MACRO CSI and Monetary Policies

Disposable Income

Consumption is dependent on

Positive Inventory

Surplus from what you produced

Contraction Policies

Used to pull down GDP

Expansionary Policies

Used to pull up GDP

Fiscal Surplus

Govt Ex < Taxes

Deflationary

Overproduction

Multiplier Effect

An increase in CIGNx, equates to a bigger increase in the GDP

Labor Supply

Worker

Labor Demand

Firms

Formula for Underemployment

(no. of unemployed/employed) x 100

Members of LF

People willing and able to work

Discouraged Worker not part of UE

not actively looking for work

Regular Employment

working at least 40 hrs a week

working partime

voluntary working for less than 40 hours a week

underemployed

working for less than 40 hours a week and willing to work for more hours

frictional UE

temporary state - in between jobs

structural UE

loss in demand for certain skills; obsolete skills

cyclical UE / deficient demand

caused by a decrease in spending

okuns law

relationship between the UE rate and the GDP gap

inflation

general increase in prices in all or nearly all markets

hyperinflation

overstated inflation

stagflation

higher UE, economic stoppage

Price Index

average of a commodity price in relation to their price in a specified base year

CPI

what price index we use

Inflation Effects Losers

fixed salary employees, retirees with fixed pensions, creditors, savers

Inflation Effects Gainers

Flexible Income Earners, Speculators, Debtors

Demand-Pull

When buyers of final goods and services desire to purchase quantities of outputs greater than what the economy can produce

Cost-Push

Occurs when overall prices increase due to increases in the cost of wages and raw materials.

Philips Curve

Shows the inverse relationship between inflation rate and UE rate

Functions of Money: Medium of Exchange

Purchasing

Functions of Money: Unit of Value

Loan 10,000 pay 10,000

Functions of Money: Store of Value

A bill or coin’s value does not change despite its condition

Money Supply

Currency in Circulation (CIC)

M1 - Transaction Money

CIC + Demand Deposit

CIC

Paper bills and coins or cash onhand

Functions of Money: Legal Tender

Money is a debt from Central Bank, assures that it has value

Demand Deposit (Checking Account)

Acts as paper bills. You deposit that amount in the bank and at anytime u can demand it

M1

most liquid

M2

M1 + Savings Account + Time Deposit

M3 = Total Liquidity

M2 + Debt Papers Issued by Central Banks

M4

M3 + Peso Equivalent of dollar deposits

Dollar Deposits

Foreign Currency Deposit Units + Offshore banking units

Central Bank

Implement Money Stability, GDP Growth and Independent from Government

Expansionary

Used in time of recession

Contractionary

Used in inflation/overheating economy

Monetary Tools: Rediscounting Rate

Rate of Interest that the BSP sets for loan papers of borrowers from commercial banks

Monetary Tools: Buy Sell government securities

Financial Papers - Bonds, Repurchase Agreements

Transaction Demand

Intend to spend for daily transactions

Precautionary Demand

Intend to spend for precautionary measure

Monetary Tools: Reserve Requirement

% of total reserve

Fractional Reserve System

Fraction of total deposits reserved by Commercial Banks

Ways to Create Money: Buy and Sell EXPANSIONARY

When CB buys forex from Commercial Banks they increase MS

Ways to Create Money: Buy and Sell CONTRACTIONARY

When CB sells forex to Commercial Banks they decrease MS

Ways to Create Money: Lending Money to Banks

BSP or Central Bank lends to Commercial Banks - EXPANSIONARY

Ways to Create Money: Lending Money to PH Government

EXPANSIONARY

EXPANSIONARY RR

Lowering the RR increases loanable

CONTRACTIONARY RR

Higher RR decreases the loanable

Fiscal Deficit

Govt Ex > Taxes

USE OF GOVT FUNDS: Consumption Expenditures

Salaries and wage, social instruments; purchase of goods and services to produce and provide for the public

USE OF GOVT FUNDS: Capital Outlay

Public works construction, infrastructure and new equipment

USE OF GOVT FUNDS: Economic Services

Assisting particular industries

Taxes

Main revenue source of Public Funds

Govt Expenditure

Inflows in FP

Taxes

Outflows in Govt Expenditure

Taxes

Principle Source of revenues in financing govt expenditures

Tax revenues

Primary control in determining level of govt spending

PRINCIPLES OF TAXATION: Towards Equity or Social Justice

Taxes withdraw purchasing power from society members

Benefit Principle

Those who pay taxes should benefit from the use for which tax is spent

Ability to pay/Sacrifice Principle

Those who have greater income/wealth should pay a greater income should pay a greater proportion than those with less income

PRINCIPLES OF TAXATION: Administrative Ease of Tax

Tax measures should be devised so that it can be implemented with ease and at a low cost (VAT)

PRINCIPLES OF TAXATION: Adequacy of Revenue

To be worth the effort, a tax should yield sufficient revenue

Other Principles of Taxation - Sin Tax

Aimed at discouraging the use of a commodity or service

Tax Relief

Affects the allocation of resources in a specific activity and redistribution of income

Tax Revenue Formula

Tax rate X base

Base

Object of Tax

Progressive Tax

Increases as the base increases

Example of Progressive Tax

Income Tax and Business Tax

Regressive Tax

Lower Income Earner pays higher tax

Direct Tax

Directly imposed on people or on the income of businesses

Indirect Tax

The burden of tax is passed to another (VAT)

EXPANSIONARY Progressive tax

Decrease Taxes

CONTRACTIONARY Progressive Tax

Increase Tax

Deficit Stabilization

When economy is overheating

Surplus Stablization

When the economy is under full capacity and unemployment is high

Human Capital

Investment in Education

Debt Servicing

Lessen the amount of available funds for necessary services and infrastructures

Current Account Deficit

Any negatives in the domestic side

Theory of absolute advantage

A country that produce a good cheaper than others could specialize in that good and export to other countries

Theory of comparative advantage

Even if a country has AA over another country, that country could still benefit with the technically inferior one

Tariffs

Tax on imports

Increase Tariffs

Less imports

Non tariff barriers

Import quotas, local content requirements, health and stringent standards

Bilateral Trade Agreement

I give you you give me

Regional Free Trade Area

Some countries in the same region agree to decrease tariffs among themselves and impose common tariffs vis avi non membering countries

Price of Dollar

Exchange Rates

Dollar Demand

Downward sloping

Dollar Supply

Upward sloping

Balance Of Payment

Summarized the accounting for receipts and disbursement of dollars

Current Account

Trade in goods, services, primary income, secondary income