PUBLIC FINANCE

Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time.

Gross national product (GNP) is a broad measure of a nation's total economic activity. GNP is the value of all finished goods and services produced in a country in one year by its nationals

How do you solve for GDP?C = 500 + 0.8 Y I = 400 G = 400 (X – M) = -100 

a) Solve for GDP 

b) What happens to GDP when government spending (G) increases to 500? Why is the increase in GDP greater than the increase of $100 increase in government spending?

a] Y=C+I+G+(X-M) Y = 500+0.8Y+400+400-100 = 1200+0.8Y Y = 1200+0.8Y 0.2Y=1200 Y=1200/0.2=6000 GDP=Y=6000 

ANSWER:

b] ΔG = G¹-G° = 500-400 = +100 ΔY = ΔG/(1-0.8) = 100/0.2 = +500 or 0.2Y=1200+ΔG Y = (1200+ΔG)/0.2 = (1200+100)/0.2 = 1300/0.2 = 6500 It's because of multiplier effect.

Changein GNPper capitain a year

÷GNP percapita

at the startof the year

x 100 =

AnnualGNP percapitagrowth rate (%)

 GNP percapita atthe start

of the year

GNP percapita atthe end

of the year

Changes inGNP per

capita duringthe year

AnnualGNP per

capitagrowth rate

Country A $113 $110 [-$3] [-2.7%]Country B $1,590 $1,700 [$110] [6.9%]

How do you solve for GNP?

Public Finance-Collection of taxes from those who benefit from the provision by the government .

-Use of tax funds toward production and distribution of the public goods.

-is the study of the role of the government in the economy.

-It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

6

Public Finance and Ideology

How should a government function in economic sphere?

Organic view – community stressed above individual.  Goals of society set by the state.

Mechanistic view – government is a contrivance created by individuals to better achieve their individual goals.  Individual, not group, is at center stage.

What is Public Budgeting?

How governments strategically plan a budgetManage ongoing activitiesControl spending 

Comprehensivenessinclude all revenue and expenditure, all agencies

Accuracyrecord actual transactions and flows

Annualitycover a defined period of time (e.g. one year budget, multi-year forecasts)

Authoritativenessonly spend as authorized by law

Transparencyinformation on spending is public, timely, understandable

Basic principles of Public Finance

Threefold of Public Finance

PUBLIC FINANCE

EFFICIENT ALLOCATION OF RESOURCES

DISTRIBUTION OF INCOMEMACROECONOMIC STABILIZATION

Subdivisions form the subject matter of Public Finance.

•Public expenditure

•Public revenue

•Public debt

•Financial administration

•Federal finance

What is economic growth?

increase in the production and consumption of goods and services.

entails increasing population and/or per capita consumption

indicated by increasing gross domestic product (GDP).

refers to an economy that is getting bigger, not necessarily one that is getting better.

Level of economic development expressed through five groups of indicators.

•the total social product•the structure of social production•the level of employment of the population•the level of utilization of natural resources•the level of labor productivity

ACT of 26 November 1998on Public FinancesSection IThe General Principles of Public FinancesArt. 3.

A. The following shall be public funds:1) public income,2) funds derived from foreign sources, not returnable,3) revenues of organizational units and legal persons classified under the public finance sector, derived from activity and other sources,4) revenues of the state budget and of budgets of local government units, derived from:

a) sale of securities and other financial transactions,b) privatization of assets of the State Treasury and assets of local government units,c) repayment of loans granted from public funds,d) obtained loans and credits.

Types of Public Finance

B. The following shall be public income:

> public levies which include taxes and other cash payments incurred for the state under separate laws.

> Other income, namely:

a) fees,b) income from property, especially from lease or tenancy and other agreements of a similar character, dividend on capital brought in,c) income from the sale of things and rights as well as from performing services by the units referred to in art. 5 para. 1,d) income from the sale of rights that is not revenue in the meaning of para. 1 subpara. 4 let. a),e) inheritances, and gifts in cash,f) other income obtained under separate regulations, provided it is

collected by bodies financed with public funds or by units referred to in art. 5 para. 1, subordinated or supervised by these bodies.

Types of Public Finance

Significance of the Public Finance•T o improve efficiency, accountability and transparency in public fund use in order to ensure the direct, immediate, substantial and economical delivery of public services especially to the poor. 

•To Improve Accountability and Transparency.

• To clarify, simplify, improve and harmonize the government’s financial management processes and information systems that will cover all transactions of government and apply uniformly to all government agencies.

references:International monetary fund.org SUMMERS, R. and A. HESTON, 1988, "A New Set of International Comparisons of Real Product and Price Level Estimates for 130 Countries, 1950-85", Review of Income and Wealth.

Expenditure Cycle

Planningsystem

Medium termplans, e.g. threeyear rolling plans

Annual budgetsDevelopment,recurrent andrevenue

Fund releaseprocedure, e.g...warranting

Accounting forrevenue andexpenditure

Public expenditurereview Institutions

Reports andfinancial statements

Audit system

Project monitoring

Projectappraisal

Resourceallocation

Liquidity

managem

ent

Expenditure

control

Monitoring

& controllin

g

Post eventreview

Accountability

Expenditurereview

Financial management system boundaries

National Government Cash Budget1996 to 2013

(In million pesos)

World Public Finance

Asian Countries Public Finance

Common problemsWeak links between policy, resource limits, and budgets

failure to achieve strategic objectivesabstract planning, unrelated to ways and means

Annual focus leads to suboptimal choicesDigging a hole; inability to climb outComplacency today, unaware of crisis tomorrow

Separation between capital and recurrent budgetsLower than expected returns to capital

Non-comprehensive budgetUsing other means to support favored programsRevenues not captured in budget

Taking piecemeal decisions without reference to over-all effectFunds don’t reach intended beneficiaries

Budget executed differently than approvedGoods and services not delivered as planned

THE END!!!