SOCIAL 10

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Lesson 1:

Economics: The Basics

People often think of economics in many different ways. To some, it deals with the country‘s economy, on how the government does things to ensure that the business and economic activities in the country keep on going. To others, economics is about saving money wisely. These two ideas are true, but, as we will learn, economics is more than those concepts.

Definitions of economics Economics is a body of knowledge that analyzes, explains, and even predicts the economic behavior of people, groups, and nations and involves such concepts as the distribution of goods and services, level of employment and income of the people, prices, and basic economic issues such as scarcity, wants, needs, and allocation.

Other definitions of economic that may be related to the above concepts are the following:  Economics is the study of how choices are made in the allocation of resources to produce goods and services for consumptions, and the mechanisms and principles that govern this process.  Economics is the social science concerned with the analysis of commercial activities and with how goods and services are produced.  Economics is the study of business and trade among countries, and explains why some countries export some goods and import others.  Economics is the study of money, banking, capital, and wealth.  Economics is the study of how, what, and for whom to produce.

Choices in Economics The whole idea of economics, then, can be defined as a series of choices, described as follows: Most people have needs that are never fully satisfied. Aside from the basic needs for food, clothing, and shelter, people may also aspire for physical security, comfort, convenience, and various other wants, which can only be answered by providing them with these resources.

The fact is that there are limited resources available to satisfy every human want and need.

This creates scarcity, which is the basic problem in economics. This can be solved by the concept of allocation, which is the manner of choosing which needs should be satisfied, and how much resources should be used to satisfy them.

Thus, individuals and societies must make choices and decisions in order to come up with a suitable solution by answering the basic needs of everyone and providing them with their wants as practically as possible, without severely depleting depending the limited resources available.

Division of Economics The study of economics has two major divisions; macroeconomics, which deals with the functioning of the economy in general, or as a whole, and microeconomics, which involves the individual components of the economy such as businesses, industries, households and even individuals consumers.

Macroeconomics Macroeconomics is the division of economics that pertains to the study of whole economies or system. It includes, among others the following concerns:  Inflation and unemployment  Government income and expenses  Total money supply, investments  International finance and economies Young Ji International School / College

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Balance of payments, fiscal policy

Microeconomics Microeconomics is the division of economic that is concerned with individual decisions within an economy, a single consumer, a group, a firm, a country. It pertains to the working of individual markets. Microeconomics includes the following concerns.  Prices of goods  Value of land, labor, and capital  Specific markets: food, electronics, energy, etc.  Businesses, monopolies, and commercial empires  Employees and employers The Scientific Approach in Economics A science is defined as a systematic field of study which objects is to produce reliable explanations and solutions using experiment, observation, and deduction. In this manner, economics may also be considered as a science, because of the way it uses a scientific approach to understand the complex forces shape individuals and groups; and it is systematic body of knowledge their conforms to some universal laws.

Economics, however, is not an exact science like mathematics and physics. It is a social science because it explains how and why people behave the way they do, as individuals and in groups. It has general principles such as the Law of Supply and Demand but these do not apply in every situation to everyone. This is because human beings are so unpredictable. In the same way, no person can predict his next year‘s income or earnings, but he can use general projections to come up with estimates.

The Tools of Economics As a science, economics uses the following methods which compose a scientific approach to explaining many phenomena and issues in economics.    

Observation- this involves seeing and observing economic phenomena that are happening presently and that has happened in the past.

Economic Analysis- facts and historical events are available to any person or economist, but they have to see those phenomena in the light of certain assumptions and then come up with some projections using logic.

Statistics Analyses- Economics use statistics to perform their economic analysis.

Statistics include various data and information that are organized in a systematic manner.

Experiments- previously, economics do few experiments because it is very hard to perform controlled experiments in economics, the way they do in laboratories. However, economist nw use subjects in limited geographical areas to established control in their reactions of the people living in that area to certain economic phenomena.

Economic Sectors and Economics The world and its societies are composed of various economic sectors. Economics plays a major part in the daily lives, business and actions of these sectors. 

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Individuals- individuals struggle daily with such economic situations s employment, wages and wise spending. Economics affects each individual differently depending on their values, culture, or status in life. A rich person, for example, may not have so many problems with wage or spending as someone who‘s on a daily hand-to-mouth existence.

A household- household consists of two or more members, families or groups of families who cooperate for the purpose of living. Households can be classifies by the level of

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income, such as that of those below the poverty line or these earning below or above a certain monthly income. Households are income receivers which mean that they generate income, usually from members.

Economics is important to households and affects their daily functions as seen in such questions as should we save for the future? Or should we get fire insurance for our house? 

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Business- while the focus of individuals and households is consumption, the main objective of business forms is to satisfy the wants and needs of individuals and household, through the production of goods and services. Business is usually categorized as single proprietorships, partnerships, and corporations.

Government- this is the sector, composed of the leaders and prime movers of country, which sets its political and economic policies. Government as an economic sector is the ―visible hand‖ that directs the movement of the economy itself.

International Sector- the international economic sector refers to trade and business activities that happen between and among various nations. Production and consumptions vary among the different countries of the world.

The international sector is now a key economic sector because of increasing trade relations and the advent of globalizations. The growth of international trade has been spurred by various factors among them the following.

1. Technology, which includes faster and better methods of transporting goods, people, and services through modern cargo ships, airplanes, and vessels using state-of-the-art equipment; 2. Trade liberalization, which is the opening of markets to other countries together with an accompanying decreases on tariffs or import taxes; 3. Trade agreements among countries and regions of the world such as the Asia-Pacific Economic Conference (APEC) European Union (previously) known as the European Economic Community; and the North American Free Trade Agreement (NAFTA) among others.

The Uses of Economics Aside from understanding the different economic sectors, the student of economics should also be aware of the uses of economics. Because economics is both a science and art, it can make factual statements as well as judgments or evaluations of situations. These are known as the uses of economics. The first deals with descriptions of the economic situation, while the second is about prescribing solutions to economic problems.

Positive economics is about facts and existing situations regarding the economy. It deals with the following questions:  What is the minimum wage for city workers?  How will new taxes affect the spending power of consumers?  In what ways is Singapore ahead of the Philippines in terms of foreign investments?

On the other hand, normative economics is about norms, values, judgments, and ethical concerns regarding the economic and various economic situations. Normative economics deals with questions such as the following:   

Should government provide subsidy to recently terminated employees?

Should consumers patronize products which re cheaper but are of low quality or products which are more expensive but are of higher quality?

What percentage of the budget should families spend for their food?

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Philippine Economy: Then and Now After having learned some of the more fundamental concepts in economics, we may now take a look at the Philippine economy from pre-Spanish times to the present. While the economy of the country has continuously developed through the years, its progress has been on and off through the years.

The Spanish- Era Economy There were many changes in the economy with the coming of the Spaniards, but most were not for the benefit of Filipinos. There came up a national economy, but this was more of a fragmented national economy which replaced the previous independent tribal economies. 

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The Philippine economy during the Spanish era may be characteristics as follows: Agriculture industry and other facets of national economy were neglected as Spanish officials and friars scrambled to enrich themselves through means such as the galleon Trade where state and church funds were used to finance transactions; the forced payment of tributes by Filipinos; and tribes given to the officials for personal and political favors.

Oppressive Spanish policies devastated the livelihoods of many Filipino families. Among these is the polo which required forced labor adult Filipinos for a certain period, thereby leaving farming areas with no farm workers; and the bandala, a quota of farm goods given free to Spanish authorities. The later discouraged Filipinos from tending their farmlands.

Monopolies on various products such as gunpowder, wine, and tobacco were instituted, supposedly to pump up the economy, but these became avenues for more corruption by Spanish officials and oppression of Filipino workers.

To enliven foreign trade and the economy, ports were opened beginning in the 19 th century.

Manila in 1834, Iloilo in 1855, Cebu in 1860, and Tacloban in 1873. This did little in enriching the lives of common Filipinos.

Philippine Economy During the American Occupation  National economic plans and policies were put up. Although these emanated from the US Congress and the White House, thereby making them abashed with self-interest, the fact is that these national economic guidelines prompted better economic activity in the country.  There was a great influx of American-goods, from chocolates, suits, apples, and candies to cars and equipment. This made the taste of Filipinos sweeter for American goods and products.  Agriculture was given impetus, with emphasis on the development of rice, corn, and sugar.  Free trade between the United States and the Philippines grew, but there was criticism that the Philippines was at the losing and of the arrangement.

Philippine Economy Under the Japanese The Second World War destroyed the economies of many countries around the world. The Philippines was not spared. With the entry of the Japanese invaders in the country, the economy was placed in ruins.   

There was no clear and viable national economic policy in place. Because the Japanese were in the middle of a protracted war, they were not able to set up an effective government that would run an economy. It was an economy of ―day-to-day survival‘.

The war made it difficult for farmers, fishermen, and other workers to do their work. Many in the workforce joined the guerilla movement, preferring to be in the mountains to be able to fight the Japanese Agriculture and industry was at a standstill.

To make matters worse, the Japanese confiscated whatever food and provisions they could get their hands on. Filipinos responded by hoarding whatever food they can hide. The

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money circulated by the Japanese was not generally accepted by the people and had a bloated value, and was monickered ―Mickey Mouse money‖.

The Economy of an Independent Philippines The Philippines granted independence in 1946, confronted many problems and challenges.  The need to rehabilitate the economy devastated by the war, including the rebuilding of industries, the redevelopment of agriculture, and providing basic services.  The challenges of leadership and self-determination after centuries of colonial rule  The need to provide new hope for the economically dislocated Filipino people, whose jobs, houses, businesses, and sources of living were diminished by the war.

Terms to define 1. Bandala2. Scarcity 3. Microeconomics 4. Experiment 5. Households 6. NAFTA 7. Circular flow 8. Business 9. Macroeconomics 10. Government 11. Social science 12. Technology 13. International sector 14. Trade agreement 15. Trade liberalization Follow-up Questions 1. Given your own understanding of economics, and the definitions provided, formulate your own definition of economics.

2. Relate economics to household management.

3. What do you think are the benefits you can get by studying economics?

4. Why is scarcity the basic problem in economics?

5. Explain the government‘s role in the economy of nation.

Lesson 2

Resources and Environment

The economy of a particular country and even of the whole world depends on the viability of resources as well as the physical environment. Resources are materials that are used to help satisfy human needs, resources include natural resources, such as include natural resources, human resources, and physical resources.

The physical environment, on the other hand, consists of everything that exists within and around us, including the climate and weather, the characteristics or topography of the land, and the presence or absence of particular natural resources.

The interplay or interaction between these resources and the physical environment contributes greatly to the state of the economy of the nation and the world. It is very important to understand what constitutes these resources and environment.

The World’s resources

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The earth‘s natural resources are the stock of raw materials that are used by people in getting their various needs like food, shelter, and clothing. Among the major resources are the following:

Renewable natural resources Renewable natural resources are those that can be replaced naturally within a certain period, such as forest, soils, plants and animals, and water.

1. Forest are large areas of land covered by trees, which have grown naturally for centuries and include shrubs, mosses, wild flowers, and other small plants.

The economic values of forest are: 1. It supplies wood from trees, including timber and plywood. Wood is used for making houses, furniture, and fuel for heating and cooking; paper, plastics, and fibers.

2. It provides rubber, oils, latex, and various other materials; 3. It provides forest plants and animals which are used for food and medicines.

The world‘s forest may be classifies according to various geological formations, as follows: Boreal forests have one layer of 20-meter trees. Also called taiga, these forest have mostly needle leaf evergreen trees, with layers of shrubs, mosses and lichens, and are the home of mammals such as mice, wolves, beavers, and bears. These forest are usually found in northern Asia, Europe, and America.

Temperate deciduous forest consists mainly of broadleaf deciduous trees with shrubs and herb layers growing of fertile soil. They have rich plant and animal life, including bigger animals like leopards and tigers. These forests are usually found in Europe, and un parts of east Asia.

Temperate evergreen forest consists of needleleaft, redwood, and eucalyptus trees, as well as liverworts and ferns. These are usually found in North and South America, as well as in Pacific, where they are home to native flora and fauna.

Mediterranean forests consist mainly of evergreen oaks and laurels and thrive in moist winter and hot summers. They are home to snakes, lizards, and are rich in sects. Aside from the Mediterranean, these types of forest are also found in Africa and Australia.

Tropical rainforest have a wide array of trees, but mostly broadleaf evergreens, with shrubs, herbs, and climbing plants, they have the richest variety of plants and animals, and new species are always discovered in this type of forest. Animals in tropical rainforest include bats and monkeys, and groups of frogs and lizards. Most tropical rainforest are found in South America and Southeast Asia.

Savannas are forest where trees are widely spaced, and where most of the grounds are covered by shrubs, herbs, and grasses, which is why they are mistaken for grassland. The savanna is home to large mammals such as giraffes, elephants and lions, and this type of forest is found mainly in Africa.

Mountain forest consists of deduction, needleleaf, and pines. Deer, bears, and the panda live in this kind of ecosystem, which is found in the mountains of Europe and Asia.

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Soils are another renewable resource, and are very important because it is where most living things get their food sources. Soils contain various particles, such as minerals, which serve as nutrients for plants: plant and animal matter, the decay of which enriches and renews the soil; water, which is component in the soil solution; and air, which occupies pore spaces in the soil.

The economic values of soils are: 1. They serve as sources of food for plants and animals, which are both used by man; 2. They serve as grazing land and shelter for herds.

Plants are a very important economic resource, and in fact it is crucial to life itself. Plants come in a variety of forms and shape, in different types, and hundreds of thousands of species have been identified, and possibly even more.

Animals are considered also as valuable resources and are so diverse that no one knows exactly how many they are. There are a million kinds of insects, and thousands of kinds of fish, birds, reptiles, amphibians, and mammals.

Nonrenewable Resources These are resources that cannot be replaced anymore. Thus, there is a need to use them efficiently. Because it takes a very load long time for these minerals to form, they are being used faster than they can form, thus the term nonrenewable.

1. Coal. This is a kind of rock that can be burned to produce that and energy. Coal comes from the remains of plants that died millions of years ago, and formed thick layers of matter which eventually developed into rocks. This why is called fossil fuel. Coal is used to produce electricity from coal-burning power plants and to produce coke for manufactured of steel. Most industrialized countries utilize coal for their energy needs.

2. Petroleum. This is currently the leading energy resource in the world, and almost all machineries, equipment, and vehicles are petroleum products. It also provides electricity and power to households and businesses. It is more generally known as oil, and is sometimes called black gold for the wealth it has brought for its producers.

Recyclable Resources These are resources that may be used more than once, or converted into different forms.

1. Aluminum. This is a light metal that can be formed and reformed into any shape possible.

One of its best qualities is that it does not rush.

2. Copper. Copper is a reddish-orange metal that has been used since ancient times. It is a conductor of electricity, and is malleable enough to be patterned into shape.

3. Gold. This is one of the earliest known metals and has been a symbol of wealth for people.

This metal is beautiful to look at, and is also malleable, ductile and resistant to rust. It is presently used for the production of jewelry and for various ornamental purposes.

The Earth’s Physical Environment The earth, the only planet that is habitable for living beings, consists of about 30% land and 70% water. The lands are subdivided into various masses called continents.

Continent Asia Africa North America South America Antartica Young Ji International School / College

Area in sq. kilometers 44,0009,000 30,246,000 24,219,000 17,832,000 14,000,000 Page 8

Europe Australia

10,443,000 7,713,300

A continent is one of several very large landmasses on Earth. They are generally identified by convention rather than any strict criteria, with up to seven regions commonly regarded as continents. These are (from largest in size to smallest): Asia, Africa, North America, America, Antarctica, Europe, and Australia.[1] In geology, continents are described by means of tectonic plates. Plate tectonics is the process and study of the movement, collision and division of continents.

