UNIT 4: MONETARY POLICY

Introduction
“Money makes the world go round” as they say it. Money is important in our living
for almost all can be bought by it. However, too much or too little of it is not good for
economy. It has been learned from the past that without enough money to circulate in
the economy it will limit economic activities and will deprive the condition of the people,
on the other hand too much money in circulation will cause inflation and will lower the
real value of money which again will deprive the condition of the people. These
conditions can be controlled through policy which alters money supply called monetary
policy.

Learning Outcomes

At the end of the module, the student is expected to:

1. Appreciate the effects of monetary policy in the economy
2. Distinguish inflation from deflation and be able to know how they happen.
3. Formulate policy that will control inflation and deflation

Lesson 1: Definition of Monetary Policy

Monetary Policy can be defined as a set of guidelines and plans of action
designed to achieve stability and reliability of the financial system so that it automatically
responds and adjusts to the changes and dynamics of an economy. It likewise refers to
the issuance and control of money supply, interest rates on loans and deposits. The
primary objective of the monetary policy is to provide financial stability that promotes
growth and development of the economy with minimal inflation. The success indicator of
monetary policy is the rate of inflation in lower result.
Monetary policy is one macroeconomic policy of macroeconomic policies used to
influence the economy through altering money supply which is in the control of the
Bangko Sentral ng Pilipinas.

Lesson 2: Functions of the Bangko Sentral ng Pilipinas (BSP)

It is the responsibility of BSP to administer the monetary, banking and credit
system of the republic as embodied in Section 2, Articles of the amended R.A. 2656.

1
This responsibility is exercised to achieve monetary objectives in consonance with the
overall economic policies of the government.

The objectives are as follows:

1. to maintain internal and external monetary stability in the Philippines; and to preserve
the international value of the peso and its convertibility to other freely convertible
currencies;

2. to foster monetary, credit and exchange conditions conducive to a balanced and

sustainable growth of the economy.

Lesson 3: Types of Monetary Policy

1. Tight Money Policy – is a restriction of money supply in an economy by the

central bank through (1) tightening of credit qualifications, (2) soaking up cash by selling
government bonds, and/or (3) raising the banks’ reserve requirements.

2. Easy Money Policy – a policy initiated by a central bank to lower the rate
interest paid by banks to borrow money as a way to increase economic activity. In some
economic circumstances, lower bank borrowing rates can stimulate consumer borrowing
which in turn can increase demand for goods

Lesson 4: Monetary Policy Instruments

Monetary policy actions of the BSP are aimed at influencing the timing cost and
availability of money and credit, as well as other financial factors, for the purpose of
influencing the price level. In the Philippines, monetary policy instruments are classified
into:

1.) Open Market Operations (OMO). It involves the buying and selling of government
securities from banks and financial institutions of the BSP in order to expand or contract
the supply of money.

2.) Rediscounting. This refers to transactions whereby the BSP extends credit to a
bank collateralized by its loan papers with customers. This Instrument plays a dual role;

2
as a tool to allocate credit to preferred sectors of the economy and as an instrument to
influence the supply of money and credit. Rediscounting Rate is the interest rate
charged by the BSP to the banks that borrow from them.

3.) Reserve Requirement. This is the minimum amount of reserves that bank must
hold against deposits. The reserve requirements which are held by banks as cash in
their vaults and deposits with the BSP, help to control the money and credit by affecting
the demand for money reserves and the money multiplier. It serves as a prudential
safeguard for depositors.

4.) Direct Controls. This consist of quantitative and qualitative limits on the ability of
banks to undertake certain activities. The most common type of direct controls include
limitations on aggregate bank lending, selective limitations on certain types of banks
lending and interest rate regulations.

5.) Moral Suasion. The BSP persuade banks to make their lending policies responsive
to the needs of the economy. Banks must tighten their credit programs in times of
inflation and loosen them in times of recession.

Lesson 5: Monetary Theories

One of the most famous personality in monetary theory was Milton Friedman,
father of modern economics. He suggested that inflation be at 2% per year. Above or
below it will harm the economy, and the higher the difference the higher would be the
damage. His notion was simply an application of the “Quantity Theory of Money” with
equation MV=PQ. Where M=Money Supply, V=Velocity of Money, P=Prices of goods
and services, Q=Quantity of goods and services produced. From the equation it is
important to note that the movement start from left to right. That is it start with money
supply going right to price and quantity. When there is an increase in money supply,
definitely it will increase the price or quantity of goods.

3
Suggested Readings

 Pagoso, C., Dinio, R., & Villasis G. (2013). Introductory Macroeconomics.

