Preliminary Exam Coverage

Globalization in Business
● Integration of markets, capital, technology, and people across national borders.
● Encourages international trade, investment, and cultural exchange.
● Driven by free trade agreements, global supply chains, and multinational corporations.
● Opposite of protectionism and government restrictions on private enterprise.
Global Marketing vs. Domestic Marketing
● Domestic marketing focuses only on local consumer needs, uniform culture, and single
legal system.
● Global marketing requires adaptation to multiple cultural, legal, and economic
environments.
● Some firms standardize products worldwide, but many adapt strategies to fit local market
needs.
Drivers and Barriers of Global Markets
Drivers:
● Advances in technology and communication.
● Reduction of trade barriers.
● Growth of multinational corporations.
Barriers:
● Protectionist policies such as tariffs and quotas.
● Political instability or economic nationalism.
● Cultural and language differences.
Market Orientation and Adaptation
● Standardization: Same marketing and product design globally; lowers cost but risks poor
cultural fit.
● Adaptation: Adjusting products, marketing, or services to meet local regulations, safety
standards, or cultural expectations.
● Global mindset: Valuing cultural diversity and incorporating multiple perspectives into
decision-making.
Outsourcing and Global Strategies
● Outsourcing often reduces costs, but companies must balance savings with service or
product quality.
● Marketing campaigns abroad must reflect local cultural values and consumer habits.
● Using identical advertisements worldwide can save money but may fail in culturally
diverse markets.
● Food and consumer products often need changes for religious, cultural, or dietary
requirements (e.g., halal certification in Middle East).
Pathways to Global Markets
● E-commerce platforms and online advertising allow start-ups to expand globally without
physical stores.
● Cultural training is essential for employees to avoid misunderstandings and failed
negotiations.
● Successful joint ventures require research into local laws, etiquette, and partner
compatibility.
International Trade Theories and Balance of Payments
● Absolute Advantage: Nations produce goods more efficiently than others.
● Comparative Advantage: Nations specialize in goods with the lowest opportunity cost.
● Product Life Cycle Theory: Products are developed in one country, later spread globally.
● Balance of Payments: A deficit means imports exceed exports; a surplus means the
opposite.
International Organizations and Policies
● IMF: Maintains global monetary stability, lends to countries in crisis.
● WTO: Promotes free trade and reduces tariffs.
● World Bank: Funds development projects.
● Trade restrictions: Include tariffs, import quotas, and export taxes.
Currency and Trade Impacts
● Currency depreciation makes exports cheaper and imports more expensive.
● Tariffs can protect local industries but raise consumer prices and invite retaliation.
● Import quotas can shield domestic producers but risk inefficiency and lack of
competition.
● Policies to reduce trade deficits focus on promoting exports and local industries.
Supply Chain and Outsourcing
● Relying on a single foreign supplier creates supply chain vulnerability.
● Diversifying outsourcing across countries reduces dependency and risk.
● Safeguard measures such as temporary tariffs or quotas protect domestic industries
from sudden import surges.
Cultural Dimensions in International Business
● Relationship-oriented cultures (e.g., Latin America, Middle East): Trust and personal
rapport before contracts.
● Information-oriented cultures (e.g., US, Germany): Rely on data, direct communication,
and contracts.
● Decision-making styles vary—Japan favors consensus, while the US prefers fast, direct
decisions.
● Ignoring cultural norms leads to miscommunication and market rejection.
● Adjustments like respecting dress codes or traditions demonstrate cross-cultural
adaptation.
Cross-Cultural Management and Diversity
● Cultural training improves relationships, negotiations, and employee performance.
● Promoting gender diversity reduces bias, enhances innovation, and strengthens brand
image.
● High-context cultures require indirect communication and trust-building.
● Relationship vs. transaction orientation can cause conflicts if not aligned.
Ethics and Global Standards
● Multinational companies should establish a shared code of conduct for ethical
consistency.
● Global ethical guidelines balance cultural differences while maintaining universal
standards.
 ● Blending relationship-based trust with data-driven decisions integrates both cultural
orientations.
Marketing Across Cultures
● Successful campaigns reflect local traditions, values, and languages.
● Festivals, colors, and cultural symbols should be considered in branding.
● Standardized Western advertising may not resonate with all audiences.
Topic 1
Global Business
- All commercial activities that cross national boundaries and involve the exchange of
goods, services, capital, technology, or intellectual property.