Conventionally, "continents are understood to be large, continuous, discrete masses of land, ideally separated by expanses of water. Many of the seven most commonly recognized continents identified by convention are not discrete landmasses separated by water. The criterion "large" leads to arbitrary classification: Greenland, with a surface area of 2,166,086 square kilometers (836,330 sq mi) is considered the world's largest island, while Australia, at 7,617,930 square kilometers (2,941,300 sq mi) is deemed a continent. Likewise, the ideal criterion that each be a continuous landmass is often disregarded by the inclusion of the continental shelf and oceanic islands, and contradicted by classifying North and South America as two continents; and/or Eurasia and Africa as two continents, with no natural separation by water. This anomaly reaches its extreme if the continuous land mass of Europe and Asia is considered to constitute two continents. The Earth's major landmasses are washed upon by a single, continuous world ocean, which is divided into a number of principal oceanic components by the continents and various geographic criteria. Continents are sometimes extended beyond the major landmasses, in a way that every bit of land on earth is included in a continent.

Extent of continents The narrowest meaning of continent is that of a continuous area of land or mainland, with the coastline and any land boundaries forming the edge of the continent. In this sense the term continental Europe (sometimes "the Continent") is used to refer to mainland Europe, excluding islands such as Great Britain, Ireland, Malta and Iceland, and the term continent of Australia may refer to the mainland of Australia, excluding Tasmania and New Guinea. Similarly, the continental United States refers to the 48 contiguous states in central North America and may include Alaska in the northwest of the continent (the two being separated by Canada), while excluding Hawaii in the middle of the Pacific Ocean.

From the perspective of geology or physical geography, continent may be extended beyond the confines of continuous dry land to include the shallow, submerged adjacent area (the continental shelf) and the islands on the shelf (continental islands), as they are structurally part of the continent. From this perspective the edge of the continental shelf is the true edge of the continent, as shorelines vary with changes in sea level. In this sense the islands of Great Britain and Ireland are part of Europe, while Australia and the island of New Guinea together form a continent.

As a cultural construct, the concept of a continent may go beyond the continental shelf to include oceanic islands and continental fragments. In this way, Iceland is considered part of Europe and Madagascar part of Africa. Extrapolating the concept to its extreme, some geographers group the Australasian continental plate with other islands in the Pacific into one continent called Oceania.

This divides the entire land surface of the Earth into continents or quasi-continents The ideal criterion that each continent be a discrete landmass is commonly disregarded in favor of more arbitrary, historical conventions. Of the seven most commonly recognized continents, only Antarctica and Australia are completely separated from other continents.

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Several continents are defined not as absolutely distinct bodies but as "more or less discrete masses of land"[Asia and Africa are joined by the Isthmus of Suez, and North and South America by the Isthmus of Panama. Both these isthmuses are very narrow compared to the bulk of the landmasses they join, and both are transected by artificial canals (the Suez and Panama canals), which provide maritime passage across these landmasses.

The traditional division of the landmass of Eurasia into the continents of Asia and Europe is an anomaly, as no sea separates them. The alternative view—in geology and geography—that Eurasia is a single continent result in a six-continent view of the world. Some view separation of Eurasia into Europe and Asia as a residue of Eurocentrism: "In physical, cultural and historical diversity, China and India are comparable to the entire European landmass, not to a single European country. A better (if still imperfect) analogy would compare France, not to India as a whole, but to a single Indian state, such as Uttar Pradesh." However, for historical and cultural reasons, the view of Europe as a separate continent continues in several categorizations.

North America and South America are treated as separate continents in the sevencontinent model. However, they may also be viewed as a single continent known as America. This viewpoint was common in the United States until World War II, and remains prevalent in some Asian six-continent models. This remains the more common vision in Latin American countries, Spain, Portugal, France, Italy and Greece, where they are taught as a single continent. From the 19th century some people used the term "Americas" to avoid ambiguity with the United States of America When continents are defined as discrete landmasses, embracing all the contiguous land of a body, then Asia, Europe and Africa form a single continent known by various names such as AfroEurasia.

This produces a four-continent model consisting of Afro-Eurasia, America, Antarctica and Australia.

When sea levels were lower during the Pleistocene ice age, greater areas of continental shelf were exposed as dry land, forming land bridges. At this time Australia-New Guinea was a single, continuous continent. Likewise the Americas and Afro-Eurasia were joined by the Bering land bridge. Other islands such as Great Britain were joined to the mainland‘s of their continents. At that time there were just three discrete continents: Afro-Eurasia-America, Antarctica, and Australia-New Guinea.

Terms to Identify 1. petroleum 2. forest 3. animals 4. resources 5. soil 6. NSCB 7. Copper 8. Literacy 9. plant 10. human resources 11. savanna 12. deforestation 13. taiga 14. gold 15. aluminum 16. natural resources 17. physical resources 18. physical environment Young Ji International School / College

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19. coal 20. functional literacy Follow-up Questions 1. What are resources? How are these utilized by man?

2. Differentiate natural resources, human resources, and physical resources.

3. Explain the negative effects of deforestation. State how it may be prevented.

4. Why are forest considered as renewable natural resources? What do forests provide to people?

5. Elaborate on the economic benefits of soils.

6. What are nonrenewable resources? In what manner should these be utilized?

Activity 1. Research on the concept of deforestation. Then write a one-page essay about what is being done about it presently.

Lesson 4 Consumption Aside from scarcity, allocation, wants, and needs, another key economic concept is consumption.

Consumption is the overall spending on consumer goods by individuals, groups, and even nations in a particular time frame. Consumption may be traced to the basic economic problem of scarcity, as well as people‘s wants and needs. As people continue to fulfill their wants and needs, they would naturally consume and spend for goods. The way the consumers would behave is called consumer behavior.

The Theory of Consumer Behavior The idea behind the theory of consumer behavior is that consumer makes their choices on their incomes, the prices of the goods, and their own preferences.

For example, a parent may decide what gift he may give to a child. Will it be a toy? A very delicious delicacy? Or a trip to the mall? A girl, on the other hand, may make a choice between buying a nice blouse or a stylish pants.

Factors that Affect Consumer behavior 

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Wealth- a person‘s wealth affects how consumers goods. For example, someone who has one million pesos in the bank would probably consume more that someone who has no savings at all. More wealth tends to lead to higher consumption. This behavior called the wealth effect is seen in the fact that rich people have an abundance of things in their houses.

Income- the amount of earnings that consumers get from their work or business activity also affects their spending or consuming habits. Of course, income is mostly limited, so consumers are restricted by their own budget. Just like wealth, the more income the person has, more likely that he will spend more.

Prices- the prices of goods and services also have a considerable effect on the consuming habits of people. Generally, people purchase lower-priced products, but other factors uch as the quality of the product or its attracting to the consumer could affect the price, even if is low or high.

Psychological factors- these also come into play as the consumer decides which goods to consume. Among these are the consumers‘ desire to get the most for their money or utilize it to the fullest. Housewives, usually the bidget managers of households, often by their best to extend the family budget to its maximum use, usually buying only the bare essentials before buying any other item.

Advertising and Consumption Young Ji International School / College

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As mentioned, consumers are affected by various factors in the process of what goods to purchase or consume. One of the factors that has a very big impact on the consumption behavior of people, especially on their psychological makeup, is advertising.

Advertising is any paid information or message that promotes a belief, products, or services. It has been defined as ―a paid form of non-personal presentation of ideas, goods, and services by an identified sponsor‘ by the American marketing Association.

Adverting has been used by individuals, groups, companies, and even continue to promote their products or advocacies. These groups and companies spend a big sum of money and a large percentage of their budgets for advertisings purposes.

Reasons for Advertising Why are groups and companies willing to spend much for advertising? Following are the major reasons:  To increase sales- the effect of advertising on consumption has been correlated by various studies of companies themselves. This is the reason why they have been continually advertising their goods and services despite the high cost that it entails.  To defeat competition in the market- given two companies with the same resources and production capacity, the one with more and better advertising would have an advantage.  To continue brand loyalty- companies sell their products using brand is sustained in the minds of the consumers. Indeed, brand recall can be seen I the fact that people, when buying, do not say that they want to buy a particularly product, but more often mention a brand name.  To maintain contain reputation and standing- companies used advertising to ensure that they maintain a particular standing in the business community. Companies that advertise a lot are seen as big players in their industry.  To promote corporate values- organizations and corporations may have a particular value or advocacy that they want to promote to the general public, and they utilize advertising for this purpose.  To create new products- industries may create new products, but they just cannot put them on the shelves of supermarkets or stores. They have to inform the consuming public about the new product and what it offers.

The Good and Bad Side of Advertising There have been two opposite views of advertising. Both critics and proponents of advertising have cited various reasons to support their particular ideas about it.  Advertising informs consumers about a product, what it offers, and its features, amking them able to compare similar products and helping them make wise and informed decisions about what products to purchase.  Advertising creates a totally, independent advertising industry which gives opportunity for people to be creative and have jobs, in effect, providing a benefit to the economy.  Advertising creates a totally independent advertising industry which gives opportunity for people to be creative and have jobs, in effect, providing a benefit to the economy.  Advertising allows the communication of a message or commercial values in a way that could be suitable, direct, or point-blank, which cannot be communicated in an ordinary manner.  Advertising provides income and incentives to media, particularly the television and radio broadcast industries, which rely on advertisements to fund programs so that tehse can be provided free to the general public, and the print media, which rely on print ads to provide a cheaper pride for their publications.

Knowing About False Advertisements

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With all sorts of advertisements around us, consumers should be aware about false advertisements, or ads that sell false information, disinformation, or information that may only be partially true. To be aware of false advertisements, remember the following.

1. Take note of all the FACTS that are being said, shown, or reveled in the ad For example, is the size of the burger being shown larger that how it actually looks? You can go check it in the fast-food restaurant. Does the price display the exact amount that you will be paying, or are there taxes and hidden cost involve?

2. See if the advertisement comes with an exaggerated appeal to emotion and basic instincts.

Are we being led to but simply because our favorite actor and celebrity are promoting the product, or do we really prefer to have it by our own liking?

3. Be informed about the latest news and technologies. This way, you will know whether any claim made in an advertisement is scientific or valid.

4. In general, look at any advertisement with an open mind and a grain of salt. Remember that the main purpose of advertisement is to entice consumers to buy, and that includes you.

Protecting the Consumer After learning the concept of advertising, we may now focus on the consumer. Advertising, after all, is just one facet that can considered when consumers decide what to purchase during the act of consumption.

Republic Act 7394, the Consumer Act of the Philippines, was specifically enacted by Congress to protect the interest and general welfare of the consumer. Among its basic policies which are included in the general provision of the Act are the following: 1. Protection against hazards t health and safety; 2. Protection against deceptive, unfair and unconscionable sales acts and practices; 3. Provision of information and education to facilitate sound choice and the proper exercise of rights by the consumer; 4. Provision of adequate rights and means of redress 5. Involvement of consumer representatives in the formulation of social and economic policies.

Aside from scarcity, allocation, wants, and needs, another key economic concepts is consumption.

Consumption is the overall spending on consumer goods by individuals, groups, and even nations in a particular time frame. Consumption may be traced to the basic economic problem of scarcity, as well as people‘s wants and needs. As people continue to fulfill their wants and needs, they would naturally consumers and spend for goods. The way the consumers would behave is called consumer behavior.

THE THEORY OF CONSUMER BEHAVIOR The idea behind the theory of consumer behavior is that consumers make their choices based on their incomes, the prices of the goods, and their own preferences.

For example, a parent may decide what gift he may give to a child. Will it be a toy? A very delicious delicacy? Or a trip to the mall? A girl, on the other hand, may make a choice between buying a nice blouse or stylish pants. A student may opt to buy a body by a favorite author and not another book.

All these consumption choices are affected by some common factors.

FACTORS THAT AFFECT CONSUMER BEHAVIOR How consumers behave in the act of consumption depends on several factors which economists have identified as follows:  Wealth- a person‘s wealth affects hw he consumes goods. For example, someone who has one million pesos in the bank would probably consume more than someone who has no savings at all. More wealth tends to lead to higher consumption. This behavior, called wealth effect, is seen in the fact that rich people have abundance o things in their houses.  Income- the amount of earnings that consumers get from their work or business activity also affects their spending or consuming habits. Of course, income is mostly limited, so consumers are restricted by their own budget. Just like wealth, the more income the person has, the more likely that he will spend more.

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Prices- the prices of goods and services also have a considerable effect on the consuming habits of people. Generally, people purchase lower-priced products, but other factors such as the quality of the product or its attraction to the consumer could affects the price, even if it is low or high.

Psychological factors- these also come into play as the consumer decides which goods to consume. Among these are he consumers‘ desire to get the most for their money or utilize it to the fullest. Housewives, usually the budget manages of household, often by their best to extend the family budget to its maximum use, usually buying only the bare essentials before buying any other item.

ADVERTISING AND CONSUMPTION As mentioned, consumers are affected by various factors in the process of what goods to purchase or consume. One of the factors that has a very big impact on the consumption behavior of people, especially on their psychological makeup, is advertising.

Advertising is any paid information or message that promotes a belief, products, or services. It has been defined as an ―a paid form of non-personal presentation of ideas, goods, and services by an identified sponsor‖ by the American Marketing Association.

Advertising has been used by individuals, groups, companies, and even countries to promote their products or advocacies. These groups and companies spend a big sum of money and a large percentage of their budgets for advertising purposes.

Reasons for Advertising Why are groups and companies willing to spend much for advertising? Following are the major reasons:  To increase sales- the effect of advertisings on consumption ha been correlated by various studies of companies themselves. This is the reason why they have been continually advertising their goods and services despite the high cost that it entails.  To defeat competitions in the market- given two companies with the same resources and production capacity, the one with more and better advertising would have an advantage.

This is particularly true if the competition is between two leading companies for similar goods or offerings, as can be seen in the stiff competition.  To continue brand loyalty- companies sell their products using names, and consistent advertisings ensures that the brand is sustained in the minds of the consumers. Indeed, brand recall can be seen in the fact that people, when buying, do not say that they want to buy a particular product, but more often mention a brand name. Among most valuable brand names in the world are Motorola (electronics).  To maintain company reputation and standing- companies use advertising to ensure that they maintain a particular standing in the business community. Companies that advertise a lot are seen as big players in their industry.  To promote corporation values- organization and corporation may have a particular value or advocacy that they want to promote to general public, and they utilize advertizing for this purpose.  To create new products- industries may create new products, but they just cannot put them on the shelves of supermarkets or stores.

The Good and bad Side of Advertising There have been two opposing views of advertising. Both critics and proponent of advertising have cited various reasons to support their particular ideas about it.  Advertising informs consumers about a product, what it offers, and its features, making them able to compare similar products and helping those wise and informed decisions about what products to purchase.  Advertising creates a totally independent advertising industry which gives opportunity for people to be creative and have jibs, in effect providing a benefit to the economy.

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Advertising allows the communication of a message with political or commercial values) in a way that could be subtle, direct, or point-blank, which cannot be communication in an ordinary manner.

Knowing About False Advertisements With all sorts of advertisements around us, consumers should be create about false advertisements, or ads that sell false information, disinformation, or information that may only be partially true. To be aware of false advertisements, remember the following: 1. Take note all the fact that are being said, shown, or revealed in the add For example, is the size of the burger being shown larger that how it actually looks? You can go check it in the fast food restaurant. Does the price display the exact amount that you will be paying, or are there taxes and hidden costs involved?

2. See if the advertisement comes with an exaggerated appeal to emotion and basic instinct.

Are we being appeal 3. Be informed about the latest news and technologies. This way, you will know whether any claim made in advertisements is scientific or valid.

4. In general, look at any advertisements with an open mind and a grain of salt. Remember that the main purpose of advertisements is to entice consumers to buy, and that includes you.

