Globalization of Economics
Gross Domestic Product (GDP)
the total monetary or market value of all the finished goods and services produced within a country’s border in a specific time period.
provides an economic snapshot of a country
is calculated in 3 ways: using expenditures, production, or incomes.
when calculating, exports are added to its value while imports are subtracted.
Trade Surplus
Refers to the situation when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy.
Trade Deficit
If the total value of foreign goods and services that domestic consumers buy is greater than the total value that domestic producers sell to foreign countries.
Variations of GDP measurements
Nominal GDP: GDP evaluated at current market prices, in either local currency or in U.S. dollars
GDP Purchasing Power Parity (PPP): GDP measured in “international dollars” using PPP which adjusts for differences in local prices and costs of living in order to make cross-country comparisons.
Real GDP: an inflation-adjusted measure
GDP Growth Rate: compares one year (or quarter) of a country’s GDP to the previous year (or quarter) to measure how fast an economy is growing.
GDP per capita: a measurement of the GDP per person in a country’s population.
Gross National Product (GNP)
a measurement of the overall production of persons or corporations native to a country, including those based abroad. It excludes domestic productions by foreigners.
uses the production approach
Gross National Income (GNI)
the sum of all income earned by citizens or nationals of a country.
uses the income approach
the income of the country is calculated as its domestic income, plus its indirect business taxes and depreciation
Major Sources of Funds to Finance the National Budget
revenues from tax and non-tax sources
borrowing from both domestic and foreign sources
withdrawals from available cash balances
Revenue
refers to all cash inflows of the national government treasury which are collected to support government expenditures but do not increase the liability of the National Government.
Tax
a compulsory contribution mandated by law and exacted by the government for a public purpose.
the Bureau of Internal Revenue and the Bureau of Customs are the major tax-collecting agencies
Major Classes of tax revenues
taxes on incomes and profits - imposed on all taxable income earned or received by a taxpayer.
taxes on property - imposed on the ownership of wealth or immovable property levied at regular intervals and on the transfer of real or personal property.
taxes on domestic goods and services - imposed on the use or sale of locally manufactured goods and local services within the domestic territory.
taxes on international trade and transactions - includes import and customs duties
Non-tax Revenues
all other impositions or collections of the government in exchange for services rendered, assets conveyed, penalties imposed, etc.
Tax System
should be revenue-productive
simple and easy to administer
equitable
progressive
Current Efforts of the government to improve tax collections
Comprehensive Tax Reform Program (CTRP) - a comprehensive measure to overhaul the tax system to bring in badly needed revenues for the government.
3 Principle Components
income tax reform
excise tax reform
fiscal incentives reform
Privatization Program
launched by the government in 1987 under Proclamation No. 50 to sell non-performing assets of government financial institutions and government-owned and controlled corporations transferred to the national government.
Borrowing
refers to funds obtained from repayable sources (loans)
Domestic Borrowing - funds obtained from sources within the country.
Foreign Borrowing - funds obtained from sources outside the country (Asian Development Bank (ADB), International Bank for Reconstruction Development (IBRD), Overseas Economic Cooperation Fund (OECF)
Constructive Cash Receipts
are foreign loan proceeds in the form of goods and services for which no cash is remitted to the national treasury. Such goods and services have been paid directly by the lender to the supplier.
Net Borrowings
refer to gross borrowing less debt amortization
Liabilities under Public Debt
all claims against the government which may be payable in goods and services, but usually in cash, to foreign governments or individuals or to persons natural or juridical.
Debt Service
refers to the sum of debt amortization and interest payments on foreign and domestic borrowings of the national government or the public sector.
National Debt of the Philippines
the total debt, or unpaid borrowed funds, carried by the national government of the Philippines.
Autarky
an economic system of self-sufficiency and limited trade.
a country has a closed economy (it does not engage in international trade with any other country)
the most extreme case of autarky was pursued by Nazi Germany, which tried to maximize trade within its own economic bloc and eliminate it with outsiders.
a contemporary example of extreme autarky: North Korea’s system of juche (“self-reliance”)
Adam Smith
questioned the benefits of autarkic policies
father of modern economics
David Ricardo
father of modern international trade theory
showed that if countries engaged in international trade by specializing in the goods in which they held a comparative advantage, then there would be guaranteed gains from trade for all parties, regardless of the size of the economies involved.
