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Module 4, 5 and 6

John Kenneth A. Jimeno
Objectives of Monetary Policy

 Maintain internal and external monetary

stability in the Philippines
 Preserve the international value of the peso
and its convertibility
 To foster monetary credit and exchange
Tools of Monetary Policy

 Required Reserves
 Rediscounting
 Open Market Operations
 Selective Credit Control
 Moral Suasion
Required Reserves

The Bangko Sentral ng Pilipinas decides in

general terms what the lending behavior of the
commercial banks should be. It may change the
percentage at which banks can lend out of their
deposits. In some cases, this percentage can be
as low as 80% and may be as high as 90%.

It is the act of discounting a short-term

negotiable debt instrument for a second time.
Banks may rediscount these short-term debt
securities to assist the movement of a market
that has a high demand for loans.
When there is low liquidity in the market,
banks can generate cash by rediscounting short-
term securities. Rediscount lines can also be
subsidized and this is usually attributed to the
reasons that an incentive must be offered to
financial intermediaries and the target sector is
often judged to need subsidized funding.
Open Market Operation s

It refer to a central bank's buying and

selling of government securities in the open
market in order to expand or contract the
amount of money in the banking system.
Securities' purchases inject money into the
banking system and stimulate growth.
Selective Credit Control

This toll lets the BSP selects the kind of

credit it will give to clients. It tries to prioritize
its lending activity either to production or
consumption. If its priority is for production,
credit for consumption is lessened and gives
more funds to production and vice versa.
Moral Suasion

Moral suasion is the act of persuading a

person or group to act in a certain way
through rhetorical appeals, persuasion or
implicit threats, as opposed to the use of
outright coercion or force, it is commonly used
in reference to central banks.
Fiscal Policy

Fiscal policy refers to the use of

government spending and tax policies to
influence economic conditions, including
demand for goods and services,
employment, inflation, and economic
Fiscal policy then is an instrument which
can push the economy towards equilibrium,
when there are disequilibriating elements
operations in the economy.

Taxation is a term for when a taxing

authority, usually a government, levies or
imposes a tax. The term taxation applies to all
types of involuntary levies, from income to
capital gains to estate taxes.
Taxation is differentiated from other forms
of payment, such as market exchanges, in that
taxation does not require consent and is not
directly tied to any services rendered. The
government compels taxation through an
implicit or explicit threat of force.
Foreign Trade Policy

FTP are government actions especially

tariffs, import quotas and export subsidies,
designed to increase net exports by promoting
exports or restricting imports. By increasing net
exports, the domestic production of a nation
increases, which increases domestic income.
Tools of Foreign Trade Policy

 Administrative or Exchange Control

 Tariffs and Subsidies
 Exchange rate Regimes
Administrative or Exchange Control

Exchange controls are government-

imposed limitations on the purchase and sale of
currencies. These controls allow countries to
better stabilize their economies by limiting in-
flows and out-flows of currency, which can
create exchange rate volatility.
Not every nation may employ the
measures, at least legimately, the 14th article of
the International Monetary Fund's Articles of
Agreement allows only countries with so-called
transitional economies to employ exchange
Tariffs and Subsidies

In simplest terms, a tariff is a tax. It adds

to the cost of imported goods and is one of
several trade policies that a country can enact.
Tariffs are paid to the customs authority of the
country imposing the tariff.
Tariffs are often created to protect infant
industries and developing economies but are
also used by more advanced economies with
developed industries.
Exchange rate Regimes

It is the way a monetary authority of a

country or currency union manages
the currency in relation to other currencies and
the foreign exchange market. It is closely
related to monetary policy.
The two are generally dependent on
many of the same factors, such as economic
scale and openness, inflation rate, elasticity of
the labor market, financial market
development, capital mobility, etc.
Types of Exchange Rates

 Flexible Exchange Rates

 Fixed Exchange Rates
 Multiple Exchange Rates
Flexible Exchange Rates

A flexible exchange rate system is

a monetary system that allows the exchange
rate to be determined by supply and demand.
Every currency area must decide what type of
exchange rate arrangement to maintain.
Between permanently fixed and
completely flexible however are heterogeneous
approaches. They have different implications
for the extent to which national authorities
participate in foreign exchange markets.
Fixed Exchange Rates