The Rights of the Consumer Taking into account that the consumer has responsibilities, he also has rights that he should assert and protect. The following are the rights of the consumer as provided by the International Organization of Consumer Unions.  Right to Basic needs- as citizens of a country and as consumers, we have the right basic needs such as sufficient food and water, clothing, shelter, health, education, and basic services. These are things that the ordinary consumers should be able to afford, which means that they should be sold at the right price, and at the most affordable price possible.  Right to safety- consumes should be assured that products in the market are safe, and that they are protected from any product or good that may do harm to health or life.  Right to information- consumers should be informed about any news or issues regarding product, service, or anything that has to do with consumption, especially those with regard to pricing, safety, and standards.  Right to Be Heard- the voice of the consumer, his opinions and comments regarding a product or consumer policy, should heard in any forum, and consumer input should be respected and uses as basis for consumer policy.  Right to Complain- the consumers has all the right to complain about overpricing, substandard quality of goods or services, or any other matter that would jeopardize a fair deal for him.  Right to Choose- consumers have the right which product they will choose among two or more competing products. They should not be coerced or intimidated into buying any good, product, or services.  Right to Consumer Education- consumers have a right to be given consumer education where they will learn their responsibilities, their rights, and the actions that they should take regarding any issues on consumption.  Right to a Sale Environment- the buying of goods should be done in the safest environment as possible, free from crime or unsafe conditions, so that consumers will not fear anything while they are doing their purchasing of products.

THE CONSUMER AND DAILY LIFE As the consumer goes about in his daily life, he confronts many practical problems and challenges. Primary among these are 1) how to get the best quality products without being defrauded; and 2) how to spend wisely and budget the money he has properly earned.

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Frauds and scams are part of the everyday life of the consumer. Frauds are acts of deception that victimize the consumer, while scams are schemes that promise a gain, but eventually result into a loss for the consumer. The following are some of the more common frauds and scams that victimize consumers:  Shortcoming- sellers sometimes shortchange the buyers, sometimes by a big amount. The scheme is done using the quick hands of the seller, and when the change is given, the consumer will go home thinking he has the right change, but he actually has less.  Defective Weights- for goods that require weighing, this may pose a problem. Some weighing scales are not up to standards, and may have been tampered to gain some weight in favor of the seller. Some of the weighing containers may even be heavier than normal.  Adulterated and Unfit Goods- some sellers try to sell goods which have already expired or are past their period of freshness. This is especially true for canned goods where the explain dates have been erased. Some products may be imitations or counterfeits of the original. Most products that can be adulterer are under the food, drugs, and cosmetics category.  False Information- false information on products or services may come in the form of fraudulent advertising, which claims, half-truths, and misleading brands that copy or imitatae the logo or brand name of leading products.

Learning to Spend Wisely Aside from confronting frauds and scams another challenge for the consumer is how to spend and budget money wisely.

Because proper consumption requires the wise use of resources, it is important for the consumer to know kinds of consumptions. These are: 1. Extravagant Consumption- this is consumption of expensive goods, high above the means of the consumer. Or even if the consumer is wealthy, the gods are not worth the price. Sometimes this is done to gratify certain psychological needs, such as the needs to be praised or recognized.

2. Harmful Consumption- this pertains to the consumption of cigarettes, liquor, or even illegal drugs which are actually harmful to the consumer. It is ironic that people are willing to spend for things that would later make them sick, as countless lung and liver cancer cases will prove.

3. Wasteful Consumption- this is about buying things for the sake of buying and not the things bought. This is about collecting 1, 000 pairs of shoes or 500 pieces of clothes in your room and not being able to use them.

4. Wise Consumption- this is about spending money to its fullest capacity, which means that the consumer gets his money‘s worth and uses resources to his advantage.

After learning about the different kinds of consumption, let us now go to some measures that could be taken by the consumer to be able to do wise consumption- spending and budgeting money property. These are as follows.  Wants and Needs- as we have learned in the previous lesson, needs are something that we must have while wants are something that we would like to have. Realizing this, the consumer must be able to identify what are his wants and needs, and then prioritize his needs first before providing for his wants. He should purchase basic necessities first before buying luxuries or other items.  List of Items to Buy- consumer should have a list of items to buy before going to the market or grocery. This way, he will be able to budget his money and prevent any unnecessary expenses or purchase.  Comparison of Prices- if at all the consumer would spend time in the market, then it should be to compare prices of related items to be able to see what product would he gain most. For example, he should consider not only one brand of milk but also compare there or more brands.

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Bulk Buying- if the consumer is true that he will be using a particular product for a long time, then he may consider bulk buying, simple because bulk buying are lower. For example, bigger containers for catsup and condiments would definitely have lower prices per volume.

Terms to define 1. Price2. Extravagant consumption3. Bulk buying4. Consumer education5. Fraud6. Corporate values7. Scam8. Consumer act9. Wise consumption10. Income Follow-up Questions 1. Describe the idea of consumption. How will you defined consumption using your own words?

2. Explain the theory of consumer behavior.

3. In what way does wealth affect consumer behavior? Elaborate on the wealth effec6t and give examples.

4. What is your opinion of advertising? Is it good or bad for the economy? Defend your answer.

5. Why is it important for consumers to be informed about new products?

Lesson 5 Production and Business Organizations Everything that we see around us is the result of production. Every good, product, or service is the consequence of production. We can observe, as we delve further into the study of economics that much of its ideas revolve around the concepts of production.

The Concepts of Production We have studied the basic economic problem-that of scarcity- and with people‘s unlimited wants and needs, that would indeed be a problem. Economists have pointed to the proper allocation of resources as the main solution to the problem. However, nothing could be allocated if it is not first produced.

Production, then, is the method of creating goods and services using various resources and materials. Production of goods and services is the first stage in solving the problems of scarcity and makes possible the allocations of resources.

You can look at your surroundings and see various factories, offices, and business organizations. These firms are mostly involved in production. Factories may be producing services in the form of janitorial or household assistance. These are all goods which are produced in the daily course of business.

The factors of Production The success of production depends on the proper utilization of four factors, namely: 1. Land- includes arable land, forests and fields any territory, and natural resources such as mineral and water resources that are used in production.

2. Capital- the tools, machinery, equipment, transportation, and all other investment goods that aid in production.

3. Labor- pertains to the physical exertion, individual talents, and abilities of people who work towards the production of certain goods.

4. Entrepreneurial Ability- the special to combine land, labor, and capital to produce goods or services.

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Land as factor of production Land includes all things natural which are utilized for the production of goods. Mountains, forest, fields, and even caves may be considered as part of this category. Land is important because it is where raw materials come from- including wood from forest, oil from deep down the earth, and fish products from bodies of water.

Capital as factors of production Capital consists of all the machinery, equipment, and facilities that are used to produce goods or services. Simply put, capital consists of goods that are used to produce other goods.

Capital is not simply the money that is used for investments. Because money itself does not produce any other good or service per se, it is not considered as capital.

Land as a factor of production Labor consists of the physical and mental exertions, talents, and abilities provided by people and workers towards the production of a good or services. The act of putting sardines in a tin can, done by a factory worker, the computations done by an accountant; and the oral delivery and performance done by a teacher all fall under the category of labor.

The important of labor is a family obvious-without people, land and capital cannot be utilized because nobody would work n the materials, resources, tools, and equipment. While automation is fast becoming part of industry, people are still ones operating the automated, machines?

Entrepreneurship as factor of Production Entrepreneurship or entrepreneurial ability is the skill of a person in combining land, capital, and labor to come up with a good or service which would benefit other people, and him or her personally. Entrepreneurs may be the owners or the top officers of organizations, companies, factories, or firms, and they direct the operations of a company toward the creation of their particular product.

The importance of entrepreneur ability is paramount-without clear and proper directions- the combination of land, capital, and labor would crumble. Land or natural resources utilized may be of the wrong type; capital; goods and equipment may not be property utilized; and the men and women working may not know what to do.

But entrepreneurial ability does not only consist of knowing how to give directions or orders to employees.

Business Organizations Since production is so important for the economy, business organizations are needed to accomplish this task of production. Individuals simply cannot perform the production of goods in large quantities in order to satisfy the wants and needs of the general population.

So why do we need business organization an large firms to produce goods and services?

This is because of the following reasons.  Business organizations can produce large quantities of goods and services that can sufficiently satisfy the demand of the larger public, such as thousands of air-conditioning units, or tons of bread. This capacity to do mass production necessitates logistics and equipments that no individual can produce.  Business organizations can rather enough resources to ensure continuous production over a period of time. An increase in production requires the need for more raw materials, machinery, or workers. A project may require billions of pesos to continue for example.

Individuals simply cannot cope up with such exigencies.  Business organizations provide an efficient management of production. These managers have managers at various levels, and production is organized in the most efficient manner possible. Labor, equipment, and materials are carefully combined and their outputs or results monitored, towards better production.

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Types of Business Organization 1. Single Proprietorship- these are businesses owned and operated by individuals. These come in the form of neighborhood shops or small stories usually in the vicinity of villages or local areas. The sole proprietor or manager manages the materials, equipment, as well as all other requirements of the business, and personally sees to every aspect of the undertaking.

This type of business is largest in terms of number, but on the average, they have the lowest sales, generating small profits for their owners.

2. Partnerships- partnerships consist of two or more individuals that combine their talents and abilities to form and operate a business. This type of business may develop from single proprietorships, or simply from the agreement of two or more persons. Lawyer, accountants, and writers, for example, may pool or combine their talents to come up with a consultancy firm that would offer their expertise to the public.

3. Corporations- a corporation is a legal entity or legal personality that exists the laws of countries. Under these laws, corporation are regarded as distinct persons which are different and separated from their owners, and which have the right to produce from their distribute goods and services, acquire and dispose assets and enter into contracts and agreements, just like any flesh and blood person.

The following are some of the advantages of corporation as business firms: 1. It is considered as a legal entity and such, may conduct business on its own. For example, a certain corporation may enter into a contract with another party, but sole proprietorships and partnerships cannot; the owners and patterns would have to enter an agreement personally.

2. Stockholders of corporations have limited liability, that is, they cannot be held responsible for losses, debts, or damages incurred by the corporation for more than the total amount of the shares they own. For example, a stockholder who owns 1,000 shares with total values of P 10, 000 would risk that particularly amount only, in case of company liability.

3. Corporations are efficient in raising money and capital for its operations because o certain strategies provided to it by law. It can sell stocks and securities, and even engage in other businesses side from its main trade. Because of their assets and financial strength, banks and other financial institutions trust corporations more than the other types of business and provide them with loans, credit, and various financial arrangements.

4. The financial capability of corporations, aside from the combined strength of individuals who own, mange, and work for them, enables these companies to provide new technologies and more efficient production and distributions. This expands their materials and allows then to offered new products and services. The result-more profit for the companies and their stockholders.

5. A corporations has permanence that is unique for its personality-this is because its because may come and go, leave or die, but the corporation will continue to exists as long as it is recognized by the government.

6. Corporations are usually managed by expert individuals carefully selected for their and abilities. Because of this, decisions are made more wisely as majority approval is needed before certain project or policies can be implemented.

But while corporations have many advantages, they also have some disadvantages: 1. Corporations usually encounter bureaucratic red tape and legal problems in getting a corporate personality or legal status in a particular territory. Some territory have strict laws in granting a corporate charter especially for foreign-controlled corporations, while others have tax policies so as to promote investments.

2. Some unscrupulous individuals use the legal and financial structure of a corporation to serve as a front for their illegal activities.

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3. Government harassment and unstable political conditions can sometimes severely affect the performance of corporation. Because they are large firms, corporations are usually at the losing end of changes in government leadership and business.

Terms to Define 1. Partnership 2. Capital share 3. Labor 4. Stockholder 5. Board of Directions 6. Corporation 7. Production 8. Land 9. Entrepreneur 10. Limited liability 11. Legal personality 12. Business organizations 13. Single proprietorship 14. Perpetual succession Follow –up Questions 1. Explain the concept of production as a component of the economy.

2. Differentiate the four factors of production.

3. In what way does land contribute to the production of a good or service?

4. Illustrate the role of capital in the production process.

5. How important is labor in producing goods and services? Defend your answer.

6. Explain how the entrepreneur takes all other factors of production to product a good or services.

7. Why are business organizations necessary in an economy?

8. What are the types of business organizations? Differentiate each.

9. Explain the disadvantages of corporations.

Lesson 6 Microeconomics We have learned in an earlier lesson that microeconomics is the component of economics which deals with individual units and concepts with the scope of microeconomics (households, individuals markets, and particular prices) and the questions that it would answer.

UNDERSTANDING THE CONCEPTS OF DEMAND One of the key microeconomics concepts that of demand. Demand may be defined as a pattern or schedule showing different quantities of a product that consumers can purchase given possible prices within a certain time period. Simply put, demand represents shown as a demand schedule in tabular form or as a demand curve.

The Demand Schedule The following table shows a demand schedule for consumers who are purchasing kilos of rice.

Demand for Rice Price (per kilo) Quantity Demanded (kilos per week) P 30 50 28 60 26 80 24 100 24 120 Young Ji International School / College

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The table clearly shows how the price of rice related to the quantity that buyers would be willing and able to purchase. Willingness and ability are both important in the purchase of products. A consumer have the capacity to buy it, but may prefer to buy corn instead (the data given is a hypothetical sample and may not represent real world figures).

The data illustrate that at P 30 per kilo of rice, consumers would be willing and able to purchase 5 kilos per week. But as the price falls, the quantity demanded would increase, and at P 22 per kilo, consumers are willing and able to buy 120 kilos per week.

The Demand Curve When the demand schedule is placed in a graph, it will show the demand curve, and the inverse relationship between the period of a product and the quality demanded is more clearly illustrated.

The chart was plotted with the price of the product on the vertical (y0 axis, and the quantity of the product on the horizontal (x) axis, with each of the points showing a particular price-demand quantity relationship. The resulting curve, which is the demand curve, has a slope going downward.

The clearly shows that the price of goods and the quantity demanded are inversely related.

The Law of Demand The demand schedule, the demand curve, and the inverse relationship between the price of goods and the quantity demanded bring us to the law of demand which illustrates fundamental characteristics of demand.

The law of demand states that: all things being equal, the quantity demanded for goods increases as price falls; while the quantity demanded for goods decreases as price rises. This simply means that price and quality demanded are, in fact, inversely related, and that generally, consumers will buy more of products as its price decreases, and will buy less of a product as its price increases.

This property or laws is also called the law of downward sloping demand, as you can see in the direction of the demand curve. The law of demand has been tested in many actual situations, experiments, and research studies, and has been verified with various types of goods and products. Plain common sense also supports this law. Anyone, of course, would ordinary not buy or buy less if the price high, and buy more if the price is low.

The price of cellphone, for example, were then so high that only the really wealthy could afford it during its initial years. As time went by however, greater demand worldwide proposed more companies to manufacture and produce cellphones. Increasing competition then brought the prices down, and thus, the demand for cellphones increased the more. As prices continued to drop, even those who additional units for various purposes, which led to greater and greater demand for the product.

Demand and Everyday Living The concept of demand is inherent in everyday family life. Individuals and households generally live within the constraints of a budget of a budget, and are very sensitive changes in the prices of goods.

When demand for a good or product increase or decreases with its corresponding rise and fall in places, then individuals and consumers tend to react in a variety of ways, as follows:  Substitution Effect- this suggests that, as the price of a product increases, people usually substitute a similar but cheaper product for it. For example, if the price of rice increases, then consumers may substitute bread for it, if in case bread is currently cheaper than rice.  Income Effect- this suggests that, as the price of a product decreases, a consumer becomes ―richer‖ because his income and purchasing power would increase, enabling home to buy more of a [product and without disregarding the other goods. On the other hand, as the prince of a product increases, consumers become ―poorer‖, forcing them to decrease their demand for the product.