Philippines: Rex Book Store, Inc. Pp. 170-204
 Case, Karl E. et al. (2009). Principles of Economics. Philippines: Pearson
Education South Asia PTE. Pp. 477-521

4
 UNIT 5: FISCAL POLICY

Introduction
Perhaps the real effect of monetary policy would count month or more, and this
would not rescue an economy who needs an immediate attention for a sudden crisis.
This Covid-19 Pandemic is an example, and the hope has been only from the
government who can immediately source out and inject money to fund the financial
requirement. This action of the government is part of macroeconomic tool known as
fiscal policy.

Learning Outcomes

At the end of the module, the student is expected to:

1. Know the meaning, use, and effect of fiscal policy.
2. Tell the difference of fiscal policy and monetary policy.
3. Formulate policy that will help the poor and the unemployed.

Lesson 1: What is Fiscal Policy?

Another macroeconomic tool used to influence the economy was the fiscal policy.
It refers to the “measures employed by governments to stabilize the economy,
specifically by manipulating the levels and allocations of taxes and government
expenditures. During the time of depression, the government can either increase
government spending or lessen tax rates. On the other hand, when there is a spiraling
inflation, the government can either lessen government spending or increase tax rate.
Fiscal Policy in the Philippines is considered by continuous and increasing levels
of debt and budget deficits, though there have been improvements in the last few years.
Fiscal measures are frequently used in tandem with monetary policy to achieve
certain goals.
Fiscal policy during the Marcos administration was focused on indirect tax
collection spending on economic services and infrastructures development.
The Aquino administration inherited a large fiscal deficit from the previous
administration, but managed to reduce fiscal imbalance and improve tax collection
through the introduction of the 1986 Tax Reform Program and the Value Added Tax.
The Ramos administration experienced budget surpluses due to
substantial gains from the massive sale of government assets and strong foreign

5
investments in its early years. However, the implementation of the 1997 Comprehensive
Tax Reform Program and the onset of the Asian Financial Crisis resulted to a
deteriorating fiscal position in the succeeding years and administrations.
The Estrada administration faced a large fiscal deficit due to the decrease in tax
effort and the repayment of the Ramos administration’s debt to contractors and
suppliers.
During the Arroyo administration, the Expanded Value Added Tax Law was
enacted, national debt-to-GDP ratio peaked, and underspending on public infrastructure
and other capital expenditures was observed.
The Duterte administration enacted the TRAIN Law or the Tax Reform for
Acceleration and Inclusion Law. This supported the “Build Build Build Program” of the
government. This caused an increase in tax revenues, government expenditure and an
incremental growth in GDP.

Lesson 2: Some Concepts of Fiscal Policy

Revenues and Funding
The Philippine government generates revenues through mainly through
personal and income tax collection, but a small portion of non-tax revenue is also
collected through fees and licenses, privatization proceeds and income from
other government operations and state-owned enterprises.

Non-Tax Revenue Bureau of Treasury

The Bureau of Treasury (BTr) manages the finances of the government, by
attempting to maximize revenue collected and minimizes spending. The bulk of non-tax
revenues comes from the BTr’s income. Under Executive Order No.449, the BTr collects
revenue by issuing, servicing and redeeming government securities, and by controlling
the Securities Stabilization Fund.

Privatization
Incidence or process of transferring ownership of a business, enterprise, agency
or public service from the public sector to the private sector or to private non–profit
organizations.

6
Tax Revenue
Tax revenue is the income that is collected by the government through taxation.
Tax collections encompass the biggest percentage of revenue collected. Tax effort as a
percentage of GDP has averaged at roughly 13% for the years2001-2010.

Income Taxes
Income tax is a tax on a person’s income, wages, and profits arising from
property, practice of profession, conduct of trade or business. Income tax in the
Philippines is a progressive tax (as people with higher income pay more than people
with lower income).

Extended Value Added Tax (E-VAT)

E-VAT a form of sales tax that is imposed on the sale of goods and services and
on the import of goods into the Philippines. The current E-VAT rate is 12%
of transactions.

Tariffs and Duties

Imposes tariffs and duties on all items imported in to the Philippines. According to
Executive Order 206, returning residents, Overseas Filipino Workers (OFW’s) and
former Filipino citizens are exempted from paying duties and tariffs.