A fixed exchange rate is a regime applied

by a government or central bank ties the
country's currency official exchange rate to
another country's currency or the price of gold.
The purpose of a fixed exchange rate system is
to keep a currency's value within a narrow
Multiple Exchange Rates

When faced with a sudden shock to its

economy, a country can opt to implement
a dual or multiple foreign-exchange
rate system. With this type of system, a country
has more than one rate at which its currencies
are exchanged.
So, unlike a fixed or floating system the
dual and multiple systems consist of different
rates, fixed and floating, that are used for the
same currency during the same period of time.
In a multiple exchange rate system, the
concept is the same, except the market is
divided into many different segments, each
with its own foreign exchange rate, whether
fixed or floating.
Thus, importers of certain goods essential
to an economy may have a preferential
exchange rate while importers of non-essential
or luxury goods may have a discouraging
exchange rate.

Demand is an economic principle referring

to a consumer's desire to purchase goods and
services and willingness to pay a price for a
specific good or service. Holding all other
factors constant, an increase in the price of a
good or will decrease the quantity demanded.
Market demand is the total quantity
demanded across all consumers in a market for
a given good. Aggregate demand is the total
demand for all goods and services in an
Demand Curve

The demand curve is a graphical

representation of the relationship between the
price of a good and the quantity demanded for
a given period of time. The price will appear
on the left vertical axis, the quantity demanded
on the horizontal axis.
The demand curve will move downward
from the left to the right, which expresses
the law of demand because as the price of a
given commodity increases, the quantity
demanded decreases, all else being equal.
For example, if the price of corn rises,
consumers will have an incentive to buy less
corn and substitute it for other foods, so the
total quantity of corn consumers demand will
Law of Demand

The law of demand is one of the most

fundamental concepts in economics. It works
with the law of supply to explain how market
economies allocate resources and determine
the prices of goods and services that we
observe in everyday transactions.
The law of demand states that quantity
purchased varies inversely with price. In other
words, the higher the price, the lower the
quantity demanded. This occurs because
of diminishing marginal utility. That is,
consumers use the first units of an economic
good they purchase to serve their needs first.
Determinants of Demand

 Income
 Population
 Tastes and Preferences
 Price Expectations
 Prices of related Goods

When income rises, so will the quantity

demanded. When income falls, so will
demand. But if your income doubles, you
won't always buy twice as much of a particular
good or service.

More people means more demand for

goods and services. That is why we can
observe that there are more buyers in the city
stores than in the barrio stores. Conversely, less
population means less demand for goods and
Taste and Preferences

When the public’s desires, emotions, or

preferences change in favor of a product, so
does the quantity demanded. Likewise, when
tastes go against it, that depresses the amount
demanded. Brand advertising tries to increase
the desire for consumer goods.
Price Expectations

When people expect that the value of

something will rise, they demand more of it.
That explains the housing asset bubble of 2005.
Housing prices rose, but people bought more
because they expected the price to continue to
go up.
Prices of Related Goods

The price of complementary goods or

services raises the cost of using the product you
demand, so you'll want less. For example,
when gas prices rose to 4 dollars a gallon in
2008, the demand for Hummers fell.
Changes in Demand

Change in demand describes a change or

shift in a market's total demand. Change in
demand is represented graphically in a price vs
quantity plane, and it is a result of more or
fewer entrants into the market and changes in
consumer preferences.
Changes in Quantity Demand

A change in quantity demanded is a

change in the specific quantity of a good that
buyers are willing and able to buy. This change
in quantity demanded is caused by a change in
the demand price. It is illustrated by a
movement along a given demand curve.

Supply is a fundamental economic concept

that describes the total amount of a specific
good or service that is available to consumers.
Supply can relate to the amount available at a
specific price or the amount available across a
range of prices if displayed on a graph.
This relates closely to the demand for a
good or service at a specific price, all else being
equal, the supply provided by producers will
rise if the price rises because all firms look to
maximize profits.
Supply Schedule

A supply schedule is a table that shows the

relationship between the price of a good and
the quantity supplied. The supply schedule is a
table view of the relationship between the
price suppliers are willing to sell a specific
quantity of a good or service.
Supply Curve

The supply curves of individual suppliers

can be summed to determine aggregate supply.
One can use the supply schedule to do this, for
a given price, find the corresponding quantity
supplied for each individual supply schedule
then sum these quantities to provide a group.
Law of Supply