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The above effects show how everyday living individuals and households is affected by this thing called demand. But ether is also factors that affects demand itself and we need to understand them.

Factors that Affect demand When demand was earlier described in relation to the prices of goods it was stated that demand rises when prices become low, and vice versa, but this assumes that all other things are equal. This is also other factors that affect demand.

These factors are called determinants of demand, and a change in any of these determinants would have a great effect on the demand for a product or service. These determinate are as follows.  Consumer Income- this pertains to the average income of consumers. As the income of people rises, it is but natural for them to purchase more goods and products, especially those that are not usually bought, or luxury items such as cars, DVD players, gaming consoles, and the like, and demand for these items will naturally increase. But if the income of consumer‘s decreases, they will just go for less goods and products, thereby decreasing the demand for items.

However, an increase in income would have a negative effect on the demand for inferior or cheaper products. Consumers, who now have more purchasing power, would naturally prefer to buy new cars instead of second-hand vehicles, or prime beef cuts instead of galunggong.  Market Size- this refers to the number of buyers or consumers in a given market. In terms of goods or products which are for the general consumer, a bigger population translates to a bigger market. But this doesn‘t hold true products that cater a special or particular market.

For example, an apple vendor would have a bigger market when he does business in a city that in a small town, while a toy manufacturer would naturally have a bigger market in a more populated location. The demand for their products would naturally increase or decrease with the size of the population or market.

Changes in the population such as an increase or decrease brought about by immigration, emigration, or political conditions as wars, and changes in the ratio of birth to death, would also have an affects on the demand for products and services. 

Consumer taste- this is about the tastes or preferences of consumers in their choice of products. Consumer‘s tastes and preferences result from different factors: social, historical and religious influences; psychological cravings brought about by advertising or promotions; changes in trends, or technology and physiological needs.

For example, certain types of meat are banned by some religious, and the demand for meat would be low in countries where these religions are predominant. Improvements in technology would also lessen demand for outdated machines, and increase the demand for the latest models. A new scientific discovery, for example, on the health benefits of a particular food would increase demand for it, while new information on the ill effects of a certain delicacy would naturally decrease the demand for the product.

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Price and Availability of Related goods- Products come with related goods, which either serve as a substitute or a complement to them. Substitute goods are those which can be used in place of another because they can perform the same function; butter and margarine, pens and pencils, and Donut A and donut B. for two substitute products, there is a direct relationship between the price of one products and the demand for another. For example, when the price of want it, increasing the demand for it, while at the same tome decreasing the demand for Donut B.

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Complementary products are products that go hand in hand. An example would be whiteboards and whiteboards markers. With complementary products, the price of one is inversely related to the demand for another. Thus, when whiteboard prices increase, then there would be a decrease in the demand for it, and there would also be a corresponding decrease in the demand for markers.  Consumer Expectations- This refers to the consumer‘s expectation of the future, especially in terms of; 1. The price of products 2. Their income at that time 3. Economic conditions of tomorrow.

For example, an employee who has just been promoted may take his family to an expensive restaurant or may purchase an expensive gift for a loved one in expectation of a higher salary. People, in terms of a political crisis, may stock up on canned goods, leading to higher demand for that product. Expected price increases mat also lead consumers to buy easy to be able to beat the price adjustment as seen in the long queues at gasoline stations on the eve of a gasoline price increase. This increase demand.  Special Influence- this includes all other factors that may have an effect on the demand for goods and services. Unpleasant temperature and weather conditions, for example, may increase the demand for umbrellas, raincoats, electric fans, or air-conditioning units, while special religious and national celebrations may increase the demand for certain products. If you would always increase the demand for candles, while national independence celebrations increase the demand for flags.

The above determinates show that many elements after demand, including price and nonprice elements. It is important that consumers, which include everyone, should be able to respond to changes in the factors that affect demand. For example, consumers should be able to assess if they are purchasing goods due to psychological cravings or exposure to convincing advertisements. They should know how to make adjustments in their spending habits whenever their income rises or falls. Of course, they should also make such as facts and pertinent information to be able to come up with proper decisions in purchasing goods.

UNDERSTANDING THE CONCEPT OF SUPPLY Another key microeconomics concept is supply, a concept which is related to demand.

Supply is a pattern or schedule of the quantities of a product that a producer is willing and able to produce and sell given possible prices within a certain time period. In simple terms, supply is the quantity of products that producers are willing to produce for the market. Just like demand, supply may be shown as supply schedule expressed in table form or a supply curve in a chart form.

The Supply Schedule The table below is a supply schedule for producers who are supplying kilos of rice.

Supply of Rice Price (per kilo) Quantity Supplied (kilos per week) P 30 100 28 80 26 60 24 45 22 10

The given hypothetical data simply illustrate how the price of rice is related to the way producers would be able to supply a given quantity. At P 30 per kilo, producers can supply about 100 kilos of rice per week. It is but natural for producers to produce and sell more of their Young Ji International School / College

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decreases, and at P 22 per kilo, producers are willing and able to supply only about 10 kilos of rice per week. If we go on lowering the price, producers may not be willing to produce rice anymore at all, and may resort to planting other crops.

While a high price would be a negative factor for the willingness of consumers to buy, it is a positive factor to producers to produce more of the product. On the other hand, a low price for gods and products would be a deterrent for producers to produce but would be an incentive for consumers to purchase.

The Supply Curve We can also place the supply schedule on a graph, which is called a supply curve. The curve clearly illustrates the direct relationship between the prices of goods and the quantity supplied by products.

The quantity of rice supplied was plotted on the horizontal axis while the price of rice was plotted on the vertical axis. The points created stand for particular price-quantity supplied relationship. What stands out in the chart is the direct relationship between the price of goods and the quantity supplied. This is shown by supply curve with a slope going upward.

The Law of Supply The law of supply is clearly evident after studying the supply schedule and the supply curve.

The law o supply simply affirms: all things being equal, the quantity of goods supplied increase as price rises; while the quantity of goods supplied decreases as price falls. This means that the price of products and the quantity supplied are directly related, and generally, producers increase their supply of goods when their prices are high, and decrease their supply when price are low. Because of the directions of the supply curve, the law of supply is also called the law of upward-sloping supply.

For example, if rice is priced highly in the market, then farmers would do their best to produce rice, resulting in an increased supply of rice. The higher earnings by farmers would enable them to buy additional farmlands, better-yielding seeds, and modern fertilizers, increasing production and resulting to an even higher and ever-increasing supply of rice.

On the other hand, if rice is priced low in the market farmers would not be motivated to produce more rice, and may try planting other crops such as corn or sugarcane to produce a good that may be priced more highly. The result: a decrease in the supply of rice in the market.

Factors that Affects Supply The prices of goods and the quantity supplied are directly related in general, and if we assume that all things are qual. There are however, many other factors that affect supply and these factors called determinants of supply. If there are changes in these determinants, then the supply of goods and products will affected. These determinants are: 1. Production Costa- Producing a good gas a corresponding cost, and an increase in the elements or factors of production would naturally reduce the quantity of the product which can be supplied. The factors of production, as we have learned, are land, labor or human effort, capital and entrepreneurial ability. Any increase and decrease in the cost of these factors would have an effect in the overall cost of production, and in the quantity of goods supplied.

The lower the production cost, the greater the supply of goods and, conversely, the higher the production cost, the lower the supply of goods and products.

One important aspects in production cost is the role of technology. A technological improvement or application may come up would reduce the cost of production- it may ne a new gadget or modern equipment that produces a product using lesser resources, or a labor-saving device that lowers the budget for human labor. Thus, technology may help reduce the cost of productions, and thus, increase supply.

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Companies many also decide to cut wages, benefits, and other expenses just to lower costs of production and, thus, increase the supply of goods. Labor laws in many countries, however, may limit the ability of firms to do these types of actions. Thus, companies are forced to find other ways of lowering production coasts.

2. Taxes and Subsidies- governments called taxes from most businesses and companies as part of their revenue collection, so taxes from part of the operational and production coast of businesses. An increase in taxes on equipment, machinery, and even in social security contributions would raise production costs, decreasing supply. On the other hand, the government may lower quotas or tariffs on foreign products, opening up the market to foreign players, and increasing the supply of goods.

Businesses producing goods that are considered necessities or are deemed important to the continued functioning of the economy sometimes receive a subsidy from the government.

Subsidies are special funds that are provided by the government to particular companies, such as gasoline companies or farm communities for them to be able to continue their operation and production of goods. Generally, subsidies lower production costs, and thus, lead to increases in supply.

3. Prices of Other Goods- the increase or decrease in the price of goods my have a corresponding decrease or increase in the supply of goods related to them. For example, an increase in the price of asparagus may encourage farmers to cultivate this crop instead of their usual products.

4. Number of Sellers and Suppliers- the supply of goods depends on the number of sellers and suppliers. If there are many producers, sellers, and suppliers of a particular good, then the supply of that good will naturally increases. As an example, the opening of the Philippines to foreign trade extremely increased the supply of some goods such as chocolates and candies, garments, and ready-to-wear (RTW) clothing. The increase in the number of sellers and suppliers resulted in a very high supply of these goods.

5. Producers Expectations- the expected future price of a particular good, as determined by producers, has a great effect on the quantity of that product that they are willing to supply. If producers of milk, for example, expect that the price of their product will increase in the immediate future, then they might not supply all their products to the market, but may keep a considerable potion for higher profit later on. This results in a diminished supply of milk, further increasing its prices. This action called hoarding, is illegal most countries but happens just the same due to profit motive.

6. Special Influences- there are also other special influences that can affect the supply of goods. Among these are government restrictions, weather conditions and innovations or new methods. For example, unexpected storms may destroy farms, decreasing the supply of certain crops.

Destructive typhoons in the country have wrought havoc on many farmlands in the Bicol and Central Luzon regions, decreasing total rice supplies in the country. The government may also impose additional taxes or requirements for the conduct of business, and this additional burden would translate to higher production cost, affecting the supply of goods.

The above determinants may come as a single factor, or in combination with the other factors. When in combination, the above factors may severely affect supply, or may cancel each other out. A farmer may expect an increase in the price of rice, and may then increase production, thus increasing supply; but a strong weather disturbance may hamper his production efforts, thus decreasing supply.

The following table shows how changes in supply (either increases or decreases) may be caused by the given factors.

SUPPLY Increase in supply can be caused by 1. Decrease in the cost of production Young Ji International School / College

Decrease in supply can be caused by Increase in the cost of production Page 25

2. Decrease in taxes or tariffs or increase in subsides 3. Decrease in the price of another product 4. Expectations by producers of a marked decrease in the price of their product

Increase in taxes or tariffs or decrease in subsidies Increase in the price of another product

5. Increase in the number of producers/suppliers

Decrease in the number of producers/suppliers

Expectations by producers of a market increase in the price of their product

UNDERVALUING AND OVERVALUING OF PRICES The mechanics of supply and demand has a great effect on the prices and volume of goods and services. Sometimes unscrupulous businessman undervalues or overvalue their price either to beat their competitors, or to earn more.

A store owner, for example, might overvalue price of goods which he thinks has the monopoly of selling, or is not available in other stores. A related example would be a doctor or lawyer who would change an exorbitant fear for their services especially when they are in a farflung very much needed. These cases of overvaluing may be regarded as forms of abuses, and people must be aware of these instances, and report them to proper authorities.

But what about undervaluing? Why would businessmen undervalue their products? Well the main purpose, of course, of undervaluing a product is to beat the prices of competitors. Now, there is nothing wrong with sacrificing some profit it‘s to lower prices. The problem comes when the undervaluing of prices is made possible through manipulation of production cost.

ELASTICITIES OF DEMAND AND SUPPLY While demand and supply are the basic elements of the economy, consumers and producers respond to demand and supply according to their own type of responsiveness, which may vary from product to product. These sensitivities are measured in terms of the price elasticity of demand and the price elasticity of supply.

Price Elasticity of Demand We know that the law of demand states that consumers will buy more of a product as its price declines, or buy less of it when its price rises. However, it would be interesting to know if by how much the quantity of a certain product changes as its price changes will.

This is because the demand for products varies. There are products that are demanded in responsive manner by consumers, that is, price changes always result to changes in the quality demanded. The demand for these products is said to be elastic. On the other hand, there are products to which consumers do not give a little or does not changes at all as the price changes.

For these products, demand is said to be inelastic.

Simply put, a product is elastic when the quality demanded for it significantly responds to price changes, while a product is inelastic if the quantity demanded for it responds very little price changes in the product.

Surplus Surplus is the situation that happens when the quantity of products supplied exceeds the quantity of products demanded. When supply is greater than demand, surplus occurs, and surplus is also the term used for the amount by which the quality of supply exceeds that of demand.

In Case 1, the price of rice is at P 30 per kilo. At this price, producers are very much willing and able to supply 14, 000 kilos of rice, but the consumers are only willing to purchase or buy about 2,000 kilos of that product at the same period. This results in an excess or surplus of 12, 000 kilos in the supply of rice.

Case 2 shows a lower price of rice at P 28 per kilo. At this lower price, more consumers are encouraged to buy, which increased the demand for rice at 3, 5000 kilos per month. However, the decrease price has discouraged farmers to produce, and this decreases their supply of rice to only Young Ji International School / College

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9,000 kilos per week. The surplus or excess supply of 5, 000 kilos of rice is lower than that of Case 1, but it is still a surplus.

A surplus poses a problem especially for producers because a very large surplus of rice would make it hard for them to store it. Also the competition among producers would force to take the price down so that they will be able to reduce their surplus. Thus, surpluses tend to make the price of products go down.

Shortage Shortage happens when the quantity of products demanded excess the quantity that is supplied. When the demand for a product is greater than that which can be supplied by a producers, then shortage occurs. The amount which the quantity of demand exceeds that of supply is also termed shortage. Cases 4 and 5 of the given table show situations where shortage occurs.

At P 24 per kilo of rice in Case 4, consumers are more than able and willing to buy the product, and have demand for 8, 000 kilos of rice per week. At such price, however, farmers and producers of rice are more discouraged from producing rice and may instead plant and produce other crops, resulting to a decreases supply of only 3,000 kilos of rice per week. This means a shortage of about 5, 000 kilos of rice.

MARKET STRUCTURE After having learned the dynamics of demand and supply of goods and services, and how they affect prices, we will now study the different market structures or models. Businesses behave not only on the basis of price, production, and demand and supply, but also on their character are members of a particular industry, and or what type market through which it operates.

A market is any institutions, mechanism, or situation which brings or joins together the buyers and sellers of a particular product. Considering this definition, we may say that the local grocery store where people buy their immediate needs is a market; and the Internet is also a market, with its e-commerce.

Terms to Define 1. Market 2. Supply 3. Undervaluing 4. Elastic demand 5. Demand curve 6. Inelastic demand 7. Inelastic supply 8. Shortage 9. Equilibrium 10. Surplus 11. Substitute goods 12. Supply curve 13. Demand 14. Law of supply 15. Elastic supply Follow-up Questions 1. Briefly explain the concept of demand.

2. What does a demand schedule express? A demand curve?

3. In what manner does the law of demand affect everyday living?

4. How does an increase or decrease in income affect the demand for products and services?

5. Elaborate on substitute goods and complementary products and their role in the demand for products.

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6. Give examples of special influences that may affect the demand for goods and services.

7. Explain briefly the concept of supply and the law of supply.

Activity 1. Create group with 10 members each. Then have each group illustrate /describe/ clarify the concepts of supply and demand in their own unique manner. For example, it could be in the form of a presentation or short play, a mine, a radio program, etc. be creative.

2. Research on the four market models. Use illustrations and graphics in an illustration board to show the difference between the four models. Show actual examples of industries or companies falling under the various models.