Financing and Debt

External Sources of Financing are: Domestic Sources of Financing are:

1. Program and Project Loans 1. Treasury Bonds

2. Credit Facility Loans 2. Facility loans

3. Zero-coupon Treasury Bills 3. Treasury Bills

4. Global Bonds 4. Bond Exchanges

5. Foreign Currencies 5. Promissory Notes

7
 6. Term Deposits

According to https://en.wikipedia.org/wiki/National_debt_of_the_Philippines the

outstanding Philippines government loan as of June 2020 to ₱8.6 trillion
($172,637,518,000). This amount was higher than last year’s ₱7,292.5 trillion. The rise
was largely due to financial requirement in fighting coronavirus pandemic

 Domestic debt: ₱5.86 trillion ($117,634,401,800) (2020)

 External debt: ₱2.74 trillion ($55,003,116,200) (2020)
 Total debt: ₱8.6 trillion ($825,637,518,000) (2020)

Lesson 3: Lesson from the Great Depression

Great Depression was described as a severe worldwide economic
depression that took place during the 1930s. It started in 1929 and lasted until the late
1930s. It was the longest, deepest, and most widespread depression of the 20th century.
Worldwide GDP fell by 15% from 1929 to 1932. In the 21st century, the Great
Depression is commonly used as an example of how far the world's economy can
decline. The depression originated in the United States, after a fall in stock prices that
began around September 4, 1929, and became worldwide news with the stock market
crash of October 29, 1929 (known as Black Tuesday).
There are at least three accepted theories that explains the Great Depression
namely: Common Theory, Monetarist Theory, and the Keynesian Theory.
Common Theory tells that it has been the fault of the government why that crisis
happened since they reacted too slowly during that time of recessionary period. The
Monetarist Theory blames the banks and the U.S. Federal Reserve for responding too
long and did not lower interest rate, increase monetary base, and inject liquidity in the
banking system. The Keynesian Theory which was formulated by John Maynard Keynes
points out failure on the part of the government by not keeping employment high, not
cutting taxes to increase consumer spending.
There are lessons that can be learned from that crisis. Based from the three
theories, it tells us that it was the fault of the government by acting slow in responding
during that serious economic crisis. They could have quickly change the interest rates,
cut taxes, and inject liquidity in the system.

8
Suggested Readings
 Pagoso, C., Dinio, R., & Villasis G. (2013). Introductory Macroeconomics.
Philippines: Rex Book Store, Inc. Pp. 170-204
 Vaggi, G. & Groenewegen P. (2014). A concise history of economic thought:
From mercantilism to monetarism. UK: Palgrave Macmillan. Pp. 297-313

UNIT 6: INTERNATIONAL TRADE POLICY

Introduction

9
 Why do we engage in exchange? Basically, it is because we need something
that we don’t have which can only be found from someone else. Country as a body of
people with needs basically engage in exchange to have something that they need. It
may be goods, services, and money.
In the process of import and export, the trading partners are both better off-
improving their conditions and uplifting their economies.
This module will revolve on discussing the concept of trade policy, theories of
trade, and the current state of international trading of our country.

Learning Outcomes
At the end of this module the student will be able to:
1. Realize the concept and importance of trade.
2. Assess the trade condition of our country
3. Formulate trade policy that will boost our trade.

Lesson 1: Trade Policy

Another macroeconomic tool that influence the economy was the trade policy.
Trade policy is a basic economic concept that involves multiple parties participating in
the voluntary negotiation and then the exchange of ones goods and services for desired
goods and services that someone else possesses.

What is International Trade?

It is the process of exchanging goods and services between countries. It
involves the buying and selling of imports and exports.
When conditions are right, trade brings benefits to all countries involved and can
be a powerful driver for sustained GDP growth and rising living standards. One way of
expressing the gains from trade in goods and services is to distinguish between static
gains (i.e. improvements in allocative and productive efficiency) and dynamic gains (i.e.
gains in welfare that occur from improved product quality, increased choice and faster
innovative behavior).
Exports are goods and services produced domestically and sold abroad.
Philippine exports have been the main dollar earner of the country. In recent years, it
has contributed about fifty percent of total dollar receipts of the country. Exports earn
dollars and that we later use these dollars to buy goods we need from abroad.

10
 Imports are goods and services produced abroad and sold domestically. The
dollars we earn through exports and other sources are used mainly to import goods and
services we need. Most of our imports are composed of industrial and manufactured
items.
A net export is the value of a nation’s exports less imports.
Balance of Payments is considered favorable if dollar inflows or receipts exceed
outflows or payments.
Balanced of trade is a situation where exports equal imports. The balance of
trade is called favorable if exports exceed imports. The balance of trade is called
unfavorable if imports exceed exports.
Trade surplus is an excess of exports over imports. Trade deficit is an excess
of imports over exports.

Lesson 2: Theories of Trade

Adam Smith’s Model

Adam Smith describes trade taking place as a result of countries having absolute
advantage in production of particular goods, relative to each other. Within Adam Smith's
framework, absolute advantage refers to the instance where one country can produce a
unit of a good with less labor than another country.

