National Trade and Economy

Prepared by:Prof: SeyedAli

Fallahchay

Money

• Is anything with value that is widely acceptable for

payment of goods and services without questioning

the integrity of the person offering it.

• Primary function of money is to facilitate the process

of exchange.

Functions of Money

Primary Functions Secondary Functions

Medium of exchange

Standard of Value

Store of Value

Standard of Deferred Payments

Kinds of money

1. Commodity money

2. Credit money

3. Fiat money

4. Legal tender money

Monetary Standard

• Refers to the currency system adopted by a

country to provide a stable medium of exchange.

There are two types of monetary standard:

1. Commodity standard

2. Fiat standard

Commodity standard

• It is a monetary system in which the purchasing power or value of the monetary unit is equal to the value of designated quantity of a particular commodity or set of commodities. With a commodity standard, the monetary unit is defined in terms of a specific commodity.

• in most commodity standard ,paper currency articulate as a money but can be converted into a specific commodity.

Fiat standard

• Refers to a monetary system in which the face

value of the monetary unit is very much higher

than that the value of the material used as money.

• The fiat money is made full legal tender and all

the other money issued by the government are

redeemable in the standard fiat money.

• The Philippines has been on fiat standard.

• The major components of the money supply

consisted of debts of Bangko Sentral ng

Pilipinas or Commercial Banks.

• With this fiat standard existing in our country,

coins and paper currency are liabilities of the

government. There is no specific assets

“backing” the money supply.

The quantity theory of money

Equation: MV = PQ

• The quantity theory of money shows the relationship

among:

• Money supply (M)

• Velocity of money (V)

• Price (P)

• Quantity (Q)

Money supply changes when there are changes in:

1. The level of dollar reserves

2. The level of domestic credits granted by the

BSP to government and other banks

3. The level of domestic credits granted by banks

to business and government

Monetary Policy

• These are measures employed by the government to

influence economic activity, specifically by

manipulating money supply and interest rate.

• To achieve certain goals, monetary measures are

frequently used in tandem with fiscal policy to

achieve certain goals.

• The usual goals of both monetary and fiscal policy are to

achieve or to maintain full-employment, to achieve or

maintain a high rate of economic growth and to stabilize

prices and wages.

• Monetary policy is the domain of the nation’s central

bank.

• The deliberate control of the money supply and credit

conditions for the purpose of achieving macroeconomic

goals.

Tools of Monetary Policy

The Bangko Sentral ng Pilipinas (BSP) has three

tools of monetary control used in altering the

reserves of commercial banks.

Open-market operation

Reserve ratio

Discount rate

Easy money & Tight money

Easy Money Tight Money

Buying securities Selling securities

Lowering the reserve ratio

Increasing the reserve ratio

Lowering the discount rate

Rising the discount rate

Central Bank (Bangko Sentral ng Pilipinas)

• It is the Central monetary authority which provides

policy direction in the areas of money, credit and

banking.

• It also supervises the operation of banks an regulates

the activities of non-bank financial institutions or

intermediaries.

Objectives of BSP

1. To maintain monetary stability and price stability in

the Philippines.

2. To preserve the international value of the peso and

the convertibility of the peso into other freely

convertible currencies; and

3. To promote a rising level of production,

employment, and real income in the Philippines.

Fiscal PolicyIt is an Economic policy, which in concerned with rising of resources through taxation, borrowing, and deciding on the level and pattern of expenditures.• Refers to government policy that attempts to influence the

direction of the economy through changes in government spending or taxes

• To obtain funds for their operation, government units generally collect some from of taxes

• The expenditures of these funds not only provides goods and services for constituents, but has a direct impact on the economy

• John Maynard Keyenes thought fiscal policy could be an automatic stabilizer for the economy because it automatically responds to changes in economic activity.

Impact of fiscal policy on the economy• Keynes advocates the use of the government's fiscal

policy to offset imbalances in the economy• According to keynes, a government should use fiscal

policy to stimulate and economy slowed by a recession by running a deficit, that is, by spending more than it takes from the economy in taxes

• On the other hand, to slow down an economy that is threatened by inflationary pressures, keynes urged increasing taxes or cutting spending to create a budget surplus that would act as a drag on the economy.