Scope of Global Business
1. Trade in Goods ( Merchandise Trade)
- Involves export and import of tangible products.
- Ex.
● Export: Bananas from Mindanao to Japan.
● Import: Automobiles from Japan and South Korea to Manila.
● Germany exports luxury cars (BMW, Mercedes-Benz) to the US.
2. Trade in Services (Invisible Trade)
- Involves intangible products that are delivered across borders.
- Ex.
● BPO firms like Concentrix or Teleperformance serve US and European
clients in customer service, tech support, and accounting services.
● Indian IT companies like Infosys offer software development to clients in
Europe.
3. Capital Flows
- Refers to movement of money for investment purposes across countries
- Types:
● Foreign Direct Investment (FDI) -> long-term investment w/ control over
business operations. (ex. Toyota Japan’s building an assembly plant in
Thailand.)
● Portfolio Investment -> purchase of financial assets without direct
management (ex. A Canadian pension fund buying shares in a Philippine-
listed company.)
4. Technology Transfer
- Sharing of patents, trademarks, manufacturing processes, and know-how
between countries.
- Ex.
● Jollibee adopting new kitchen automation technology from its overseas
partners.
● Starbucks licensing its coffee roasting process to operators in China and
South Korea.
Drivers of Globalization
- Explains why global business has expanded rapidly in recent decades
1. Technological Advancements
 - Faster shipping (containerization), real-time communication (email, video
conferencing), and online marketplaces (Amazon, Alibaba) have made
cross-border transactions faster and cheaper.
2. Trade Liberalization
- Reduction or elimination of tariffs and quotas through agreements such
as:
● ASEAN Free Trade Area (AFTA)
● North American Free Trade Agreement (NAFTA) / USMCA
● World Trade Organization (WTO) commitments
3. Emergence of Multinational Corporations (MNCs)
- Large corporations operate in multiple countries, bringing jobs,
investment, and advanced management practices.
- Ex.
● Unilever produces and sells consumer goods globally, adapting
products to local tastes.
4. Global Supply Chains
- Production is divided into different stages located in various countries to
maximize efficiency and reduce costs.
- Ex.
● Apple designs its iPhones in the US, sources parts from Japan
and South Korea, and assembles them in China.
Relevance to Accountancy
- For accountants, global business means working with complex financial transactions that
involve:
1. Multiple Currencies
- Recording foreign exchange gains or losses due to fluctuations in
exchange rates.
- Ex.
● A Philippine exporter paid in US dollars may have higher revenue
when the peso depreciates.
2. Different Accounting Standards
- Navigating the differences between International Financial Reporting
Standards (IFRS) and US Generally Accepted Accounting Principles
(GAAP).
- Ex.
● Adjusting revenue recognition policies depending on the country’s
standard.
3. Transfer Pricing
- Setting prices for transactions between subsidiaries in different countries,
ensuring compliance with tax regulations.
- Ex.
● Coca-Cola’s Philippine subsidiary buying syrup from its Singapore
affiliate must follow the “arm’s length principle” to avoid tax
disputes.
 4. Cross-border Taxation
- Dealing with multiple tax jurisdictions and applying tax treaties to avoid
double taxation.
Influence of Culture on International Operations
Cultures
- shared values, beliefs, norms, customs, and behaviors of a group of people.
- In business, culture influences how organizations communicate, negotiate, lead, make
decisions, manage employees, and market products across borders.
- When companies operate internationally, they cannot assume that what works in their
home country will work abroad — cultural sensitivity and adaptation are essential.
Key Cultural Frameworks
A. Hofstede’s Cultural Dimensions
- identifies six dimensions that shape workplace and business behavior. For our
discussion, we’ll focus on the three most relevant:
a. Power Distance
- The extent to which less powerful members expect and accept
unequal power distribution.
- Type:
● High Power Distance countries: Authority is respected,
hierarchies are clear, and subordinates rarely question
leaders.
▪ Example: In the Philippines, managers are expected to
make the final decisions, and employees may avoid openly
disagreeing.
● Low Power Distance countries: Equality is valued, and
subordinates freely share opinions.
▪ Example: In Denmark, junior staff may openly challenge
their managers in meetings.
b. Individualism vs. Collectivism
- The degree to which people prioritize personal goals over group
harmony.
- Individualistic cultures: Focus on personal achievements and
autonomy.
▪ Ex: US companies use performance-based rewards for
individuals.