Comparative Advantage
occurs when one country can produce a good or service at a lower opportunity cost than another.
means a country can produce a good relatively cheaper than other countries
Classical Liberalism
Advocates for private property, unhampered market economy, rule of law, constitutional guarantees of freedom of religion and press, and international peace via free trade.
Known simply as "liberalism" until around 1900; now distinguished as "classical" due to the association of liberalism with state intervention for egalitarian goals.
Emerged from Western culture, particularly influenced by the historical context of the absolutist states of the 16th and 17th centuries.
The Dutch struggle against Spanish absolutism exemplified liberal traits, highlighting property rights, religious toleration, and limited government.
The Levellers, led by John Lilburne and Richard Overton, were early liberal radicals advocating for trade freedom, separation of church and state, and limits on parliamentary authority.
John Locke popularized natural rights to life, liberty, and property which influenced the American Revolution.
America became a model of liberalism, with radical ideas emerging from groups like the Jeffersonians and abolitionists.
The 18th century produced significant liberal theories, particularly from the Scottish Enlightenment thinkers like Adam Smith who emphasized spontaneous social order.
Conflict arose between liberals and conservatives regarding the market's self-regulating ability, with liberals favoring minimal state intervention.
The Industrial Revolution set the stage for critiques of liberalism based on alleged materialism and a lack of moral compass.
The Manchester School, led by figures like Richard Cobden, promoted peace through international trade but faced inconsistencies in liberal application.
Benjamin Constant highlighted the dangers of unchecked state power, advocating for social buffers against authority.
J.S. Mill's views in "On Liberty" diverged from classical liberal thought by emphasizing individual liberty against society.
Classical liberalism opposes the socialist state, with Ludwig von Mises arguing against central planning.
Classical liberalism is often contrasted with new social liberalism, which calls for extensive state intervention to correct social imbalances.
Many classical liberals see social liberalism as a deviation akin to revisionist socialism, undermining civil society.
In modern contexts, classical liberals and antistatist conservatives may find common ground against the expansion of state power.
Keynesian Economics (Keynesianism)
Developed in response to the Great Depression, a severe worldwide economic downturn starting in 1929 and lasting until about 1939.
Led to fundamental changes in economic institutions, macroeconomic policy, and economic theory.
Economic History
The Great Depression began as an ordinary recession in the U.S. but escalated to severe declines in output and high unemployment globally.
Severity varied by country; the Depression was longest and most severe in the U.S. and Europe, while milder in Japan and Latin America.
Causes included declines in consumer demand, financial panics, and misguided government policies. The gold standard played a key role in spreading the downturn globally.
Timing and Severity
Economic output in the U.S. fell significantly: industrial production declined by 47%, real GDP fell by 30%, and unemployment peaked over 20%.
Other countries experienced varied impacts; for example, Great Britain faced less severe declines compared to the U.S.
Causes of the Decline
Initial Decline: Triggered by a tight monetary policy leading to a stock market crash (Great Crash of 1929) that significantly reduced aggregate demand.
Banking Panics: Followed by banking panics that put pressure on the banking system. A wave of banking failures led to a significant rise in currency demand relative to deposits.
Monetary Contraction: Decline in money supply had severe contractionary effects on output and spending.
Gold Standard
The gold standard limited U.S. monetary policy, spreading economic decline to other countries, necessitating global monetary contraction.
Recovery Sources
Recovery was driven by the abandonment of the gold standard and monetary expansion, with a notable correlation between devaluation of currencies and output recovery.
In the U.S., monetary expansion began in 1933, which stimulated spending and economic growth, though fiscal policy's role was relatively minor.
Economic Impact
Severe human suffering as global output and living standards fell dramatically; approximately one-fourth of the labor force in industrialized nations was unemployed.
The Great Depression ended classic adherence to the gold standard, leading to greater government intervention in economies, increased union membership, and the establishment of social welfare programs like Social Security.