Fiscal policy is generally divided into three categories:

1. Policies concerning government purchases of

goods and services

2. Policies concerning taxes

3. Policies concerning transfer payment (such as

unemployment compensation, social security

benefits, welfare payments, veterans’ benefits)

Economic effects of fiscal policy• It helps offset imbalances in the economy

• It can help moderate the extremes of the business

cycle

• It stimulate aggregate demand

• Fiscal policy is used by governments to influence

the level of aggregate demand in the economy, in an

effort to achieve economic objectives of price

stability, full employment and economic growth.

• In case of a government running a budget

deficit, funds will need to come from public

borrowing (issue of government bonds),

overseas borrowing or the printing of new money

Objectives of fiscal policy

Provision of social goods

Equitable distribution of wealth and income

Maintain high employment

Ensure price stability

Sustain a satisfactory rate of economic growth

Budget Deficit• It is the amount by which an individual,

business, or government’s income falls short of the expectations set forth in its budget over a given time period.

• A budget deficit occurs when an entity (often a government) spends more money than it takes in.

• Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock.

Why do deficits occur?• Deficits occur because cash is not available to cover

expenses.

• Deficit may be the result of delays in collections on sales

or a capital expenditure that was not planned, like the

purchase of a new piece of equipment.

• Deficits could also result when sales are worse than the

forecast due to a downturn in the economy or lost sales

to competitors.

What should the government do to solve

budget deficits?

• Source of cash might include collections

• The sale of assets

• Investment income

• Receipts from planned long term financing

Government Debt

• (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government

• As the government represents the people, government debt can be seen as an indirect debt of the taxpayers

• An accumulated deficit over several years(or centuries) is referred to as the government debt

• Government debt is usually financed by borrowing,

although if a government’s debt is denominated in its

own currency it can print new currency to pay debts.

• Monetizing debts, however, can cause rapid inflation if

done on a large scale

• Governments can also sell assets to pay off debt

• Most governments finance their debts by issuing long -

term government bonds or shorter term notes and bills

• Governments usually must pay interest on what they

have borrowed

• Governments reduce debt when their revenues

exceed their current expenditures and interest

costs

• According to keynesian economic theories,

running a fiscal deficit and increasing

government debt can stimulate economic activity

Two types of government debt

1. Internal debt – owed to lenders within the country

2. External debt – owed to foreign lenders

Differences between monetary policy and fiscal policy

Fiscal Policy Monetary PolicyHigher taxes Selling treasury

securities

Lower taxes Buying treasury securities

Higher government spending

Increasing the reserve ratio

Lower government spending

Increasing the discount rate

Measuring National Income

Gross Domestic Product (GDP)

• It is the total market value of a country’s output.

• It is the market value of all final goods and services

produced within a given period of time by factors of

production located within a country.

• GDP measures two things at once: the total income of

everyone in the economy and the total expenditure on

the economy’s output of goods and services.

Goods and services can be classified for the

purpose of measuring GDP as:

• Final goods

• Intermediate goods

Intermediate Goods

Intermediate goods or producer goods or semi-

finished products are goods, such as partly

finished goods, used as inputs in the production of

other goods including final goods.

• EX. The components parts such as tires,

batteries & etc. sold to the car manufacturer are

intermediate goods.

Note

Intermediate goods are not counted in a

country’s GDP, as that would mean double

counting, as the final product only should be

counted, and the value of the intermediate

good is included in the value of final good.

Gross National Product

• It measures the size of the nation’s economy

• It is the total value of the final goods and services

produced in a year by a country’s nationals (including

profits from capital held abroad).

• GNP reflects the output of domestically owned

enterprises both within and outside national borders.

• It is also referred to as Gross National Income (GNI)

GNP Vs. GDP

GDP is the value of goods and services

made in the Philippines.

