Policies Discussion (Econ Villarente)

8/11/2019 Policies Discussion (Econ Villarente)

1/6

FISCAL POLICY

Discussion

Federal Taxation and spending policies designed to level out the business cycle and achieve full

employment, price stability, and sustained growth in the economy.

Fiscal policy basically follows the economic theory of the 20 th- century English economist John

Maynard Keynes that insufficient demand causes unemployment and excessive demand leads to inflation.

It aims to stimulate demand and output in periods of business decline by increasing government purchases

and cutting taxes, thereby releasing more disposable income into the spending stream, and to correct

overexpansion by reversing the process.

Working to balance these deliberate fiscal measures are the so-called built-in stabilizers, such as

the progressive income tax and unemployment benefits, which automatically respond countercyclical.

Fiscal Policy is administered independently of monetary policy, by which the BSP attempts toregulate economic activity by controlling the money supply. The goals of fiscal and monetary policy are

the same, but the Keynesian and Monetarists disagree as to which of the two approaches works best. At

the basis of their differences are questions dealing with the velocity(turnover) of money and the effect of

changes in the money supply on the equilibrium rate of interest rate (rate at which money demand equals

money supply).

Definitions

Fiscal Policy is the use of government revenue collection (taxation) and expenditure (spending) to

influence the economy. The two main instruments of fiscal policy are changes in the level and

composition of taxation and government spending in various sectors.

Tax rate- describes the burden ratio (usually expressed as a percentage) at which a business or person is

taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective.

These rates can also be presented using different definitions applied to a tax base: inclusive and exclusive.

National budget - is a financial document prepared at the end of each fiscal year with the expected

expenditures of the entire nation. The national budget takes into account the budgets of the regional

governments and analyses them before coming up with the national budget. It mainly includes the sources

of revenue and expected expenditure on employees of the national governments as well as the projects

initiated by the national government.

Marginal Propensity to Tax- The proportion of each extra pound of income taken by the government

Tax multiplier - represents the multiple by which GDP increases (decreases) in response to a decrease

(increase) in taxes charged by governments.

Tax effort- is an index measure of how well a country is doing in terms of tax collection, relative to what

could be reasonably expected given its economic potential. It is a ratio that, by construction, is always

positive.


2/6

Regressive tax - a tax imposed in such a manner that the tax rate decreases as the amount subject to

taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the

way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate.

Progressive tax - a tax where the tax rate increases as the taxable base amount increases. The term

"progressive" refers to the way the tax rate progresses from low to high, with the result that the average

tax rate is less than the highest marginal tax rate.

Government spending/government expenditure - on goods and services includes all government

consumption and investment but excludes transfer payments made by a state.

MONETARY POLICY

Discussion

Bangko Sentral ng Pilipinas (BSP) decisions on the money supply. To make the economy grow

faster, the BSP can supply more credit to the banking system through its open market operations, or it can

lower the member bank reserve requirements or lower the discount rate-which what bank pays to borrowadditional reserves from the BSP. If, on the other hand, the economy is growing too fast and inflation is

an increasing problem, the BSP might withdraw money from the banking system, raise the reserve

requirement, or raise the discount rate, thereby putting a brake on the economic growth.

Other instruments of monetary policy range from selective credit controls to simple but often

highly effective moral suasion.

Monetary policy differs from fiscal policy, which is carried out through government spending and

taxation. Both seek to control the level of economic activity as measured by such factors as industrial

production, employment, and prices.

Definitions

BSP- The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. The

BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its

mandated responsibilities.

Commercial bank - A financial institution that provides services, such as accepting deposits, giving

business loans and auto loans, mortgage lending, and basic investment products like savings accounts and

certificates of deposit.

Money Supply - In economics, the money supply or money stock is the total amount of monetary assets

available in an economy at a specific time.

Currency in Circulation- Currency in circulation can be thought of as "currency in hand", meaning that it

is used to buy goods and services. Central banks pay attention to the amount of physical currency in

circulation because it is present in the most liquid asset class. The more money that comes out of

circulation and into longer-term investments, the less money is available to fund shorter-term

consumption - a major component of GDP.


3/6

Open Market Operations (OMO)the sale or purchase of government securities by the BSP to withdraw

liquidity from or inject liquidity into the system.

Required reserves- Reserve requirements are the amount of funds that a depository institution must hold

in reserve against specified deposit liabilities

Discounted Rates- interest rate charged by the Federal Reserve Bank to its member banks for loans; also

called rediscount rate.

Money Multiplier- Mathematical relationship between the monetary base and money supply of an

economy. It explains the increase in the amount of cash in circulation generated by the banks' ability to

lend money out of their depositors' funds.