- Collectivist cultures: Value loyalty, cooperation, and team
consensus.
▪ Example: Japanese corporations make decisions based on
group agreement, even if it takes longer.
c. Uncertainty avoidance
- The extent to which people feel uncomfortable with ambiguity and
uncertainty.
- High Uncertainty Avoidance: Preference for rules, procedures,
and stability.
 - Ex. German firms create very detailed project plans before starting
work.
- Low Uncertainty Avoidance: More comfortable with change and
risk.
- Ex. US startups often launch products quickly, then adapt based
on market feedback.
B. Hall’s High-Context vs. Low-Context Cultures
a. High-context cultures
- Communication is indirect; meanings are often conveyed through tone, body
language, and relationships.
- Ex. In Japan or the Philippines, business discussions may be vague initially,
relying on mutual understanding built over time.
b. Low-context cultures
- Communication is explicit, direct, and relies less on non-verbal cues.
- Ex. In Germany or the United States, business messages are clear and to the
point.
Impact on International Operations
1. Negotiations
- Misunderstandings arise when cultural styles clash.
- Example: A US negotiator (low-context, direct) might be perceived as pushy by a
Japanese counterpart (high-context, indirect)
- Resolution: Train employees in cross-cultural negotiation techniques.
2. Marketing and Product Adaptation
- Global brands adjust to cultural tastes.
- Example: McDonald’s offers McRice Burgers in Asia and vegetarian menus in
India due to religious and cultural preferences.
3. Human Resource Management (HRM)
- Expatriates often face culture shock; cultural training improves adaptation.
- Example: A Filipino manager assigned to Canada may need to adjust to a more
individualistic, low power distance environment.
4. Accounting and Finance
- Report presentation styles differ — in high power distance cultures, questioning
financial reports might be avoided to preserve “face.”
- International accountants must also adapt to different business etiquette when
discussing errors or audit findings.
Economic Integration
- process where countries collaborate to reduce or remove trade barriers and harmonize
economic policies to promote free flow of goods, services, capital, and sometimes labor.
- This cooperation fosters trade, strengthens political ties, and improves competitiveness
in the global market.
Levels of Economic Integration
1. Free Trade Area (FTA)
- Members eliminate tariffs and quotas among themselves but keep independent
external trade policies toward non-members.
 - Example: ASEAN Free Trade Area (AFTA) significantly reduces tariffs among
ASEAN countries like the Philippines, Thailand, and Malaysia.
- Real-world impact: A Philippine electronics manufacturer can export to Malaysia
with lower costs due to reduced tariffs, making products more competitive.
2. Custom Unions
- Includes all FTA benefits plus a unified external tariff policy toward non members.
- Example: Southern African Customs Union (SACU).
- Impact: All members apply the same tariff rates on imports from outside the bloc,
simplifying trade policy.
3. Common Market
- Adds free movement of labor and capital to a customs union.
- Example: Mercosur in South America allows Brazilian engineers to work in
Argentina without a work visa.
- Impact: Easier mobility of skilled professionals across borders.
4. Economic Union
- Includes a common market and harmonized economic policies, sometimes
sharing a single currency.
- Example: European Union’s Eurozone uses the Euro for trade, travel, and
investment.
- Impact: Cross-border trade becomes easier with no currency exchange risk.
5. Political Union
- Full integration with a single political authority.
- Example: United States of America is a political union of individual states with
centralized governance.
Key Regional Blocs and Their Importance
1. ASEAN (Association of Southeast Asian Nation)
- Members: 10 Southeast Asian countries (e.g., Philippines, Indonesia, Singapore,
Thailand).
- Purpose: Promote economic growth, trade liberalization, and regional stability.
- Initiative: ASEAN Economic Community (AEC) — aims for a single market and
production base.
- Example: A Filipino furniture exporter can sell directly to Singapore with reduced
tariffs, lowering consumer prices and boosting sales.
2. European Union (EU)
- Members: 27 countries in Europe, with 20 using the Euro.
- Purpose: Promote political and economic unity, allowing free movement of
goods, services, people, and capital.
- Example: An Italian machinery company can sell to France without border
checks or currency conversion.
- Impact: Simplifies trade and strengthens economic ties.
3. Other Blocs
- NAFTA/USMCA: North America (USA, Canada, Mexico).
- CPTPP: Trans-Pacific Partnership countries.