I. Identify the following questions. ___________________1. It is a body of knowledge that analyzes, explains, and even predicts the economic behavior of people, groups, and nations. ___________________2. The condition or situations that occur when people‘s wants and needs are unlimited, while resources needed to meet them are limited. ___________________3. Deciding what and how much will be produced with the limited resources available; how; the goods and services will be produced; and for whom will the goods and services be produced. ___________________4. Division of economics that is concerned with individual decisions within an economy: a single consumer, a group, a firm, and a country. ___________________5. Division of economics that pertains to the study of whole economies or systems. ___________________6. It is defined as a systematic field of study which objective is to produced reliable explanations and solutions using experiment, observation, and deduction. ___________________7. It includes faster and better methods of transporting goods, people, and services through modern cargo ships, airplanes, and vessels using state-of-the-art equipment. ___________________8. It is the opening of markets to other countries together with an accompanying decrease on tariffs or import taxes. ___________________9. It is the combination of among countries and regions of the world, such as the APEC. ___________________10. It is about facts and existing situations regarding the economy. ___________________11. It is about norms, values, judgments, and ethical concerns regarding the economy and various economic situations. ___________________12. Who is the former President who declared martial law? ___________________13. It is the destruction of forest for human needs without the corresponding replacement of lost trees. ___________________14. It is considered as valuable resources and are so diverse that no one knows exactly how many they are. ___________________15. It uses and required more thinking abilities/skills in decision making. ___________________16. It has a physical effort and talents in doing the job. ___________________17. They are called professional. ___________________18. They are considered as technical/vocational workers. ___________________19. These are group of people in the labor force who are working or with a job. ___________________20. It is a situation where people have a job.

II. Encircle the correct answer.

1. Involves the individual components of the economy a. macroeconomics c. economics b. allocation d. microeconomics 2. watching economic phenomena a. economics c. experimentation b. observation d. statistical analysis 3. Means household management Young Ji International School / College

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a. macroeconomics c. economics b. allocation d. microeconomics 4. Economics of facts a. microeconomics c. normative economics b. macroeconomics d. positive economics 5. Shows the interaction of the economy a. needs and wants c. circular flow b. shortage d. allocation 6. A systematic fields of study a. education c. allocation b. science d. scarcity 7. Economics of ethical concerns. a. microeconomics c. normative economics b. macroeconomics d. positive economics 8. Rocked the Philippine economy in 1997 a. World War II c. Asian financial crisis b. EDSA revolution d. Martial Law 9. Initiated the Filipino First Policy a. Carlos Garcia c. Ferdinand Marcos b. Cory Aquino d. Disodado Macapagal 10. Deals with the functioning of the economy as a whole a. macroeconomics c. economics b. allocation d. microeconomics 11. mistaken for grasslands a. savanna c. tropical rainforest b. boreal forest d. Mediterranean forest 12. Materials that are used to help satisfy human needs a. human resources c. wants b. resources d. unemployment 13. The current leading energy source in the world a. coal c. animals b. petroleum d. sun 14. Ability to read and write a. literacy c. functional literacy b. employment d. unemployment 15. Comprise about 6% of the population a. children c. senior citizens b. adults d. women 16. Provides rubber and latex a. animal c. forest b. sea d. ocean 17. Resources that cannot be replaced anymore a. human resources c. renewable resources b. physical resources d. nonrenewable resources 18. Also known as taiga a. savanna c. tropical rainforest b. boreal forest d. Mediterranean forest 19. Black gold a. aluminum c. coal b. petroleum d. copper 20. Climate type where rainfall is evenly distributed throughout the year a. Type I c. Type III b. Type II d. Type IV 21. Something you would like to have Young Ji International School / College

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a. shortage c. allocation b. need d. want 22. Done to motivate new industry player a. deregulation c. allocation b. shortage d. regulation 23. Something that you must have a. shortage c. allocation b. need d. want 24. A showcase of society‘s choices a. selling price c. opportunity cost b. scarce resources d. production possibility frontier 25. Temporary breakdown in the supply of goods a. deregulation c. allocation b. shortage d. regulation 26. The solution to the problem of scarcity a. allocation c. choices b. need d. scarcity 27. The cost of a product compared to an alternative a. selling price c. opportunity cost b. scarce resource d. production possibility frontier 28. Happens when there are many producers of a single good a. state ownership c. competition b. free enterprise d. profit 29. Made by everyone in their actions a. allocation c. choices b. need d. scarcity 30. Main incentive for businesses a. state ownership c. competition b. free enterprise d. profit 31. Paid message that promotes a product a. advertising c. consumption b. economy d. sales 32. More wealth means higher consumption. a. wealth effect c. higher consumption effect b. income effect d. wealth-consumption ratio 33. Displayed on liquor ads a. Drink moderately c. Minors not allowed b. Drinking kills d. Don‘t drink and drive 34. To spend more than what one earns a. dissave c. bulk buying b. consume d. save 35. Buying in greater quantity a. unlimited purchase c. fraudulent buying b. bulk buying d. extravagant consumption.

36. Republic Act 7394 a. Labor Code c. Philippine Constitution b. Consumer Act d. Advertising Act 37. Buying 600 hats which will not be used a. false advertising c. fraudulent purchase b. sales talk d. wasteful consumption 38. Overall spending on goods a. behavior c. consumption b. consumers d. allocation 39. Act of deception Young Ji International School / College

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a. scheme c. brand loyalty b. fraud d. advertising 40. Consumers should take note of this in an advertisement. a. price c. colors used b. brand name d. fact 41. One who combines the other factors of production a. entrepreneur c. labor b. capital d. land 42. Stockholders are not personally responsible for company losses a. stockholder c. perpetual succession b. management d. limited liability 43. Machinery, equipment, and investment goods a. entrepreneur c. labor b. capital d. land 44. Unit owned by stockholders a. shares c. gold b. liability d. business 45. Method of creating goods and services a. scarcity c. production b. distribution d. allocation 46. Talents and abilities of people a. entrepreneur c. labor b. capital d. land 47. Owned and operated by individuals a. corporations c. single proprietorships b. organizations d. partnership 48. Coming and going of people in an organization a. stockholder c. perpetual succession b. management d. limited liability 49. Includes natural resources a. entrepreneur c. labor b. capital d. land 50. These cannot produce in large quantities a. corporations c. organizations b. individuals d. groups III. Answer the following questions. (5 points each) 1. In what way does land contribute to the production of a good or service?

2. What, for you, is the consumer‘s role in the overall functioning of the economy?

3. How important is advertising in presenting new products?

4. Explain why it is important to make sustainable use of resources.

IV. Enumeration 1-3 Types of Business Organizations 4-7 factors of Productions 8-11 Kinds of consumptions 12-16 Common frauds and scams 17-25 The Rights of the Consumer Lesson 7 Microeconomics We have learned in an earlier lesson that microeconomics is the component of economics which deals with individual units and concepts with the scope of microeconomics (households, individuals markets, and particular prices) and the questions that it would answer.

UNDERSTANDING THE CONCEPTS OF DEMAND Young Ji International School / College

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One of the key microeconomics concepts that of demand. Demand may be defined as a pattern or schedule showing different quantities of a product that consumers can purchase given possible prices within a certain time period. Simply put, demand represents shown as a demand schedule in tabular form or as a demand curve.

The Demand Schedule The following table shows a demand schedule for consumers who are purchasing kilos of rice.

Demand for Rice Price (per kilo) Quantity Demanded (kilos per week) P 30 50 28 60 26 80 24 100 24 120 The table clearly shows how the price of rice related to the quantity that buyers would be willing and able to purchase. Willingness and ability are both important in the purchase of products. A consumer have the capacity to buy it, but may prefer to buy corn instead (the data given is a hypothetical sample and may not represent real world figures).

The data illustrate that at P 30 per kilo of rice, consumers would be willing and able to purchase 5 kilos per week. But as the price falls, the quantity demanded would increase, and at P 22 per kilo, consumers are willing and able to buy 120 kilos per week.

The Demand Curve When the demand schedule is placed in a graph, it will show the demand curve, and the inverse relationship between the period of a product and the quality demanded is more clearly illustrated.

The chart was plotted with the price of the product on the vertical (y0 axis, and the quantity of the product on the horizontal (x) axis, with each of the points showing a particular price-demand quantity relationship. The resulting curve, which is the demand curve, has a slope going downward.

The clearly shows that the price of goods and the quantity demanded are inversely related.

The Law of Demand The demand schedule, the demand curve, and the inverse relationship between the price of goods and the quantity demanded bring us to the law of demand which illustrates fundamental characteristics of demand.

The law of demand states that: all things being equal, the quantity demanded for goods increases as price falls; while the quantity demanded for goods decreases as price rises. This simply means that price and quality demanded are, in fact, inversely related, and that generally, consumers will buy more of products as its price decreases, and will buy less of a product as its price increases.

This property or laws is also called the law of downward sloping demand, as you can see in the direction of the demand curve. The law of demand has been tested in many actual situations, experiments, and research studies, and has been verified with various types of goods and products. Plain common sense also supports this law. Anyone, of course, would ordinary not buy or buy less if the price high, and buy more if the price is low.

The price of cellphone, for example, were then so high that only the really wealthy could afford it during its initial years. As time went by however, greater demand worldwide proposed more companies to manufacture and produce cellphones. Increasing competition then brought the prices down, and thus, the demand for cellphones increased the more. As prices continued to drop, even those who additional units for various purposes, which led to greater and greater Young Ji International School / College

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Demand and Everyday Living The concept of demand is inherent in everyday family life. Individuals and households generally live within the constraints of a budget of a budget, and are very sensitive changes in the prices of goods.

When demand for a good or product increase or decreases with its corresponding rise and fail in places, then individuals and consumers tend to react in a variety of ways, as follows: 

Substitution Effect- this suggests that, as the price of a product increases, people usually substitute a similar but cheaper product for it. For example, if the price of rice increases, then consumers may substitute bread for it, if in case bread is currently cheaper than rice.  Income Effect- this suggests that, as the price of a product decreases, a consumer becomes ―richer‖ because his income and purchasing power would increase, enabling home to buy more of a [product and without disregarding the other goods. On the other hand, as the prince of a product increases, consumers become ―poorer‖, forcing them to decrease their demand for the product.

The above effects show how everyday living individuals and households is affected by this thing called demand. But ether is also factors that affects demand itself and we need to understand them.

Factors that Affect demand When demand was earlier described in relation to the prices of goods it was stated that demand rises when prices become low, and vice versa, but this assumes that all other things are equal. This is also other factors that affect demand.

These factors are called determinants of demand, and a change in any of these determinants would have a great effect on the demand for a product or service. These determinate are as follows.  Consumer Income- this pertains to the average income of consumers. As the income of people rises, it is but natural for them to purchase more goods and products, especially those that are not usually bought, or luxury items such as cars, DVD players, gaming consoles, and the like, and demand for these items will naturally increase. But if the income of consumer‘s decreases, they will just go for less goods and products, thereby decreasing the demand for items.

However, an increase in income would have a negative effect on the demand for inferior or cheaper products. Consumers, who now have more purchasing power, would naturally prefer to buy new cars instead of second-hand vehicles, or prime beef cuts instead of galunggong.  Market Size- this refers to the number of buyers or consumers in a given market. In terms of goods or products which are for the general consumer, a bigger population translates to a bigger market. But this doesn‘t hold true products that cater a special or particular market.

For example, an apple vendor would have a bigger market when he does business in a city that in a small town, while a toy manufacturer would naturally have a bigger market in a more populated location. The demand for their products would naturally increase or decrease with the size of the population or market.

Changes in the population such as an increase or decrease brought about by immigration, emigration, or political conditions as wars, and changes in the ratio of birth to death, would also have an affects on the demand for products and services. 

Consumer taste- this is about the tastes or preferences of consumers in their choice of products. Consumer‘s tastes and preferences result from different factors: social, historical and religious influences; psychological cravings brought about by advertising or promotions; changes in trends, or technology and physiological needs.

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For example, certain types of meat are banned by some religious, and the demand for meat would be low in countries where these religions are predominant. Improvements in technology would also lessen demand for outdated machines, and increase the demand for the latest models. A new scientific discovery, for example, on the health benefits of a particular food would increase demand for it, while new information on the ill effects of a certain delicacy would naturally decrease the demand for the product. 

Price and Availability of Related goods- Products come with related goods, which either serve as a substitute or a complement to them. Substitute goods are those which can be used in place of another because they can perform the same function; butter and margarine, pens and pencils, and Donut A and donut B. for two substitute products, there is a direct relationship between the price of one products and the demand for another. For example, when the price of want it, increasing the demand for it, while at the same tome decreasing the demand for Donut B.

Complementary products are products that go hand in hand. An example would be whiteboards and whiteboards markers. With complementary products, the price of one is inversely related to the demand for another. Thus, when whiteboard prices increase, then there would be a decrease in the demand for it, and there would also be a corresponding decrease in the demand for markers.  Consumer Expectations- This refers to the consumer‘s expectation of the future, especially in terms of; 4. The price of products 5. Their income at that time 6. Economic conditions of tomorrow.

For example, an employee who has just been promoted may take his family to an expensive restaurant or may purchase an expensive gift for a loved one in expectation of a higher salary. People, in terms of a political crisis, may stock up on canned goods, leading to higher demand for that product. Expected price increases mat also lead consumers to buy easy to be able to beat the price adjustment as seen in the long queues at gasoline stations on the eve of a gasoline price increase. This increase demand.  Special Influence- this includes all other factors that may have an effect on the demand for goods and services. Unpleasant temperature and weather conditions, for example, may increase the demand for umbrellas, raincoats, electric fans, or air-conditioning units, while special religious and national celebrations may increase the demand for certain products. If you would always increase the demand for candles, while national independence celebrations increase the demand for flags.

The above determinates show that many elements after demand, including price and nonprice elements. It is important that consumers, which include everyone, should be able to respond to changes in the factors that affect demand. For example, consumers should be able to assess if they are purchasing goods due to psychological cravings or exposure to convincing advertisements. They should know how to make adjustments in their spending habits whenever their income rises or falls. Of course, they should also make such as facts and pertinent information to be able to come up with proper decisions in purchasing goods.

UNDERSTANDING THE CONCEPT OF SUPPLY Another key microeconomics concept is supply, a concept which is related to demand.

Supply is a pattern or schedule of the quantities of a product that a producer is willing and able to produce and sell given possible prices within a certain time period. In simple terms, supply is the quantity of products that producers are willing to produce for the market. Just like demand, supply may be shown as supply schedule expressed in table form or a supply curve in a chart form.

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The Supply Schedule The table below is a supply schedule for producers who are supplying kilos of rice.

Supply of Rice Price (per kilo) Quantity Supplied (kilos per week) P 30 100 28 80 26 60 24 45 22 10

The given hypothetical data simply illustrate how the price of rice is related to the way producers would be able to supply a given quantity. At P 30 per kilo, producers can supply about 100 kilos of rice per week. It is but natural for producers to produce and sell more of their decreases, and at P 22 per kilo, producers are willing and able to supply only about 10 kilos of rice per week. If we go on lowering the price, producers may not be willing to produce rice anymore at all, and may resort to planting other crops.

While a high price would be a negative factor for the willingness of consumers to buy, it is a positive factor to producers to produce more of the product. On the other hand, a low price for gods and products would be a deterrent for producers to produce but would be an incentive for consumers to purchase.

The Supply Curve We can also place the supply schedule on a graph, which is called a supply curve. The curve clearly illustrates the direct relationship between the prices of goods and the quantity supplied by products.

The quantity of rice supplied was plotted on the horizontal axis while the price of rice was plotted on the vertical axis. The points created stand for particular price-quantity supplied relationship. What stands out in the chart is the direct relationship between the price of goods and the quantity supplied. This is shown by supply curve with a slope going upward.

The Law of Supply The law of supply is clearly evident after studying the supply schedule and the supply curve.