Demand Deposit- a deposit of money that can be withdrawn without prior notice.

Liabilities- defined as an obligation of an entity arising from past transactions or events, the settlement of

which may result in the transfer or use of assets, provision of services or other yielding of economic

benefits in the future.

Asset - an economic resource. Anything tangible or intangible that is capable of being owned or

controlled to produce value and that is held to have positive economic value is considered an asset.

Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is

also considered an asset)

Monetary Policy in General- is the process by which monetary authority of a country, generally a central

bank controls the supply of money in the economy by exercising its control over interest rates in order to

maintain price stability and achieve high economic growth.

Moral Suasion the influence which the central bank exercises to induce or convince banks to conduct

operations in a manner that would contribute to the attainment of monetary goals but not necessarily

support the profit-maximizing objectives of the banks.

Selective Credit Control - 'Credit control' is the system used by a business to make certain that it gives

credit only to customers who are able to pay, and that customers pay on time. Credit control is part of the

financial controls that are employed by businesses particularly in manufacturing to ensure that once sales

are made they are realized as cash or liquid resources.

Tight Credits -A situation in which it is difficult to find a loan. That is, tight credit occurs when banks are

unwilling to part with their money, even on an interim basis. Tight credit may occur during periods of

uncertainty or simply during times of high interest rates.

FOREIGN TRADE POLICY

Discussion

Foreign Trade Policy is a collection of rules and regulations which pertain to trade. The purpose of this

policy is to help a nation's international trade run more smoothly, by setting clear standards and goals


4/6

which can be understood by potential trading partners. Moreover, its goal is to create or increase a

country's balance of trade surplus, that is, to increase net exports.

In many regions, groups of nations work together to create mutually beneficial trade policies. Similarly,

the World Trade Organization is the international body that supervises 95 % of global trade and provides

the legal ground-rules for international trade and commerce. Its goal is to help producers, exporters, and

importers worldwide and bring them under one roof.

When nations trade with each other regularly, they often establish trade agreements. Trade agreements

smooth the way for trading, spelling out the desires of both sides to create a stronger, more effective

trading relationship.

There are three important things to remember when discussing Foreign Trade Policy namely:

Tariffs It is simply taxes placed on imports. It is designed to restrict imports and promote exports is

tariffs on imports. They work like any other taxes. A tariff is added to the price of the imported good. The

resulting price of the import is thus higher, which tends to decrease the quantity purchased. And if fewer

imports are purchased, then more domestic production is sold.

Import Quotas - A quantity restriction placed on a good, service, or activity. Import quotas are then

merely legal restrictions on the quantities of imports that are imposed by the domestic government.

Import quotas can be established as a simple aggregate, presumably satisfied on a first-come-first-serve

basis. Once the total is reached, then no more imports of the particular good are allowed. Alternatively,

the total quota can be divided among foreign producers, perhaps pro-rated based on past imports.

Lastly,Export Subsidies- A subsidy is a payment made by the government sector, either to a business or

consumer, with no expectations of receiving any production in exchange. That is, subsidies are usually

paid to encourage or promote specific activity. An export subsidy is then a subsidy paid to domestic

producers to encourage exports of production to the foreign sector. This export subsidization effectivelyincreases the overall revenue received by the domestic firms when exporting production, which is bound

to encourage exports.

The Philippines is a participant Asia-Pacific Economic Cooperation,Asian Development Bank,

theColombo Plan,Group of 24,G-20,G-77, theWorld Bank,Next Eleven and theWorld Trade

Organization (WTO). It is also a member ofAssociation of Southeast Asian Nations,East Asia Summit,

and theLatin Union.And other trade relations to other countries like New Zealand, South Korea, China

and India.

References: http://www.wisegeek.com/what-is-trade-policy.htm

Definitions

Foreign Trade Policy- Laws related to the exchange of goods or services involved in international trade

including taxes, subsidies, and import/export regulations.

Policies enacted by the government sector of a domestic economy to discourage imports from,

and encourage exports to, the foreign sector. The three most common foreign trade policies are tariffs,

import quotas, and export subsidies. Tariffs and import quotas are designed to discourage imports and
http://en.wikipedia.org/wiki/Asia-Pacific_Economic_Cooperationhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/Colombo_Planhttp://en.wikipedia.org/wiki/Group_of_24http://en.wikipedia.org/wiki/G20_developing_nationshttp://en.wikipedia.org/wiki/Group_of_77http://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Next_Elevenhttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nationshttp://en.wikipedia.org/wiki/East_Asia_Summithttp://en.wikipedia.org/wiki/Latin_Unionhttp://www.wisegeek.com/what-is-trade-policy.htmhttp://www.wisegeek.com/what-is-trade-policy.htmhttp://en.wikipedia.org/wiki/Latin_Unionhttp://en.wikipedia.org/wiki/East_Asia_Summithttp://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nationshttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/World_Trade_Organizationhttp://en.wikipedia.org/wiki/Next_Elevenhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Group_of_77http://en.wikipedia.org/wiki/G20_developing_nationshttp://en.wikipedia.org/wiki/Group_of_24http://en.wikipedia.org/wiki/Colombo_Planhttp://en.wikipedia.org/wiki/Asian_Development_Bankhttp://en.wikipedia.org/wiki/Asia-Pacific_Economic_Cooperation