The law of supply is microeconomic law

that states that, all other factors being equal, as
the price of a good or service increases, the
quantity of goods or services that suppliers
offer will increase, and vice versa.
The law of supply says that as the price of
an item goes up, suppliers will attempt to
maximize their profits by increasing the
quantity offered for sale.
Determinants of Supply

 Technology
 Cost of Production
 Number of Sellers
 Taxes and Subsidies
 Weather

Modern technology incorporation in

business and service delivery enables efficient,
and efficacy in the production of goods and
delivery of services reduces the overall costs of
the final product.
The reduction in the production cost
through technology will increase
profits. Therefore, the supply increases and the
supply curve will shift rightwards. Technology
rarely deteriorates and it ensures the business
remains efficient therefore a constant supply of
the goods and services.
Cost of Production

An increase in the prices of the inputs will

increase production costs. This will, in turn,
shrink the profits. Moreover, a decrease in the
prices of the inputs will increase profits.
Since profit is a major incentive the
producers supplying goods and services to a
certain market will increase, the production of
service or product when there is low
production costs and vice versa.
Number of Sellers

When the number of sellers is high in a

certain market, the quantity of product or
service supplied to that market will be high and
vice versa. Therefore, an increase in the
number of sellers in a market will decrease the
supply and the supply curve shifts leftwards.
Taxes and Subsidies

High taxes reduce profits because the

suppliers will have to pay huge bills to cater for
their production. Subsidies, on the other hand,
reduces the cost of production, and the
suppliers can gain profits by selling the product
or service.

Production of goods also depends on

weather conditions. A businessman will
produce more sweaters during cold season,
umbrellas during rainy season and light
clothing materials and walking shorts during
Changes in Supply

A change in quantity supplied is a change

in the specific quantity of a good that sellers
are willing and able to sell. This change in
quantity supplied is caused by a change in
the supply price. It is illustrated by a movement
along a given supply curve.
Equilibrium of Demand and Supply

The graphs for demand and supply curves

both have price on the vertical axis and
quantity on the horizontal axis, the demand
curve and supply curve for a particular good or
service can appear on the same graph.
Effect of Equilibrium of a Shift in Demand and Supply

When a market is in equilibrium, the price

of a good or service tends to stay the
same. Equilibrium is the price at which the
quantity demanded by consumers.
It is also equal to the quantity that's
supplied by suppliers. When either demand or
supply changes, however, the equilibrium price
and quantity will also change.
Law of Demand and Supply

The law of supply and demand is a theory

that explains the interaction between the sellers
of a resource and the buyers for that resource.
The theory defines how the relationship
between the availability of a particular product
and the desire for that product has on its price.
Concepts of Elasticity

 Elasticity
 Price Elasticity
 Income Elasticity
 Cross Elasticity

A measure used in response to changes in

the determination of supply and demand.

Price Elasticity

A measure used in determining the

percentage change in quantity against the
percentage change in price.
Income Elasticity

The percentage change in quantity

compared to the percentage change in income.

Price Elasticity

The percentage change in quantity of one

good compared to the percentage change in
the price of related goods.
Price Elasticity of Demand

It is an economic measure of the change in

the quantity demanded or purchased of a
product in relation to its price change. It is Price
Elasticity of Demand equal to the percentage of
Change in Quantity Demanded over
percentage of Change in Price.
Types of Elasticity

 Elastic
 Inelastic
 Unitary
 Perfectly Elastic
 Perfectly Inelastic

It refers to the demand when the

proportionate change produced in demand is
greater than the proportionate change in price
of a product. The numerical value of relatively
elastic demand ranges between one to infinity.

Inelastic is one when the percentage

change produced in demand is less than the
percentage change in the price of a product. If
product increases by 30% and the demand for
the product decreases only by 10%, then the
demand would be called inelastic.
Perfectly Elastic

When a small change in price of a product

causes a major change in its demand, it is said
to be perfectly elastic demand. In perfectly
elastic demand, a small rise in price results in
fall in demand to zero, while a small fall in
price causes increase in demand to infinity.
Perfectly Inelastic

A perfectly inelastic demand is one

when there is no change produced in the
demand of a product with change in its
price. The numerical value for perfectly
inelastic demand is zero.
Price Elasticity of Supply

