippines under President Manuel Roxas 1946–1948 Population 1948 19.23 million Gross Domestic Product 1947 Php 85, 269 million Growth rate, 1947–48 39.5 % Per capita income Php 4,434 Total exports Php 24, 824 million Exchange rates 1 US$ = Php 2.00 1 Php = US$ 0.50 Sources: Philippine Presidency Project Malaya, Jonathan; Eduardo Malaya. So Help Us God... The Inaugurals of the Presidents of the Philippines. Anvil Publishing, Inc.

Gross Domestic Product Economy of the Philippines under President Carlos Garcia 1957–1961 Population 1957 22.68 million Gross Domestic Product Php 189,457 million 1961 Php 224,430 million Growth rate, 1957-61 4.54 % Per capita income Php 8,353 Php 7,927 Total exports Php 35,980 million Php 39,845 million Exchange rates 1 US US$ = Php 2.64 1 Php = US US$ 0.38

APPRECIATION OF PESOS: It takes less pesos to buy foreign goods The peso exchange rate provides us the price of goods and services that we buy from foreigners It also provides us the price that foreigners pay for the goods and services that we produce and sell to them APPRECIATION OF PESOS:  It takes less pesos to buy foreign goods DEPRECIATION OF PESOS:  It takes more pesos to buy foreign goods. -foreign goods become more expensive -exports become cheaper to foreigners.

price of dollar in terms of pesos 2)Exchange Rate Regimes price of dollar in terms of pesos Price = dollar can be sold or bought

2.1.FLEXIBLE EXCHANGE RATE INCREASE DEMAND IN DOLLARS DECREASE DEMAND IN DOLLARS HIGH OR LOW EXCHANGE RATE? MORE OR LESS PESOS IN THE CIRCULAR FLOW S > D = EXCHANGE RATE DECREASES S < D = EXCHANGE RATE INCREASES TO RESOLVE DEFICIT & SURPLUS OF MONEY TO RESOLVE DEFICIT & SURPLUS OF MONEY = BUYS & SELLS

2.2. FIXED EXCHANGE RATES To avoid price fluctuations ( bad for trade and business) Exchange rate operates only on one price Central Bank fills in shortages and absorbs surpluses CB can devalue and revalue pesos. Devaluation of Pesos (Dollar is expensive; D> S; import<exports) EXAMPLE: Exporters earned $50M. They wanted to sell all of it to local banks. Local Banks can only buy $25M. (Demand is low) CB steps in to buy the balance from the sellers.

2.3. Multiple Exchange Rates To have buyers and sellers transact at different exchange rates Exchange Rate Buyers & Sellers P 21 for sellers of traditional exports 22.50 For ordinary buyers and sellers of dollars 24 For buyers of luxuries and consumer goods

3) Tariffs and Subsidies Tariffs: are taxes imposed on imports which are based on either the value of the product (ad valorem) or on the physical unit of measure. Subsidies: The government has to dole out in equivalent pesos in order to achieve a foreign exchange balance or strength.