5/6

export subsidies are designed to encourage exports. The general goal of these foreign trade policies is to

create or increase a country's balance of trade surplus, that is, to increase net exports.

Tariffs- The first of three foreign trade policies designed to restrict imports and promote exports is tariffs

on imports. Tariffs are simply taxes placed on imports. They work like any other taxes. A tariff is added

to the price of the imported good.

Import Quotas - The second of three foreign trade policies designed to restrict imports and promote

exports is quotas on imports. In general, a quota is simply a quantity restriction placed on a good, service,

or activity.

Export Subsidies -The third of three common foreign trade policies is export subsidies. In general, a

subsidy is a payment made by the government sector, either to a business or consumer, with no

expectations of receiving any production in exchange. That is, subsidies are merely gifts. They are also

commonly thought of as negative taxes. Whereas taxes a payments flowing from businesses and

consumers to government, subsidies are payments flowing from government to businesses and

consumers.

Exchange rate - (also known as a foreign-exchange rate, forex rate, FX rate or Agio) between two

currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value

of one countrys currency in terms of another currency.

Foreign exchange controls- various forms of controls imposed by a government on the purchase/sale of

foreign currencies by residents or on the purchase/sale of local currency by nonresidents.

Common foreign exchange controls include: Banning the use of foreign currency within the country,

Banning locals from possessing foreign currency, Restricting currency exchange to government-approved

exchangers, fixed exchange rates, Restrictions on the amount of currency that may be imported or

exported

Marginal propensity to import (MPM) - refers to the change in import expenditure that occurs with a

change in disposable income (income after taxes and transfers).

Subsidy- a form of financial or in kind support extended to an economic sector (or institution, business,

or individual) generally with the aim of promoting economic and social policy.

Automatic stabilizers - In macroeconomics, describes how modern government budget policies,

particularly income taxes and welfare spending, act to dampen fluctuations in real GDP.

Revaluation - refers to the adjustment of the exchange rate of a country's currency. It is a change of a

price of goods or products. This term is specially used as revaluation of a currency, where it means a rise

of currency to the relation with a foreign currency in a fixed exchange rate.

Devaluation in modern monetary policy - is a reduction in the value of a currency with respect to those

goods, services or other monetary units with which that currency can be exchanged. Devaluation means

official lowering of the value of a country's currency within a fixed exchange rate system, by which the

monetary authority formally sets a new fixed rate with respect to a foreign reference currency.


6/6

Overvalued exchange rate - implies that a countries currency is too high for the state of the economy. An

overvalued exchange rate means that the countrys exports will be relatively expensive and imports

cheaper. An overvalue exchange rate tends to depress domestic demand and encourage spending on

imports. An overvalued exchange rate can also be measured by looking at purchasing power parity PPP.

An overvalued exchange rate will mean goods are relatively more expensive in that country.

Floating exchange rate or fluctuating exchange rate - is a type of exchange-rate regime in which a

currency's value is allowed to fluctuate according to the foreign-exchange market. A currency that uses a

floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed

currency.

Policies to promote stability:

Fiscal stabilizers - Built-in automatic fiscal stabilizers, which include progressive taxes and escalating

welfare payments, provide a shock absorber to stabilize an economy following an economic shock.

Floating exchange rates- also seen as an automatic stabilizer. In the event of either a negative demand or

supply side shock affecting an economy, the exchange rate will fall as currency traders sell the currency,leading to a fall in export prices and an automatic increase in competitiveness.

Flexible labor markets - The third automatic stabilizer is flexible labor markets. In the events of a demand

side shock, like the credit crunch, aggregate demand will fall and firms will experience a fall in demand

for their products.

Multiple exchange rates - A system where a country will have both fixed and floating foreign exchange

rates at the same time, and both can be used when exchanging currencies in that country

Nontrade sources - free trade, also called laissez-faire, a policy by which a government does not

discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (toexports). A free-trade policy does not necessarily imply, however, that a country abandons all control and

taxation of imports and exports.

Documents

Policies Discussion (Econ Villarente)