In his major work the Wealth of Nations, Adam Smith, discussing gains from
trade, provides a literary model for absolute advantage based upon the example of
growing grapes from Scotland. He makes the argument that while it is possible to grow
grapes and produce wine in Scotland, the investment in the factors of production would
cost thirty times than more than the cost of purchasing an equal quantity from a foreign
country. The minimization of aggregate real costs and efficient resource
allocation through trade without strong consideration for comparative costs form the
basis of Adam Smith's model of absolute advantage in international trade.

Comparative Advantage

This principle was derived by DAVID RICARDO in his 1817 book, Principles of
Political Economy and Taxation. Ricardo’s result, which still holds up today, is that

11
what matters is not absolute production ability but ability in producing one good relative
to another.
Reckoned in physical output—for example, bunches of bananas produced per
day—a producer’s EFFICIENCY at growing bananas depends on the amounts of other
goods and services he sacrifices by producing bananas (instead of other goods and
services) compared with the amounts of other goods and services sacrificed by others
who do, or who might, grow bananas.
Comparative advantage exists when a country has a ‘margin of superiority’ in the
supply of a good or service i.e. where the marginal cost of production is lower.
Countries will generally specialize in and export products which use intensively
the factors inputs which they are most abundantly endowed. If each country specializes,
total output can be increased leading to better allocative efficiency and welfare.
Because production costs are lower, providing that a good price can be found
from buyers, specialization should focus on goods and services that provide the best
value
In many countries, comparative advantage is shifting towards specializing in
producing and exporting high-value and high-technology manufactured goods and high-
knowledge services

Lesson 3: Philippines Trade Policy at a Glance

Since 1980s, the Philippines have opened their economy to foreign markets, and
established a network of free trade agreements with several countries. The United
States is one of the Philippines top trading partner. In 2010, according to US Department
of Commerce , trade between the Philippines and US amounts to US$15.4 billion. US is
also the Philippines largest foreign investor, with foreign direct investment close to US$6
billion at the end of 2009.

The current administration of President Rodrigo Duterte signed into law on

February 14, 2019 the Republic Act (RA) No. 11203 or “An Act liberalizing the
importation, exportation, and trading of rice, lifting for the purpose the quantitative import
restriction on rice, and for other purposes". The law amends RA No. 8178 or the
Agricultural Tariffication Act of 1996 and replaces the quantitative restrictions (QR) on
rice imports with tariffs. (https://www.trade.gov/knowledge-product/philippines-trade-
barriers)

12
 At present, the average tariffs on agricultural products is at 11.63 percent for July
1 to December 31, 2020. For products like rice, corn, pork, chicken meat, sugar, coffee,
and other sensitive agricultural products, our country maintains a two-tiered tariff policy.
In-quota and out-of-quota tariff rates are imposed at averaged 36.5 percent and 41.2
percent, respectively, and have not changed since 2005.

Philippines’ Import and Export Indicators and Statistics at a Glance (as of Dec.
2019)

Total value of exports: US$70,325,600,000

Primary exports – commodities: Electronic Products, Other Manufactured Goods,
Cathodes & Sections of Cathodes of Refined Copper, Ignition Wiring Set and Other
Wiring Sets Used in Vehicles, Aircrafts and Ships, Machinery and transportation
Equipment, Bananas, Chemicals, Gold, Metal Components, Coconut Oil.
Primary exports partners: US (16.3 percent of total exports), Japan (15.1 percent),
Hong Kong (13.7 percent), China (13.7 percent), Singapore (5.4 percent), South Korea
(4.6 percent), Thailand (4.2 percent), Germany (3.9 percent), Taiwan (3.2 percent),
Malaysia (2.6 percent)

Total value of imports: US$107,374,740,000

Primary imports – commodities: Electronic Products, Mineral Fuels, Transport

Equipments, Industrial Machinery and Equipment, Telecommunication Equipment and
Electrical Machinery, Miscellaneous Manufactured Articles, Iron and Steel, Other Food
and Live Animals, Cereals and Cereal Preparations, Plastics in Primary and Non-
Primary Forms

Primary imports partners: China (22.9 percent), Japan (9.4 percent of total imports),
South Korea (7.7 percent), US (7.2 percent), Thailand (6.3 percent), Indonesia (6. 1
percent), Singapore (6.0 percent), Taiwan (4.3 percent,), Malaysia (4.2 percent),
Germany (2.5 percent)
Suggested Readings
 Pagoso, C., Dinio, R., & Villasis G. (2013). Introductory Macroeconomics.
Philippines: Rex Book Store, Inc. Pp. 213-235

13
 Vaggi, G. & Groenewegen P. (2014). A concise history of economic thought:
From mercantilism to monetarism. UK: Palgrave Macmillan

14