The elasticity of supply is also the response

of quantity offered for sale for every change in
price . It is Price Elasticity of Supply equal to the
percentage of Change in Quantity Supplied
over percentage of Change in Price.
Income Elasticity

The coefficient of income elasticity

measures a product`s percentage change in
quantity as ration of the percentage change
in income which caused the change in
Cross Elasticity

The coefficient of cross elasticity of

demanded of Good A in response to a
percentage change in the price of Good B.
Goods A and B may be related in two
ways, as substitutes and as compliments. If
the coefficient of cross elasticity is positive,
Goods A and B are substitutes. An increase
in the good price of Good B will cause
consumer to purchase more or Good A.
Gross National Product

Gross national product is an estimate of

total value of all the final products and services
turned out in a given period by the means of
production owned by a country's residents.
GNP is commonly calculated by taking the
sum of personal consumption expenditures,
private domestic investment, government
expenditure, net exports and any income
earned by residents from overseas investments,
minus income earned within the domestic
economy by foreign residents.
Types of Goods and Services

 Goods and services which enter into the

channel of trade and commence
 Products which are produced and consumed
by the producers
 Imputed value on rentals
Limitations of GNP

 National income in less developed countries

 Inadequacy and inaccuracy of statics
 GNP only measures the number of goods
and services but not the quality
 It does not reflect the distribution of income
among members of society
Gross Domestic Product

It is comprised of final goods and

services produced within national
boundaries. The GDP is a tool that measures
the value of all locally which is produced
goods and services at the market price.
Ways to measure GNP

 Current GNP
 Real GNP
Current GNP

It is the total value of final goods and

services produced during the year at prices
prevailing during that year. It is a value using
current prices. To get this, current price will
be multiplied to current volume of goods
and services.
Real GNP

It is a measurement using a base or

constant price. This method means
expressing GNP for several years at prices of
a single year. The effect of price changes is
eliminated so as to show GNP values which
reflect only changes in quantity.
Other Approaches to GNP

 Expenditure Approach
 Income Approach
 Industry Origin Approach
Expenditure Approach

Under this approach, GNP is measured in

terms of the total sales of the economy, which
is basically, the total expenditures of our
economy. This is the summation of the
consumption, investment, government
expenditures and exports minus imports.
Income Approach

The main component of this approach is

the National income which is the sum total of
all factor income of persons and households
and government income derived from capital
and undistributed corporate income. Also
included in this approach are the indirect.
Industry Origin Approach

Using this approach the GNP is derived

by getting the sum of the gross value-added
by all sectors of the economy.
Concepts of National Income Accounting

 Net National Product

 Personal Income
 Personal Disposable Income
Net National Product

It is a fine tuned value for a more

accurate accounting of the economy`s finals
products. NNP is the total sales value of
output after deducting capital consumption
or depreciation and indirect taxes of net
Personal Income

It is the income received by the


Personal Disposable Income

This is an income used for consumption.

Personal taxes are excluded in the
computation of disposable income.
Income Distribution

Income distribution looks at how much

different socioeconomic groups in a country
earn. In other words, income distribution refers
to the equality or smoothness with which
people’s incomes are distributed.
Types of Income Distribution

 Personal Distribution
 Functional Distribution
Personal Distribution

It relates to the forces governing the

distribution of income and wealth among the
various individuals of a country.

Functional Distribution

The pattern of the distribution of NI and

the shares received by the different classes.
Causes of Income Inequality

 Intelligence and Talents

 Education and Training
 Unpleasant and Risky Jobs
 Ownership of Productive Factors
Intelligence and Talents

Individuals who are more intelligent

and talented are more likely to earn more
income. Bright persons have greater
opportunities to fame and fortune as well as
those who have talents for singing, painting,
acting and so forth.
Education and Training

Those with higher levels of education

and training generally gets higher incomes.
For examples, top level scientists and
individuals with doctorate degrees have
higher salaries than those who just finished
elementary or high school education.
Unpleasant and Risky Jobs

In highly developed countries,

employers provide financial incentives to
work that are dirty, unpleasant difficult and
risky. Otherwise people would take other
Ownership of Productive Factors

Only few families own most of the

productive factors like land, machines,
buildings and so forth. These are the ones
who are rich. They derive big incomes from
their properties. Such unjust distribution of
health and income of the root of poverty