Keynesian Theory
Founded by John Maynard Keynes, who emphasized the role of government intervention through spending and monetary policy to stabilize economies during downturns.
Keynesian economics became a foundation for modern macroeconomic policy, advocating for active government measures to prevent or mitigate depressions, marking a shift towards more interventionist fiscal and monetary policies in the decades following the Great Depression.
The Business Cycle: Definition and Phases
Definition: The term "business cycle" refers to economy-wide fluctuations in production, trade, and general economic activity. It represents the periodic expansions and contractions in levels of economic activity around a long-term growth trend, typically measured by GDP.
Phases: There are four distinct phases of the business cycle:
Expansion: Characterized by increasing employment, economic growth, and upward pressure on prices.
Peak: The highest point where the economy produces at maximum output, employment is at full capacity, and inflationary pressures are evident.
Contraction: Following a peak, the economy slows down, employment declines, and pricing pressures subside.
Trough: The lowest point of the cycle where output bottoms out, marking the transition to the next phase of expansion.
Business Cycle Fluctuations
Fluctuations around the long-term growth trend are often measured by the growth rate of real GDP.
The National Bureau of Economic Research (NBER) is the authority on determining the dates of peaks and troughs in the U.S. business cycle.
Recession is defined as a significant decline in economic activity lasting more than a few months, as identified by NBER. If expansion doesn’t resume, the economy may enter a state of depression.
Impact on Business Operations
Scenario: Normal Maintenance, a small home construction business, navigates the business cycle through various phases:
Expansion: Increased demand leads to hiring and equipment purchases, but capacity strains as quality declines.
Peak: Business overheats, resulting in exhausted crews and rising customer complaints.
Contraction: Demand decreases, leading to overtime cuts and more competitive bidding as the owner adapts to economic changes.
Trough: Significant reduction in work leads to layoffs, idle equipment, and financial losses. The owner adjusts marketing strategies, hoping to survive until the next expansion.
Key Takeaways
Phases: Business cycles consist of four phases: peak, trough, contraction, and expansion.
Measurement: Business cycle fluctuations are measured by real GDP growth rates.
Authority: The NBER determines the official dates for the business cycle's peaks and troughs.
Understanding Keynesian Economics
Represented a new perspective on spending, output, and inflation, contrasting with classical economic thinking.
Classical theory posited that cyclical employment swings allow for profit opportunities that will eventually correct economic imbalances.
Keynes argued that during recessions, business pessimism exacerbates economic weakness, causing aggregate demand to fall further.
Disputed the idea that lower wages can restore full employment, suggesting instead that weak demand leads to reduced capital investment and overall expenditures.
Keynesian Economics and the Great Depression
Often referred to as "depression economics" since Keynes's theories emerged during the Great Depression.
His 1936 book, "The General Theory of Employment, Interest, and Money," rejected classical theory, arguing that the economy does not naturally return to equilibrium post-recession.
Advocated for countercyclical fiscal policy, where government deficit spending would stimulate demand during economic downturns.
Criticized government approaches that focused on balancing budgets and increasing taxes, advocating instead for increased government spending and tax cuts.
Keynesian Economics and Fiscal Policy
The multiplier effect suggests that an initial government spending boost can lead to greater overall economic activity, resulting in an increase in GDP.
The magnitude of the Keynesian multiplier is linked to the marginal propensity to consume.
One dollar spent can create more than one dollar in economic growth through subsequent spending cycles.
Keynesian Economics and Monetary Policy
Focuses on demand-side solutions, advocating for direct government intervention to stabilize employment and economic demand.
Argues that economies require active intervention to combat sluggish adjustments in wages, prices, and employment.
Lowering interest rates can stimulate borrowing and consumption, fostering economic activity.
Monetary policy alone may be insufficient during a liquidity trap where lower interest rates do not spur investment.
Emphasizes that without intervention, economic growth may become unstable and prone to fluctuations.
Conclusion
Keynesian economics remains a significant framework for understanding economic fluctuations and guiding fiscal and monetary policy in times of economic distress.