The law o supply simply affirms: all things being equal, the quantity of goods supplied increase as price rises; while the quantity of goods supplied decreases as price falls. This means that the price of products and the quantity supplied are directly related, and generally, producers increase their supply of goods when their prices are high, and decrease their supply when price are low. Because of the directions of the supply curve, the law of supply is also called the law of upward-sloping supply.

For example, if rice is priced highly in the market, then farmers would do their best to produce rice, resulting in an increased supply of rice. The higher earnings by farmers would enable them to buy additional farmlands, better-yielding seeds, and modern fertilizers, increasing production and resulting to an even higher and ever-increasing supply of rice.

On the other hand, if rice is priced low in the market farmers would not be motivated to produce more rice, and may try planting other crops such as corn or sugarcane to produce a good that may be priced more highly. The result: a decrease in the supply of rice in the market.

Factors that Affects Supply The prices of goods and the quantity supplied are directly related in general, and if we assume that all things are qual. There are however, many other factors that affect supply and these factors called determinants of supply. If there are changes in these determinants, then the supply of goods and products will affected. These determinants are: Young Ji International School / College

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7. Production Costa- Producing a good gas a corresponding cost, and an increase in the elements or factors of production would naturally reduce the quantity of the product which can be supplied. The factors of production, as we have learned, are land, labor or human effort, capital and entrepreneurial ability. Any increase and decrease in the cost of these factors would have an effect in the overall cost of production, and in the quantity of goods supplied.

The lower the production cost, the greater the supply of goods and, conversely, the higher the production cost, the lower the supply of goods and products.

One important aspects in production cost is the role of technology. A technological improvement or application may come up would reduce the cost of production- it may ne a new gadget or modern equipment that produces a product using lesser resources, or a labor-saving device that lowers the budget for human labor. Thus, technology may help reduce the cost of productions, and thus, increase supply.

Companies many also decide to cut wages, benefits, and other expenses just to lower costs of production and, thus, increase the supply of goods. Labor laws in many countries, however, may limit the ability of firms to do these types of actions. Thus, companies are forced to find other ways of lowering production coasts.

8. Taxes and Subsidies- governments called taxes from most businesses and companies as part of their revenue collection, so taxes from part of the operational and production coast of businesses. An increase in taxes on equipment, machinery, and even in social security contributions would raise production costs, decreasing supply. On the other hand, the government may lower quotas or tariffs on foreign products, opening up the market to foreign players, and increasing the supply of goods.

Businesses producing goods that are considered necessities or are deemed important to the continued functioning of the economy sometimes receive a subsidy from the government.

Subsidies are special funds that are provided by the government to particular companies, such as gasoline companies or farm communities for them to be able to continue their operation and production of goods. Generally, subsidies lower production costs, and thus, lead to increases in supply.

9. Prices of Other Goods- the increase or decrease in the price of goods my have a corresponding decrease or increase in the supply of goods related to them. For example, an increase in the price of asparagus may encourage farmers to cultivate this crop instead of their usual products.

10. Number of Sellers and Suppliers- the supply of goods depends on the number of sellers and suppliers. If there are many producers, sellers, and suppliers of a particular good, then the supply of that good will naturally increases. As an example, the opening of the Philippines to foreign trade extremely increased the supply of some goods such as chocolates and candies, garments, and ready-to-wear (RTW) clothing. The increase in the number of sellers and suppliers resulted in a very high supply of these goods.

11. Producers Expectations- the expected future price of a particular good, as determined by producers, has a great effect on the quantity of that product that they are willing to supply. If producers of milk, for example, expect that the price of their product will increase in the immediate future, then they might not supply all their products to the market, but may keep a considerable potion for higher profit later on. This results in a diminished supply of milk, further increasing its prices. This action called hoarding, is illegal most countries but happens just the same due to profit motive.

12. Special Influences- there are also other special influences that can affect the supply of goods. Among these are government restrictions, weather conditions and innovations or new methods. For example, unexpected storms may destroy farms, decreasing the supply of certain crops.

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Destructive typhoons in the country have wrought havoc on many farmlands in the Bicol and Central Luzon regions, decreasing total rice supplies in the country. The government may also impose additional taxes or requirements for the conduct of business, and this additional burden would translate to higher production cost, affecting the supply of goods.

The above determinants may come as a single factor, or in combination with the other factors. When in combination, the above factors may severely affect supply, or may cancel each other out. A farmer may expect an increase in the price of rice, and may then increase production, thus increasing supply; but a strong weather disturbance may hamper his production efforts, thus decreasing supply.

The following table shows how changes in supply (either increases or decreases) may be caused by the given factors.

SUPPLY Increase in supply can be caused by Decrease in supply can be caused by 6. Decrease in the cost of production 7. Decrease in taxes or tariffs or increase in subsides 8. Decrease in the price of another product 9. Expectations by producers of a marked decrease in the price of their product

Increase in the cost of production Increase in taxes or tariffs or decrease in subsidies Increase in the price of another product

10. Increase in the number of producers/suppliers

Decrease in the number of producers/suppliers

Expectations by producers of a market increase in the price of their product

UNDERVALUING AND OVERVALUING OF PRICES The mechanics of supply and demand has a great effect on the prices and volume of goods and services. Sometimes unscrupulous businessman undervalues or overvalue their price either to beat their competitors, or to earn more.

A store owner, for example, might overvalue price of goods which he thinks has the monopoly of selling, or is not available in other stores. A related example would be a doctor or lawyer who would change an exorbitant fear for their services especially when they are in a farflung very much needed. These cases of overvaluing may be regarded as forms of abuses, and people must be aware of these instances, and report them to proper authorities.

But what about undervaluing? Why would businessmen undervalue their products? Well the main purpose, of course, of undervaluing a product is to beat the prices of competitors. Now, there is nothing wrong with sacrificing some profit it‘s to lower prices. The problem comes when the undervaluing of prices is made possible through manipulation of production cost.

ELASTICITIES OF DEMAND AND SUPPLY While demand and supply are the basic elements of the economy, consumers and producers respond to demand and supply according to their own type of responsiveness, which may vary from product to product. These sensitivities are measured in terms of the price elasticity of demand and the price elasticity of supply.

Price Elasticity of Demand We know that the law of demand states that consumers will buy more of a product as its price declines, or buy less of it when its price rises. However, it would be interesting to know if by how much the quantity of a certain product changes as its price changes will.

This is because the demand for products varies. There are products that are demanded in responsive manner by consumers, that is, price changes always result to changes in the quality demanded. The demand for these products is said to be elastic. On the other hand, there are products to which consumers do not give a little or does not changes at all as the price changes.

For these products, demand is said to be inelastic.

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Simply put, a product is elastic when the quality demanded for it significantly responds to price changes, while a product is inelastic if the quantity demanded for it responds very little price changes in the product.

Surplus Surplus is the situation that happens when the quantity of products supplied exceeds the quantity of products demanded. When supply is greater than demand, surplus occurs, and surplus is also the term used for the amount by which the quality of supply exceeds that of demand.

In Case 1, the price of rice is at P 30 per kilo. At this price, producers are very much willing and able to supply 14, 000 kilos of rice, but the consumers are only willing to purchase or buy about 2,000 kilos of that product at the same period. This results in an excess or surplus of 12, 000 kilos in the supply of rice.

Case 2 shows a lower price of rice at P 28 per kilo. At this lower price, more consumers are encouraged to buy, which increased the demand for rice at 3, 5000 kilos per month. However, the decrease price has discouraged farmers to produce, and this decreases their supply of rice to only 9,000 kilos per week. The surplus or excess supply of 5, 000 kilos of rice is lower than that of Case 1, but it is still a surplus.

A surplus poses a problem especially for producers because a very large surplus of rice would make it hard for them to store it. Also the competition among producers would force to take the price down so that they will be able to reduce their surplus. Thus, surpluses tend to make the price of products go down.

Shortage Shortage happens when the quantity of products demanded excess the quantity that is supplied. When the demand for a product is greater than that which can be supplied by a producers, then shortage occurs. The amount which the quantity of demand exceeds that of supply is also termed shortage. Cases 4 and 5 of the given table show situations where shortage occurs.

At P 24 per kilo of rice in Case 4, consumers are more than able and willing to buy the product, and have demand for 8, 000 kilos of rice per week. At such price, however, farmers and producers of rice are more discouraged from producing rice and may instead plant and produce other crops, resulting to a decreases supply of only 3,000 kilos of rice per week. This means a shortage of about 5, 000 kilos of rice.

MARKET STRUCTURE After having learned the dynamics of demand and supply of goods and services, and how they affect prices, we will now study the different market structures or models. Businesses behave not only on the basis of price, production, and demand and supply, but also on their character are members of a particular industry, and or what type market through which it operates.

A market is any institutions, mechanism, or situation which brings or joins together the buyers and sellers of a particular product. Considering this definition, we may say that the local grocery store where people buy their immediate needs is a market; and the Internet is also a market, with its e-commerce.

Terms to Define 16. Market 17. Supply 18. Undervaluing 19. Elastic demand 20. Demand curve 21. Inelastic demand 22. Inelastic supply 23. Shortage 24. Equilibrium Young Ji International School / College

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25. Surplus 26. Substitute goods 27. Supply curve 28. Demand 29. Law of supply 30. Elastic supply Follow-up Questions 8. Briefly explain the concept of demand.

9. What does a demand schedule express? A demand curve?

10. In what manner does the law of demand affect everyday living?

11. How does an increase or decrease in income affect the demand for products and services?

12. Elaborate on substitute goods and complementary products and their role in the demand for products.

13. Give examples of special influences that may affect the demand for goods and services.

14. Explain briefly the concept of supply and the law of supply.

Activity 3. Create group with 10 members each. Then have each group illustrate /describe/ clarify the concepts of supply and demand in their own unique manner. For example, it could be in the form of a presentation or short play, a mine, a radio program, etc. be creative.

4. Research on the four market models. Use illustrations and graphics in an illustration board to show the difference between the four models. Show actual examples of industries or companies falling under the various models.

Lesson 7 MACROECONOMICS In Lesson 1 we have studied what macroeconomics is and has compared it with microeconomics. To understand these concepts, always remember that macroeconomics is the study of the economy as a whole, while microeconomics is about economics of individual markets or consumers.

The following will further illustrate the difference between macroeconomics and microeconomics:  Microeconomics seeks how the supply of rice might affect its price; macroeconomics asks how a drop in the price of rice can affect government policies on rice production.  Microeconomics studies particular aspects of the market, such as which products are hot and which are not; macroeconomics studies overall trends and factors that affects the performance of the markets as a whole.  Microeconomics deals with the way households consumer goods using money income; macroeconomics answers how controlling the money supply may affect the country‘s economy.

Because macroeconomics pertains to the overall aspects of the economy, most nations have macroeconomics aspects in place and the success of their economy depends on the success of their macroeconomics programs and policies. Macroeconomics also deals with such concepts as government expenses, trade policies, exchange rate, inflation, and unemployment.

Inflation and deflation Most of us have heard about inflation and some bad effects that it has on the economy. However, inflation is here to stay and it‘s proper for the student of economics to have a thorough understanding of this concept.

Inflation is a rise in the level of prices, in general. This comes as a whole and like a trend, and does not mean that the prices of all goods are rising. When your grandmother says the cost of bread before was only a few centavos, then you could already see inflation as bread today cost pesos.

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When inflation happens, people are generally wary because the prices of goods tend to become higher. Consumers are not able to buy within their budgets and housewives have a problem keeping both ends meet. Inflation does indeed provide some economic instability, however, gentle levels of inflation can be considered quite normal for the efficient functioning of the price system.

Measuring Inflation Inflation is measuring using the Consumer Price Index or CPI. The Consumer price Index is the common measure of the general or overall level of prices.

It is a prepared by the country‘s monetary authorities and shows changes in the prices of some of the more common consumers‘ goods such as food products and household items.

The inflation rate is the general rate in the rise of prices. If the inflation rate is 7 % then that means the cost of these prices or the cost of living has generally risen by 7%, and the power of your money to purchase decreases. To further understand the significance of the inflation rate, we then divide the number 70 by the annual rate of inflation to see the number of years that would commerce for prices to double.

Theories and Causes of Inflation Inflation has been attributed to two major causes. The first one is called demand-pull inflation. Demand-pull inflation happens when there is excess or too much demand for certain goods and services that are not met by a corresponding increase in the supply of those goods and services. The excess demand will bring up the prices of those goods and services, which result to inflation. The excess demand may be due to the available of funds or money, and thus demandpull inflation is something described as ―a case of too much money going after too few goods.‖ Another major contribution to inflation is the so-called cost-push inflation. This is inflation that happens due to changes in the supply side of the market. This happens when there is a general increase in the cost of production that may be due to higher wages or increase in the cost raw materials and other inputs.

Effects of Inflation The effects of inflation may range from the ordinary rise in prices to the most bizarre changes in an economy. The following are some of its effects:  Inflation reduces the purchasing power of money. People could buy less with what they have, and will need to spend less to afford the cost of living. Inflation is a big burden to fixed income earners, or those with no capacity to raise their incomes quickly.  Because of inflation, people will be discouraged or unable to save, because the reduced value of money would not be enough even for their daily needs, and they will assume that the money they will save have les value in the future.  Inflation may lead to an inflationary spiral: as prices rise due to inflation, workers may request for an increase in wages. If businessmen agree to an increase, then they will be forced to increase the prices of their products, thus leading to another inflation situation, and so on.  When inflation leads to hyperinflation, or a rapid type of inflation that has a devastating effect on the economy, then it may further lead, given the combination of events and situations, to an economic collapse.  One good effect of the inflation is the benefit derived by businessmen who have just bought machines, equipment, or other capital goods before the advent of inflation; thus they may have benefitted from the transaction.

Inflation Through the Years Inflation has occurred in various ways and in varying degrees among many countries.

Indeed, inflation is arbitrary and exits even if it runs counter to society‘s objectives.

Here are some ways by which inflation has occurred in some countries.

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Since 1965, the United States has experienced a yearly growth of its inflation rate. But this has been limited to not more than 4 percent annually.

The Philippines has also been experiencing a steady increase in its inflation rate in the past decades. Our highest inflation rates occurred just right after World war II when Filipinos had a high demand for goods which they were not able to have during the Japanese occupati0on.

Brazil experienced a hyperinflation in 1993 at the rate of more than 2, 000 percent, severely affecting its economy.

In the 1920s, during one of the lowest points in German economic history, inflation was so high that price levels rose trillions of times, with common food items coasting millions on their currency.

Combating Inflation There are ways by which inflation may be limited to acceptable levels.

At the highest level, countries can set up fiscal and monetary policies that can effectively counter inflation or inflationary tendencies. Government can raise the discount rate and discourage banks from lending, and thus discourage people from borrowing and spending inhibiting inflation.

At the level of the individual, consumers should be more conservative and careful in the use and consumption of resources, and should practice selective buying. This would prevent too much demand for products or raise I the cost of raw materials.

Inflation however, has always been a part of the economy, and it will not really be eradicated. The best policy is to control it towards acceptable levels that will not have such impact on the growth of the economy.

Deflation Deflation is a fall in the average level of prices in the economy, or some reduction in the level of economic activity. As government executives measures to counter inflation, such as an increase in interest rates and taxes, and a decrease in the money supply and government spending, then deflation may occur. Only when deflation occurs with a general decline in the purchasing power of consumers does it become a concern. Usually, deflation is used a s part of an economic policy to lower inflation.

SAVING AND INVESTMENTS Two other important macroeconomics concepts are savings and investments, which form part of the total or aggregate expenditures of an economy.

Savings Saving is a very important feature in a money economy in a barter economy, people can only save goods, which may spoil or be stolen. But money economies have mechanisms in place for people to save. With this opportunity, people should learn how to save.

Basic Concepts in Savings  Money- This is means of exchange of currency. You can exchange money for a product (such as new pants) or a service (such as a haircut). Money comes in bills or coins.  Income- This is the money you receive from your work or profits or interests from your businesses. Initially, you will earn gross income, but taxes and other deductions will be subtracted from it, thus, leaving you with disposable income, which you can spend or save.  Saving- This is the act of putting aside a part of the disposable income for future use.