 - African Continental Free Trade Area (AfCFTA): Aims to create a single African
market.
Relevance to Accountancy
- Economic integration directly affects accounting and financial reporting for multinational
businesses:
a. Tariff Changes: Lower duties reduce Cost of Goods Sold (COGS), which affects
profitability
b. Foreign Exchange: Common currencies like the Euro remove FX risk and
simplify accounting.
c. Financial Standards: Adoption of IFRS by many regional blocs allows easier
consolidation of multinational financial statements.
d. Taxation: Regional agreements often prevent double taxation, so accountants
must understand treaty provisions.
e. Customs Compliance: Accountants help ensure correct reporting of import/export
duties under bloc agreements.
TOPIC 2: The Global Economy
International Dependence of Nations
- means that no country can fully provide for all of its needs on its own.
- Nations rely on each other for raw materials, manufactured goods, services, capital
(money/investments), and technology.
- This interdependence is a natural result of globalization, differences in resources, and
the specialization of economies.
- a defining feature of the global economy.
- It allows countries to benefit from specialization, trade, and cooperation, but also
exposes them to vulnerabilities when crises disrupt global supply chains.
Causes of Dependence
1. Unequal Distribution of Natural Resources
- Some countries have abundant oil, while others have fertile lands or advanced
technology.
- Example: The Philippines imports crude oil from Saudi Arabia because it lacks oil
reserves, but exports tropical fruits like bananas and pineapples that Saudi
Arabia cannot grow.
2. Specialization and Comparative Advantage
- Countries specialize in what they can produce efficiently and trade for other
goods.
- Example: Japan specializes in cars and electronics, while Vietnam specializes in
rice production. Both trade to meet needs.
3. Global Supply Chains
- Modern production involves parts from different countries.
- Example: Apple’s iPhone is designed in the U.S., assembled in China, and uses
parts from South Korea, Japan, and Taiwan.
4. Labor Migration and Remittances
- Workers move across borders to fill labor shortages, sending money home.
 - Example: Millions of Overseas Filipino Workers (OFWs) work abroad, and their
remittances support the Philippine economy.
5. Capital and Investments
- Developing nations depend on foreign investments for growth, while developed
nations seek cheap labor and markets abroad.
- Example: Foreign companies invest in call centers in the Philippines to reduce
costs and access English-speaking talent.
Advantages of International Dependence
● Access to a wider variety of goods and services (e.g., Filipinos enjoy Korean electronics,
while Koreans eat Philippine bananas).
● Lower costs and higher efficiency due to specialization and outsourcing.
● Economic growth and job creation through foreign trade and investments.
● Cultural exchange and stronger international relations.
Risks of Dependence
● Vulnerability to global crises: A pandemic or war can disrupt supply chains.
- Example: During COVID-19, countries that depended on imports for medical supplies
struggled.
● Economic imbalance: Poor countries may remain dependent on richer ones for
technology and capital.
● Trade deficits: Heavy reliance on imports can weaken a nation’s currency.
- Example: The Philippines often imports more than it exports, leading to trade deficits.

1. Energy Dependence:
● Japan relies on Middle Eastern oil since it lacks domestic energy resources.
2. Food Dependence:
● Many African countries import rice from Asia because local production is insufficient.
3. Technology Dependence:
● Developing nations rely on the U.S., Japan, and South Korea for advanced technologies
like semiconductors and software.
Basic Theories of World Trade
1. Absolute Advantage (Adam Smith, 1776)
- Specialize where you’re best
- Idea: A nation has an absolute advantage if it can produce a good using fewer
resources or at a lower cost than another nation.
- Implication: Countries should specialize in producing goods where they are most
efficient and trade for the rest.
- Example: Saudi Arabia → oil (efficient due to vast reserves), Brazil → coffee
(ideal climate and land). If both specialize and trade, each gains more than if
they try to produce everything themselves.
2. Comparative Advantage (David Ricardo, 1817)
- Specialize where you have the lowest opportunity cost
- Idea: Even if one country is more efficient in producing all goods, trade is still beneficial if
each specializes where it has the lowest opportunity cost.
- Key Point: Comparative advantage is about relative efficiency, not absolute productivity.
 - Example: The Philippines can produce both bananas and textiles, but it’s
much more efficient at bananas. Japan can produce both cars and electronics,
but it’s relatively more efficient at cars. By specializing (Philippines →
bananas, Japan → cars), both trade and benefit.