GNP is the value of goods and services

made by Filipino.

GDP = Market value of

goods and services

produced by residents

in country plus

incomes earned in the

country by foreigners.

GNP = Market value of domestically produced goods and services plus incomes earned by the residents of a country in foreign countries minus incomes earned by the foreigners in the country.

Items not included in GDP and GNP

• Quality of the goods and services produced

• Leisure time

• Housewives’ services

• Resale (resold or transfer goods)

• Transfer payments (ex. pension payments, gifts,

grants etc.)

• Security (buying and selling stocks and bonds)

Calculating Gross Domestic Product (GDP) and Gross National Product (GNP)

Methods used to measure GNP

• Expenditure methods or flow of production approach

• Income method or earnings and cost of production

• Industrial origin approach

• Value added approach

Expenditure approach• Measures the total amount spent on all final

goods and services during a given period.

Four(4)main categories of Expenditures

1. Personal Consumption expenditures (C)

Household spending on consumer goods

The largest part of GDP (due to the consumer

expenditures)

Expenditures by consumers on goods and

services

Three (3) main categories of consumer expenditures

Durable goods, automobiles, furniture’s and

household appliances

Non-durable goods, foods, clothing, gasoline

and cigarettes

Services things we buy that do not involve

production of physical

2. Gross private domestic investment (I)

Spending by firms and households on new

capital, that is, plant, equipment, inventory and

new residential structures.

Investment in capital - that is the purchase of

new housing, plants, equipment and inventory

by the private (or nongovernment) sector.

Gross private domestic investment (I)

Non – residential investment

Residential investment

Change in business inventories

3. Government consumption and gross

investment (G)

Expenditures of national and local government for

final goods and services.

Final goods – (military equipments, pencils,

school buildings).

Services – (military salaries, school teachers’

salaries, congressional salaries)

4. Net export (X - M): net spending by the rest of the

world, or exports (X) minus imports (M)

• The difference between exports (selling produced

goods and services across the borders) and

imports (Philippines purchases goods and services

from abroad).

• The figure can be negative or positive.

GDP = C+Ig+G+Xn (in an open economy)

GDP = C+Ig+G (in a closed economy)

Income ApproachThis approach calculates National Income (NI). NI is the sum of the following components:•Compensation of employeesIncludes wages, salaries, and various supplements employer contributions to social insurance and pension funds.•Proprietors incomeThe income of unincorporated business•Rental incomeThe income received by the property owners in the form of rent

• Corporate profits

The income of corporations

• Net interest

The interest paid by business

• Indirect business taxes, minus subsidies

Includes taxes such as sales taxes, customs duties, and

license fees less subsidies that the government pays

for which it receives no goods or services in return.

• Net business transfer payments

Net transfer payment by businesses to others

• Surplus of government enterprises

Income of government enterprises

Industrial Origin Approach

• This approach measures the sum of the market

value of the total production of all the major

industries comprising the economy.

• It is broken down into four sectors: Agriculture,

fishery, and Forestry, Industry and services.

Value Added Method Approach• This method measures the value of the goods

and services produced based on the value added at each stage of production or distribution and included in the cost to the ultimate consumer.

• Value added is the difference between the cost of material/goods and the value of sales of goods.

• For example, if a firm buys materials for P100 and produces from them a product while sells for P250, the value added by the firm is P150.

Other national accounts• Net Nation Product (NNP)Gross national product less capital consumption

allowances (depreciation).NNP = GNP – depreciation

• Personal Income (PI)Payments of income to individuals such as rents paid

to owner of the land, salaries and wages paid to laborers, and interest paid to the owners of capital.

PI = NI – (SSS contributions + corporate income taxes + undistributed corporate profits) + transfer payments

• Personal Disposable Income (DI)Income left after deducting personal income taxes,

which the individual has at his disposal to spend or to save.

DI = PI – personal income taxes• Personal Savings (S)Refers to income not spent for consumption

S = DI – COr if there is interest paid by consumers

S = DI – (C + interest paid by consumers)