Saving is the act of putting aside the money while savings is the money put aside.

Thus, when you earn income, you have the option of spending all your disposable income, or set aside a part of it to be your savings. As a general rule, it is important to save money, since it an benefit you and your community in many ways.

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Reasons Why It is Important to Save There are many reasons why it is important to save. Consider the following:  By saving, you will have money to get when you need it in the future. You don‘t have to borrow from anymore, or sell something just to have money, especially in cases of emergency needs.  By saving, you earn some more, even if it is just a small amount.  By saving, you can help people with their business startups and other money needs. Money saved in banks and lent to people wearing credit for their various needs.

How to Save  Have a plan or budget for your money coming in. even if you are not yet earning income, just regard every amount of money that comes your way as ―income‘, and have a plan or budget ready on how you would spend it.  The budget should apportion a certain amount as saving. For example, if you recently received P1,000 as a birthday gift, then you could set aside P 100 or P 200 as savings.

Make sure that you set aside some amount from your income before tou spend the rest.

Investment Investment, in economics, means businesses spending for the production and accumulation of capital goods and additions to inventories such as new plants. Machinery, etc. however, investment for the individual means using savings to earn more money.

Basic Concepts in Investing  Interest – this is money that you will earn when you lend money to others given a certain period. Your money can earn interest in savings account, bond, or stock.  Compounding- this is the process whereby the interest you earn also money for you.  Inflation- as we have learned, this is the general increase in the prices of products and services. It is important to always be aware of the inflation rate. Remember to always invest our money where the interest rate is higher than the rate of inflation.

Where to Invest Choosing where to invest is always a question of how much you would want to invest and what risks you is willing to take. Some investments tools are risky while others are not. Those which provide better interest per year, and where you can easily withdraw your money. You may also put your money in a time deposits account, where you will put money for a given period without withdrawing.  Bank Accounts- You can invest your money in the bank through savings accounts, which earns up to 4% interest per year, and where you can easily withdraw your money. You may also put your money for a given period without withdrawing it,  Treasury Bills- T-Bills are bonds issued by the government for the purpose of acquiring money for its projects. You can buy T-Bills for as P5, 000 per bond. The bill is also given a set period of time, by which you would get your original investment plus the corresponding interest. T-Bills are low-risk types of investments as they are guaranteed by the government.  Mutual Funds- These are collections of stocks or bonds, which are pooled by an investment manager to be invested in companies that they believe will provide them with the necessary returns. Although mutual funds allow you to diversify your investments, it also is a high risk venture.  Commodities- These include anything that you buy and then sell, such as silver, jewelry, food, cars, and collectibles. Some people earn their living through the buying and selling of commodities. The risk involved depends on the ability of the investors to buy low and sell high.

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Real Estate- properties such as a land, house, apartment, or building are art of real estate.

These generally are at low risk as real estate prices tend to rise in time. However, they may also rise and fall depending on their circumstances.

Saving and investing are important functions that should be done by individuals to help improve microeconomics conditions. By saving and investing, much-needed funds can be generated and reinvested in the economy, leading to better economic conditions and more employment.

Employment, Unemployment, and Underemployment The more people invest, the more businessmen will have the needed funds to put up businesses or expand their enterprises. This would mean more employment opportunities for individuals‘ workers. But while this would be good for the ordinary worker, what would be the effects of employment, unemployment, and underemployment on the economy‘s a whole?

Any country has a labor force, which consists of persons fifteen years old and older, but who are not incapacities or are in institutions, who are employed or seeking employment. A primary economic objective of any government is full employment, which means putting people where they can gainfully work. The employment rate is the percentage of the labor force who is currently employed, while the unemployment rate is the percentage of the labor force who s not currently employed.

Underemployment, on the other hand, means the employment of workers with high skills and abilities in low-wage and low-earning jobs. An example of this is an engineer working as a jeepney driver. While being a jeepney driver is an honorable way to earn a living it, does not require advanced skills and knowledge on engineering.

MEASURES OF NATIONAL INCOME AND OUTPUT All economic activities, including savings and investments, production, as well as the employment of workers, all contribute to the general growth of the economy. In economics, the national income and output are measured to determine the local value of goods and services produced in an economy.

Gross National Product The Gross national product or GNP is the total and final income output of land, labor, capital, and entrepreneur ability produced by the country‘s citizen, whether these are production from capital held abroad. As an example, the earnings of our OFW‘s in the Middle east and in any other foreign country is considered part of the Philippines‘ GNP. Gross Domestic Product Gross Domestic Product or GDP, on the other hand, comprises the value of total goods and services produced within the boundaries of a country, whether these are produced by the citizens of that country or by foreign. For example, the value of products made by an Americanowned factory based in the Philippines forms part of our country‘s GDP, while the output of a Filipino-owner company in Thailand would not be part of our GDP. Principal methods of Measuring the GNP and GDP The following are the three main ways to measure GNP/GDP.  Expenditure Approach- the estimates of all types of spending on goods and services by households, businesses, government, and by the people outside a country are all added up.  Income- Approach- The sum of the estimates of all earnings, including total wages and salaries, profits, and incomes from rentals and interest is arrived at.  Output or Product Approach- The sum of all output of all individuals and organizations producing goods and services is added with the cost for raw materials and depreciation subtracted.

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Measuring the country‘s national income makes possible the following: 1. It enables us to keep track of the economy, including the level of production in a given period of time.

2. It allows us to look at an economy‘s performance over a long period of time. For instance, knowing the national income (GNP or GDP) of a country for a ten-year period would allow us to determine whether the economy has improved or not.

3. It provides lawmakers and government policymakers with basis on which to base their economic policies and legislation that would promote the betterment of the economy of the country.

While national incomes are just estimates, they still provide people with information by which to base how their economy is growing, which they may use for their personal decisions.

Macroeconomics as a subject not only covers savings and investments, employment, and national incomes.

Terms to define 1. Wage-push theory 2. Cost-push inflation 3. National income 4. Money 5. Supply-shock theory 6. Income 7. Real estate 8. GDP 9. Inflation rate 10. Treasury bills 11. Mutual funds 12. CPI 13. Demand-pull inflation 14. Savings 15. GNP Follow-up Questions 1. Differentiate macroeconomics and microeconomics by providing examples other than those given in the lesson.

2. Elaborate on the role of John Maynard Keynes in macroeconomics theory.

3. Describe inflation and give examples that would illustrate the concepts.

4. What is the CPI? State its functions in determining inflation.

5. Differentiate demand-pull inflation from cost-push inflation.

6. Provide some of the effects of inflation. In your opinion, in what manner does inflation effect a country‘s economy?

7. Give some ways by which inflation can be managed.

8. Differentiate saving from investing.

Lesson 8 FISCAL POLICY Certain macroeconomic situations such as inflation or unemployment have a great effect on the economic conditions in a country. If left unchecked, these may become worse and lead to a breakdown of the economy. Because governments are responsible for stabilizing their economies, they enact certain policies to help pump up or rehabilitate the economy.

The most basic of these macroeconomics policies is fiscal policy which we will study in this lesson.

THE CONCEPT OF FISCAL POLICY Young Ji International School / College

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Fiscal policy consists of efforts by the government to change how it spend money or how it gets taxes for the purpose of achieving economic stability. All top government policies and strategies that are deliberate efforts to improve certain aspects of the economy, such as full employment and lower inflation, are collectively known as the government‘s fiscal policy.

During a period of recession, or when there is deflation or very low prices, government can increases its spending, and thus stimulate demand and decrease unemployment in long run. On the other hand, when there is inflation, government may decrease spending. This will lead to a reduced deficit onto a budget surplus, thus reducing inflation.

The heads of states, including the President of the Philippines, seek the advice of an economic team composed of some of the best minds in economics in a particular. These economist analyze the most important and the latest economic and business data and information available, and use them to make analyses or projections.

This information is then provided to the country‘s leaders to be used as bases in making decisions.

OBJECTIVES OF FISCAL POLICY The totality of private and public spending, called the aggregate demand, affects the live; of income and employment in the economy.

Private spending includes the purchase of goods, products, and services by the general public, the purchase of businesses by investors and net exports. Government, on the other hand, spends for various public needs such as defense, peace and other maintenance, education, social projects, in fracture, and the like using funds from taxes and other revenue sources.

Because private spending is independently, it cannot be directly controlled, and thus, it is up to the government to take certain actions so that it can change or modify the composition of these spending. This way, government can have a hand in the management of the growth of economy. This is what is meant by fiscal policy.

What are the objectives of the government in taking certain actions to manage the economy? What then, are the objectives or aims of fiscal policy?

Although government mat differ somewhat in their fiscal policies, the following are some of the more general objectives or aims of fiscal policy:  To keep acceptable level of employment for the labor force  To have industrial plants and machinery running at optimum levels  To keep inflation at a minimum or at its most efficient level  To promote maximum purchasing power FISCAL POLICY AND ECONOMIC SITUATIONS In a way, fiscal policy is like a flexible tool that can be utilized by the government in adjusting the economy during different situations. Lets us study two situations and how government may use fiscal policy to manage the economy at these times.

Situation 1 : Recession Recession may come about when 10 there is a sharp decrease in spending, thus reducing aggregated demand; and 2) unemployment levels are high (because there is les demand, there is a lesser for production, and thus, lesser workers needed).

In a situation of recession, government may implement the following options as part of its fiscal policy.

1. Increased Government spending- the government may use resources at its disposal to increase spending. For example, it may initiate infrastructure and various other project. This will have two results: demand will increase as the projects will require raw materials (cement, steel, etc.) and tools and equipment; and it will increase employment of workers as many of them will be hired to work on the projects.

2. Reduced taxes- The government reduce taxes in order to increase demand. For example, if the government cuts the percentage of income taxes then the fixed wage earner will have additional income, which he can dispose or spend, thus leading to more demand for goods and services.

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3. Combination of Increased Government Spending and Reduced tax rates- The combination of the above options may be used by government. For example, the government may want to increase spending but may be lacking in funds, so instead of borrowing funds from other sources, a moderate increase in government spending might be combined with a reduction tax rates to simulate a higher public spending.

Situation 2 : demand-Pull Inflation As we have earlier learned, demand-pull inflation happens when there is too much demand for goods and services, which are not met by a corresponding level of supply resulting in an increase in prices.

In this situation, government may implement the following options as part of its fiscal policy, which are the opposite of the options in the first situation: 1. Decreased Government Spending- if the government decreases its spending, then it will reduce the overall demand for goods and services, thus decreasing demand-pull inflation.

2. Increased taxes- if the government increase individuals and corporate income taxes, then consumption spending will be halted as people and private businesses will not have extra funds to spend. This will affects the overall demand for goods and services, thus inhibiting inflation.

3. Combination of decreased Government Spending and increased tax Rates- as with the above, the government may use both a decrease in government spending and an increase in tax rates simultaneously to help in curbing demand-pull inflation.

Whatever the situation is, government fiscal officials must know when to take action and just how these actions may be done singular and in combination to accomplish the desired effect in the economy.

FISCAL POLICIE OF THE PHILIPPINE GOVERNMENT The idea of fiscal policy as a tool for the management of the economy is inherent in the Philippine constitution, as follows; The State shall promote a just and dynamic social order that will ensure the prosperity and independence of the nation and free the people from poverty through policies that provide adequate social services, promote full employment, a rising standard of living and an improved quality of life for all. (Article II Section 9) In fact the whole of article XII of the Philippines is about National economy and patrimony and Section 1 of the said article is as follows: The goals of the national economy are a more equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the key to raising the quality of life for all, especially the underprivileged.

The State, through various administrations, has consistently been doing efforts to formulate a fiscal policy that would conform with the above constitutional provisions,.

The Philippine government has always been very conservative in formulating measures and guidelines that would form part of its fiscal policy. The following are only some of the fiscal policy measures done by the government of President Gloria Macapagal arroyo in recent years.  A budget deficit-reduction program was instituted to ease interest rates.  An anti-money laundering act was passed to achieve uncertainties about the handling of money by banks and other financial institutions.  Spending was increased for agricultural modernization, education and wealth, socialized housing, infrastructure, information and communication technology, and tourism.  The amount of P 22 billion was set aside as a fiscal stimulus with P 14 billion for infrastructure projects and P 8 million for back payment to government constrictors.  Strengthening the revenue of government by improving tax collection and administration.

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Cutting down on non-essential spending, or expenditure control, so that the extra funds generated can be coursed to more important projects, or those that would generate employment.

As long as the country enjoys a healthy fiscal policy. It can look forward to an improved economy in the decade ahead.

HOW GOVERNMENT DERIVES AND SPENDS MONEY If government uses increased spending as one of the tools of fiscal policy, then how does it get its budget to spend?

The primary reason governments derive and spend money is to provide basic services to the general public. If it does use funds to spend as a component of fiscal policy, it is also the purpose delivering goods and services to the population. So how does government derive and spend money/ Source of government revenues Following are some of the ways by which government derives funds or revenue:  Taxes- this is the main source of revenue for the most governments. Taxes are the money raised by the government from individuals and organized to pay for the goods and services it provides. Taxes come in many forms and are derived from many sources. In the Philippines, taxes are collected mainly through the efforts of the Bureau of Internal revenue (BIR), the agency tasked with this responsibility.  Sale of Government assets and properties- subject to certain limitations, then government may sell its properties or assets to private companies and corporations, except those that are not allowed by law. Government properties and assets may include land, housing, factories, machinery, equipment, and various types of corporations.

This is true especially for non-performing assets, or those that do not generate any revenue for the government. Government may also sell public corporations to be owned and operated by private companies in a concept called privatization.  Service Fees and Fines- the government changes fees for many services t provided to the public, including fees and charges for licenses, ID‘s, certifications, and the like. Moreover, it also changes fines for violations of rules and laws, such as traffic rule infraction, or nonfilling on taxes.  Government-Owned and Controlled Corporations (GOCCs) and other Government Businesses- the government owns or controls companies and the profits or revenues they make go to government coffers. However, many of these GOCCs do not make a lot of money, and are even losing financially. Some government businesses in the Philippines, however, such as the Philippine Amusement and gaming Corporation (PAGCOR) and the Philippine Charity Sweepstakes office (PCSO), have generated hundreds of millions of funds for the government. The Philippine government, however, has been criticized for generating money from gambling and lottery.  Loans from Local and International Financial Institutions- sometimes, when government has not raised enough money for its budget due to poor tax collection, it may have to borrow money from local and foreign financial institutions. These creditors, however, trust the government enough to provide even up to billions of dollars in loans. The problem is that interest rates for these loans are sometimes too high that the government cannot even pay the interest alone.

Mechanics of Government Spending After the government has derived funds and revenues from these sources, it then ensures that the money is spent well using a list of appropriations in a national budget prepared by the Executive Department headed by the president with the assistance of the Department of Budget and management (DBM) The following are the general functions of the department of Budget and Management as it prepares how the government should spend money: Young Ji International School / College

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Formulates the overall resource application strategy to match the government‘s macroeconomics policy; Prepares the medium-term expenditure plan, indicating the programming, prioritization, and financing of capital investment and current operating expenditure requirements of mediumterm sectoral development plans; Undertakes the formulation of the annual national budget in a way that ensures the appropriate prioritization and allocation of funds to support the annual program of government.

Develops and administers a national accounting system essential to fiscal management and control: Conducts a continuing study of the bureaucracy and assesses as well as makes policy recommendations on its role, size, composition, structure and functions to establish a government bureaucracy imbued with a spirit of public services; Establishes the rules and procedures for the management of government organization resources, I.e., physical, manpower and other resources; formulates standards of organizational program performance; and undertakes or provides services in work simplification or streamlining of system and procedure to improve efficiency and effectiveness in government operations; Conceptualizes and administrations the government‘s compensation and position classification plan; and Monitors and assesses the physical as well as the financial operations of local government units and government-owned and /or controlled corporations.