3. Heckscher-Ohlin Theory (H-O Model, 1933)
- Specialize based on abundant resources
- Idea: Trade is based on factor endowments—the resources a country has in abundance
(land, labor, capital).
- Implication: Countries rich in labor → export labor-intensive goods. Countries
rich in capital → export capital-intensive goods.
- Example: China (abundant labor) → exports textiles, toys, and electronics
assembly. United States (abundant capital and technology) → exports
airplanes, advanced machinery, and software.
4. Other Supporting Theories (for context)
a. New Trade Theory (Paul Krugman, 1970s):
- Some industries benefit from economies of scale (large-scale production
reduces costs), leading to trade even without big resource differences.
- Example: Airbus (Europe) and Boeing (US) dominate aircraft production
globally due to massive economies of scale.
b. Gravity Model of Trade:
- Countries trade more with neighbors or those with similar economic size.
- Example: Canada and the U.S. are each other’s largest trading partners
due to proximity and market size.
Global Outsourcing
- the practice where companies contract specific business functions or processes to
external providers located in other countries.
- The main goal is usually to reduce costs, gain efficiency, and access specialized talent
or technology.
- part of a broader concept called globalization of business operations, where production,
services, and management are spread across different parts of the world.
Why Companies Outsource Globally
1. Lower Costs
- Labor and operational expenses are cheaper in developing countries.
- Example: U.S. companies outsource call centers to the Philippines due to lower
wages but high English proficiency
2. Access to Skilled Talent:
- Countries may have expertise in specific fields.
- Example: India is a hub for IT and software development services.
3. Focus on Core Competencies
- Outsourcing non-core tasks allows companies to focus on what they do best.
- Example: A U.S. tech company outsources HR and payroll processing to
specialized firms abroad.
4. Time Zone Advantage
- Work can be done 24/7 by teams in different countries.
 - Example: Customer support from Asia serves Western clients during their
nighttime hours.
5. Scalability and Flexibility
- Easier to expand or contract operations without hiring/firing in-house staff.
Types of Outsourcing
1. Business Process Outsourcing (BPO): Customer service, HR, accounting.
2. Information Technology Outsourcing (ITO): Software development, data management.
3. Knowledge Process Outsourcing (KPO): Research, analytics, legal services.
4. Manufacturing Outsourcing: Producing goods in countries with cheaper labor or
materials.
Benefits of Global Outsourcing
● Cost savings for companies.
● Increased efficiency and productivity.
● Access to global markets and new talent.
● Encourages international cooperation.
● Provides jobs in developing countries.
Risks and Challenges
● Job Loss in Home Country: Outsourcing may reduce employment opportunities locally.
● Quality Control Issues: Different countries may have varying standards.
● Dependency on External Providers: Over-reliance on foreign firms can be risky.
● Data Security Concerns: Outsourcing IT functions may expose sensitive information.
● Political and Economic Risks: Trade restrictions or unstable governments can disrupt
outsourcing.
Balance of Payments (BOP)
- a comprehensive record of all economic transactions between residents of a country and
the rest of the world during a specific period (usually a year).
- shows whether a country is earning more from the world than it spends, or vice versa.
- is like a country’s financial “scorecard” with the world
- A balanced or surplus BOP strengthens an economy, while a deficit signals higher
dependence on foreign capital or imports.
Main Components of the BOP
1. Current Account
- records flows of goods, services, income, and transfers.
a. Trade Balance (Exports – Imports):
● Surplus = exports > imports
● Deficit = imports > exports
● Example: The Philippines imports more oil than it exports, creating a
trade deficit
b. Services: Tourism, transport, insurance, BPO services.
● Example: Filipino seafarers and call centers bring in foreign payments.
c. Primary Income: Wages earned abroad, interest, dividends.
d. Secondary Income (Transfers): Remittances from OFWs.
2. Capital and Financial Account
- records investments and financial flows.
 a. Foreign Direct Investment (FDI): Buying/building businesses abroad.
● Example: Toyota invests in manufacturing plants in the Philippines.
b. Portfolio Investment: Buying stocks, bonds, or financial assets.
c. Loans and Aid: Money borrowed from or lent to other nations/institutions.
*If a country imports more than it exports → trade deficit.
*If it exports more than it imports → trade surplus.
*Remittances, foreign aid, and investments can offset deficits in trade.
Example:
● Current Account: Often runs a deficit because it imports more oil, machinery, and
consumer goods than it exports.
● Offset: The country receives large remittances from OFWs (over $30 billion annually),
which help stabilize the peso.
● Financial Account: Foreign companies (like BPO investors) bring in capital, balancing
out trade gaps.
Why BOP Matters
1. Economic Stability: A healthy BOP supports stable exchange rates and growth.
2. Currency Value: A deficit can weaken the peso, while a surplus strengthens it.
3. Policy Decisions: Helps the government and central bank (e.g., Bangko Sentral ng Pilipinas)
decide on trade, investment, and monetary policies.
Exchange Rate
- the price of one country’s currency expressed in terms of another currency.
- tells us how much foreign currency we get when we exchange local money and vice
versa
- The exchange rate is a critical economic tool that affects trade, investments, tourism,
and overall economic stability.
- A weaker currency boosts exports but raises import costs, while a stronger currency
makes imports cheaper but can hurt exporters.
Types of Exchange Rate Systems
1. Fixed Exchange Rate (Pegged):
- Government or central bank maintains the currency’s value relative to another
(like the U.S. dollar).
- Example: Hong Kong dollar is pegged to the U.S. dollar.
2. Floating Exchange Rate:
- Determined by supply and demand in the foreign exchange (forex) market.
- Example: The Philippine peso fluctuates daily against the U.S. dollar.
3. Managed Float (Hybrid):
- Currency mostly floats, but the central bank intervenes when needed.
- Example: Many emerging economies, including the Philippines, follow this system
Factors Affecting Currency
1. . Supply and Demand for Currency
- More demand for exports = stronger currency.
- More imports = weaker currency.
2. Interest Rates
- Higher interest rates attract foreign investments, strengthening currency.
 3. Inflation
- High inflation reduces a currency’s value.
4. Political and Economic Stability
- Stable countries attract investments, boosting currency value.
Effects of Exchange Rates
1. On Trade:
- If the peso depreciates (falls in value):
● Philippine exports (bananas, BPO services) become cheaper abroad, boosting
sales.
● Imports (oil, electronics) become more expensive, raising domestic prices.
- If the peso appreciates (rises in value):
● Exports become more expensive abroad, reducing competitiveness.
● Imports become cheaper, good for consumers but bad for local producers.
2. On Investments:
- Strong currency → more attractive for foreign investors.
- Weak currency → local assets are cheaper for foreigners.
3. On Travel and Tourism:
- Strong peso → cheaper for Filipinos to travel abroad.
- Weak peso → more expensive for Filipinos abroad but attracts more foreign
tourists to the Philippines.
International Agencies for Promoting Economic Development
1. World Trade Organization (WTO)
- Promotes free and fair trade by reducing tariffs, quotas, and trade barriers.
- Provides a platform for negotiations and settles disputes between member
countries.
- Ensures that trade flows as smoothly, predictably, and freely as possible.
- Prevents harmful trade wars.
- Encourages global cooperation in trade.
- regulates trade and resolves disputes
2. International Monetary Fund (IMF)
- Provides loans, policy advice, and technical assistance to countries facing
economic crises.
- Promotes monetary cooperation and stability in the international financial system.
- Monitors global economic trends and offers recommendations.
- Prevents economies from collapsing during crises.
- Restores confidence in financial systems.
- provides emergency financial support and policy guidance
3. World Bank
- Provides long-term loans and grants for development projects.
- Focuses on reducing poverty, improving infrastructure, education, and
healthcare.
- Supports reforms that strengthen governance and institutions.
- Helps developing nations build the foundation for sustainable growth.
- Improves quality of life by funding social and infrastructure projects.
 - funds long-term projects to reduce poverty
4. Other Important Agencies
a. Asian Development Bank (ADB)
- Based in Manila; funds development projects in Asia and the Pacific.
b. United Nations Conference on Trade and Development (UNCTAD)
- Promotes trade and investment opportunities in developing countries.
c. Organization for Economic Cooperation and Development (OECD)
- Helps coordinate policies among advanced economies.
Monetary Stability
- means keeping the value of money stable over time so that prices, interest rates, and
the currency exchange rate remain predictable.
- It protects purchasing power, supports investment, and ensures economic confidence.
- key goal of a country’s central bank (e.g., Bangko Sentral ng Pilipinas).
- Ensures:
• Low and predictable inflation
• Reliable currency value
• Healthy banking and financial systems
• Conditions for sustainable economic growth
Why Monetary Stability Matters
1. Protects Purchasing Power
- If prices rise too fast (high inflation), money loses value.
- Example: In countries like Venezuela, hyperinflation made salaries worthless.
2. Encourages Investment & Savings
- Stable interest rates attract investors and allow businesses to plan for the future.
3. Supports Trade & Exchange Rates
- A stable currency makes imports and exports more predictable.
4. Reduces Economic Uncertainty
- Stability builds trust in the financial system.
Threats to Monetary Stability
a. Inflation: Rapid increase in prices.
b. Deflation: Continuous fall in prices, discouraging spending and investment.
c. Currency Depreciation: When the peso weakens too much against the dollar, imports
(like oil) become expensive.
d. Global Shocks: Wars, pandemics, or oil price hikes can disrupt stability.
Tools for Achieving Monetary Stability
- Central banks (like BSP, U.S. Federal Reserve, European Central Bank) use monetary
policy tools:
a. Interest Rates (Policy Rates):
● Raising rates = reduces borrowing & spending → lowers
inflation.
● Cutting rates = stimulates borrowing & spending → boosts
growth.
b. Money Supply Control:
● Too much money in circulation causes inflation.
 ● Central banks regulate money supply to maintain balance.
c. Foreign Exchange Interventions:
● Buying/selling foreign currency to keep the peso’s value stable.
d. Reserve Requirements for Banks:
● Dictating how much banks must keep in reserves to control lending and
liquidity.
Protectionism
- refers to government policies designed to shield domestic industries from foreign
competition
- often done by restricting imports or supporting local producers.
- While free trade encourages open competition, protectionism limits it in order to protect
jobs, industries, and national security.
- uses tariffs, quotas, subsidies, and restrictions to protect domestic industries from
foreign competition.
- While it can save jobs and help local industries grow, it often raises consumer prices,
reduces choices, and risks retaliation from trading partners.
Main Tools of Protectionism
1. Tariffs – Taxes on imported goods.
- Makes foreign products more expensive, encouraging consumers to buy local
goods.
- Example: The U.S. imposed tariffs on Chinese steel and aluminum to protect
American steel producers.
2. Quotas – Limits on the quantity of certain goods that can be imported.
- Ensures foreign goods don’t flood the local market.
- Example: The Philippines has imposed quotas on rice imports to protect local
farmers.
3. Subsidies – Government financial support to local industries so they can compete with
cheaper imports.
- Example: The European Union subsidizes its farmers to keep European
agriculture competitive against cheaper imports.
4. Import Licenses & Standards – Bureaucratic requirements that make it harder for foreign
products to enter the market.
- Example: Some countries impose strict safety or quality standards on imported
food and medicine.
5. Trade Barriers / Embargoes – Complete bans on trade with certain nations for political or
security reasons.
- Example: The U.S. embargo on Cuba restricted most trade for decades.

Why Governments Use Protectionism

● Protect Local Jobs: Prevents industries from being wiped out by cheaper imports.
● Support Infant Industries: Helps new industries grow until they can compete
internationally.
● National Security: Avoid dependence on foreign suppliers for critical goods (e.g., food,
weapons, medicine).
 ● Correct Trade Imbalances: Reduces large trade deficits with other countries.
● Political Reasons: Sometimes used as leverage in international disputes.

Advantages of Protectionism
● Safeguards domestic industries and jobs.
● Promotes self-sufficiency in essential goods.
● Gives new industries time to grow and compete globally.
Disadvantages of Protectionism
● Higher prices for consumers (imported goods become expensive).
● Less variety and innovation due to reduced competition.
● Risk of trade wars if other countries retaliate with their own tariffs.
● Inefficiency – protected industries may become complacent and uncompetitive.
Examples:
a. United States
- Tariffs on Chinese goods during the U.S.–China trade war (2018–2019).
Protected its auto industry in the 1980s by limiting Japanese car imports.
b. Philippines
- Rice Tariffication Law initially limited rice imports to protect farmers, though it
later shifted to tariffs to balance supply and prices. Tariffs on imported sugar and
chicken to support local producers.
c. European Union
- Common Agricultural Policy (CAP) heavily subsidizes European farmers, making
local produce competitive against cheaper imports.
d. China
- Protects strategic industries like telecommunications and energy through
restrictions on foreign ownership.