The national budget, which is the plan for a country‘s expenses for a given year, is prepared with consultation from the different departments of the national government, such as the department of education, defense, health, and others, to ensure that the needs of the department and its attached officers. For example, the Health Department may need more hospitals and doctors, and will request for such with an estimate of coast. It is up to the president and the DBM whether to include the requested appropriations in the budget.

After the national budget has been prepared, it will be submitted to the Congress of the Philippine, and the legislative body will then conduct hearings on the budget, to determine whether the requested amount is, in fact, justifiable. The Constitution of the republic specifically gives Congress the power to approve the national budget: After the national budget has been approved, it will be submitted to the President, and his approval makes the national budget official-it will now the basic for how the government will spend its money for a given year.

The different departments of government, with their own objectives now, would then utilize the funds to accomplish their objectives. A separate constitutional body, the Commission on Audit (CAO), would then have the task of making sure that the money is spent the way it was appropriate, as indicated in the Philippine constitutions.

TAX AS A MAN SOURCE OF GOVERNMENT REVENUE We have identified taxes as one of the main sources of government revenue. Indeed, without taxes, government would have a much bigger problem of where to get funds. Since the taxes paid by the people through their income and spending are returned back by the government through goods and services, people find it is their moral responsibility to pay taxes.

Taxes may be classified as a direct tax, when it is deducted directly from income or indirect tax, when it is added to the price of goods and services, by which it becomes a tax on consumption.

Principle of taxation Taxation seems to be a really big burden to people but when done properly and using acceptable principles, taxation is a good way to strengthen government‘s capacity to deliver basic services. Among the general principles of taxation are the following:

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Taxation must be productive. Taxation should meet its goal of providing needed revenue to government for it to deliver its services to the people. If it cannot do this, then it has failed to be productive. When taxes collected are not enough or do not meet the target, or when these taxes go to the pockets of corrupt officials, then it becomes non-productive.

Taxation must be equitable. Taxation must be at least fair to taxpayers. This is possible if taxes become higher only when your income become higher (a progressive tax, which we will later learn.) taxes should not discriminate against people.

Taxation must be flexible. Government should provide built-in mechanisms whereby taxes can be adjusted depending on the financial situation of the country. Authorities should have the flexibility to increase or decrease taxes, subject to limitation of law. In the Philippines, taxation authority is with Congress.

Kinds of taxes Governments derive various types of taxes from both individuals and corporations. The following are some these taxes.  Personal Income tax- This is the tax derived from the income of individuals and residents of a country. A certain portion of the income is declared as a taxable income after certain deductions and exemptions are subtracted from it. Then the actual taxes are calculated on the basis of this taxable income.  Corporate Income tax- Just like the personal income tax, this tax is levied against income but not of the individual, but of corporations and businesses, and comes with a different computation.  Sales tax- This is the tax for merchandise or items bought, sometimes ranging from 3 percent to 4 percent.  Value-Added tax- This is like a national sales tax, and it collects taxes at various stages of production. Value-added tax collects tax from the production of raw materials to the point of sales. In our country, VAT is levied on food products and even electricity and gasoline, although there are moves to exempt oil products from this tax.  Property Tax- The government requires an annual tax to be paid by property owners for each piece of property (real estate and/or building) that they own. Rates deepened on the evaluation of the property by the local assessor.  Capital Gains tax- This is a tax on the income gained from the sale of real estate and other capital assets.  Tariff- this is tax placed on foreign goods that earlier a country. By using tariffs, countries will not only be able to earn additional income, but will also able to raise the price of imported goods, thereby protecting their local industries.

The above are only some of the most common taxes levied by the government. There are taxes on almost every good and service and every economic transaction or business agreement that happens.

Types of taxes Taxes may be classified into three types, depending on the relationship between income and tax rates. These are as follows.

1. A progressive tax increase as the income increases. In progressive taxation, the higher the income, the higher the taxes that would have to be paid. The tax takes up a larger portion of the income as income increases. Individual income taxes are usually progressive.

This type of tax is a burden for the rich.

2. A regressive tax decreases as the income increases. In this type of taxation, the higher income, the lower the taxes that would have to be paid. Sales taxes are regressive as the income of the rich which are not used to buy goods will not be subjectected to the tax.

Corporate income taxes are also regressive as part of the tax is passed on to consumers as higher prices. This type of tax is a burden for the poor.

3. A proportional tax remains the same regardless of the income. Personal income tax may be a proportional. This means that the income to be taxed amounts to P 60, 000, 00.

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Terns to Define 1. Sales tax 2. Recession 3. Indirect tax 4. Congress 5. Property tax 6. DBM 7. BIR 8. Privatization 9. GOCC 10. Philippine Constitution 11. Capital gains tax 12. Corporate income tax 13. National budget 14. Fiscal policy 15. Government assets Follow-up Questions 1. Explain the concept of fiscal policy and how it is used to steer the country‘s economy.

2. Give the objectives of fiscal policy. Tell how each of these aims can help the economy.

3. Elaborate on the steps that should be taken as part of fiscal policy when ether is a recession.

4. What are the ways by which the government gets revenues?

5. Elaborate on the important of the national budget.

Lesson 9

Monetary policy of the Philippines

Monetary policy is the monitoring and control of money supply by a central bank, such as the Federal Reserve Board in the United States of America, and the Bangko Sentral ng Pilipinas in the Philippines. This is used by the government to be able to control inflation, and stabilize currency. Monetary Policy is considered to be one of the two ways that the government can influence the economy – the other one being Fiscal Policy (which makes use of government spending, and taxes). Monetary Policy is generally the process by which the central bank, or government controls the supply and availability of money, the cost of money, and the rate of interest.

Money Supply Indicator

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The New Generation Philippine Banknotes Money supply indicators are often found to contain necessary information for predicting future behavior of prices and assessing economic activity. Moreover, these are used by economists to confirm their expectations and help forecast trends in consumer price inflation. One can predict, to a certain extent, the government's intentions in regulating the economy and the consequences that result from it. For example, the government may opt to increase money supply to stimulate the economy or the government may opt to decrease money supply to control a possible mishap in the economy.

These indicators tell whether to increase or decrease the supply. Measures that include not only money but other liquid assets are called money aggregates under the name M1, M2, M3, etc.

M1: Narrow Money M1 includes currency in circulation. It is the base measurement of the money supply and includes cash in the hands of the public, both bills and coins, plus peso demand deposits, tourists‘ checks from non-bank issuers, and other checkable deposits. Basically, these are funds readily available for spending. Adjusted M1 is calculated by summing all the components mentioned above M2: Broad Money This is termed broad money because M2 includes a broader set of financial assets held principally by households. This contains all of M1 plus peso saving deposits (money market deposit accounts), time deposits and balances in retail money market mutual funds.

M3: Broad Money Liabilities Broad Money Liabilities include M2 plus money substitutes such as promissory notes and commercial papers.

M4: Liquidity Money These include M3 plus transferable deposits, treasury bills and deposits held in foreign currency deposits. Almost all short-term, highly liquid assets will be included in this measure.

Implications If the velocity of M1 and M2 money stock has been low, this indicates that there is a lot of money in the hands of consumers and money is not changing hands frequently.

Generally we would expect that when money supply indicators are growing faster than interest rates plus growth rate or inflation, whichever is higher, interest rates should possibly be increased.

This should only generally apply when broad measures of money supply growth are higher than narrow measures, to rule out some of the measurement error issues that could emerge.

Monetary Policy Instrument  Open Market Operations Open Market Operations consist of repurchase and reverse repurchase transactions, outright transactions, and foreign exchange swaps.  Repurchase and Reverse Repurchase This is carried out through the Repurchase Facility and Reverse Purchase Facility of the Bangko Sentral ng Pilipinas. In Purchase transactions, the Bangko Sentral buys government securities with a dedication to sell it back at a specified future date, and at a predetermined interest rate. The BSP‘s payment increases reserve balances and expands the monetary supply in the Philippines. On the other hand, in Reverse Repurchase, the government acts as the seller, and works to decrease the liquidity of money. These transactions usually have maturities ranging from overnight to one month.  Outright Transactions Unlike the repurchase or reverse repurchase, there is no clear intent by the government to reverse the action of their selling/buying of monetary securities. Thus, this transaction creates a more permanent effect on our monetary supply. ―When the BSP buys securities, it pays for them by directly crediting its counterparty‘s Demand Deposit Account with the BSP.‖The reverse is done upon the selling of securities.  Foreign Exchange Swaps

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This refers to the actual exchange of two currencies at a specific date, at a rate agreed upon the deal date and the reverse exchange of the currencies at a farther ate in the future, also at an interest rate agreed on deal date.

Acceptance of Fixed-Term Deposits To expand its liquidity management, the Bangko Sentral introduced this method in 1998. In the Special Deposits Account, or SDA, consists fixed terms deposits by banks and institutions affiliated with the BSP. Standing Facilities To increase the volume of credit in the financial system, the Bangko Sentral ng Pilipinas extends loans, discounts, and advances to banking institutions. ―Rediscounting is a standing credit facility provided by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to their clients.‖ There are two types of rediscounting in the BSP: the peso rediscounting facility and the Exporter‘s dollar and Yen Rediscount Facility.

Reserve Requirements In banking institutions, there are required amounts that banks cannot lend out to people. They always need to maintain a certain balance of money, which are called "reserves". Once these reserve requirements are changed and are varied, changes in the monetary supply will be observed greatly.

Two Forms: 1. Regular or Statutory Reserves 2. Liquidity Reserves Philippine Monetary Policy  Bangko Sentral ng Pilipinas The Bangko Sentral ng Pilipinas or BSP is the central monetary authority of the republic of the Philippines. It provides policy directions in the areas of money, banking and credit and exists to supervise operations of banks and exercises regulatory powers over nonbank financial institutions. It keeps aggregate demand from growing rapidly with resulting high inflation, or from growing too slowly, resulting in high unemployment.

The primary objective of BSP's monetary policy is to promote price stability because it has the sole ability to influence the amount of money circulating in the economy. In doing so, other economic goals, such as promoting financial stability and achieving broad-based, sustainable economic growth, are given consideration in policy decisionmaking.

Philippine Monetary Framework I: 1980s to early 1990s In the past, the BSP followed the monetary aggregate targeting approach to monetary policy. This approach is based on the assumption that there is a stable and predictable relationship between money, output and inflation.

In particular, all money aggregates, with the exception of reserve money, are incorporated with output and interest rate. This means that there is a long-run relationship between money on one hand and output and interest rate on the other so that even if there are shocks in the economy, the variables will return to their trend equilibrium levels.

This means that changes in money supply (on the assumption that velocity is stable over time) are directly related to price changes or to inflation. Thus, it is assumed that the BSP is able to determine the level of money supply that is needed given the desired level of inflation that is consistent with the economy's growth objective. In effect, under the monetary targeting framework, the BSP controls inflation indirectly by targeting money supply.

Philippine Monetary Framework II: June 1995 to Present The BSP employs a modified framework beginning the second semester of 1995 in attempt to enhance the effectiveness of the monetary policy by complementing Young Ji International School / College

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monetary aggregate targeting with some form of inflation targeting, placing greater emphasis on price stability.

Certain key modifications include:  Allows base money levels to go beyond target as long as the inflation rates are met  An excess of one or more percentage points of inflation over the program induces mopping up operation by the BSP to bring down base money to the previous month‘s level Under an aggregate targeting framework, the BSP fixes money growth so as to minimize expected inflation. On the other hand, under the new framework, BSP sets monetary policy so that price level is not just zero in expectation but is also zero regardless of latter shocks. Moreover, the framework was changed because BSP wanted to address the fact that aggregate targeting did not account for the long-run effects of monetary policy on the economy.

With this approach, the BSP can exceed the monetary targets as long as the actual inflation rate is kept within program levels and policymakers monitor a larger set of economic variables in making decisions regarding the appropriate stance of monetary policy.

Current Approach: Inflation Targeting As mentioned earlier, Inflation Targeting requires a public announcement of an inflation rate that a country will target for the coming years, or in a given period of time. It focuses on maintaining a low level of inflation, that which is considered to be optimal, or at least would allow the country to have ample economic growth. Its main desire is to achieve price stability as the ultimate end goal of the monetary policy. The Philippines formally adopted Inflation Targeting as the framework for Monetary Policy on January 2002.

The Philippines‘ inflation target is measured through the Consumer Price Index (CPI).

For 2009, inflation target has been set to be 3.5 percent, having a 1% tolerance level, and 4.5 percent for 2010, also having 1% tolerance. Also, the Monetary Board of the Philippines announced a target of around 4±1 percent from 2012 to 2014. 

Monetary Policy Issues Exchange Rate Exchange rates play a significant role in monetary transmission mechanism and at the same time, it can have a large impact on inflation rates. Although the BSP has adopted the inflation targeting approach, it may be tempted to inexplicitly target exchange rate to achieve its low inflation target. The issue here is the extent of the exchange rate passthrough or ERPT to domestic prices since higher ERPT would require the BSP to shift its attention to exchange rate movements to stabilize prices.

Role of Monetary Aggregates Since the shift to inflation targeting, BSP has already abandoned monetary aggregates because its information content has apparently declined in the recent years. Moreover, it is also assumed that a shift of approach was necessary because money aggregates are normally not good indicators of future economic policy requirements due to unreliability of measurement.

Measurement of Inflation and Liquidity Trap Since inflation targeting leads to lower and stable inflation rates, more improvement should then be given to the measurement of the consumer price index since few percentage points have greater repercussions when rates are low. Errors in CPI measurement could lead to ineffective and unsuitable monetary policy response by the BSP which definitely result to detrimental effects to the economy.

Another issue arising from monetary policies is the liquidity trap. This happens when inflation rate declines too much leading to a threat of deflation. Liquidity trap is defined as a situation in which there are zero nominal interest rates, persistent deflation and

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deflation expectations. In the event this occurs, bonds and money earn the same real rate of return thus making people indifferent to holding bonds or excess money.

Budget Deficit and External Debts Given high budget deficits, the government is concerned about two closely related issues: it does not want to pay very high interest on its borrowings and it does not want to crowd out the market. Ideally, the government could raise tax revenues to avoid borrowing huge sums from the market. However, the government opted to borrow from the international capital market and though rates are low, these have shorter maturity and country‘s outstanding external debt has continued to move towards a less ideal position.

Fiscal Dominance According to the fiscal theory of the price level, it is not the non-interest bearing money but the total nominal liabilities including interest bearing notes and future fiscal surpluses that matter for price-level determination. In the absence of fiscal discipline, an independent central bank such as the BSP cannot guarantee a stable nominal anchor.

In other words, for the BSP to successfully focus on price stability, there must be a credible commitment on the part of the National Government to reduce total fiscal deficits by a meaningful amount.

The Monetary and Financial Sectors The Bangko sentral ng Pilipinas is only the central financial authority in the country.

However, it is not the only financial institution that offers monetary and financial services. There are also institutions called banks, which are also a main component of the country‘s monetary sector.

The Philippine banking System The Philippine banking System consists of universal and commercial banks, thrift banks, and rural and cooperative banks. The BSP monitoring these banks and sets requirements on reserve, branching and services.

Universal and Commercial banks- these have the largest resources and offer the widest services. Universal banks also serve as investment houses, and can engage in underwriting and equity investment activities.

Thrift Banks- consists of savings and mortgage banks, private development banks, stocks savings and loan associations and microfinance thrift banks. Their main functions are to derive savings from depositors and invest them; finance businesses engaged in the agriculture, housing, and industry; and offer basic housing and auto loans.

Rural and Cooperative banks- these are very popular in the provinces and in rural areas.

Their function is to foster economic growth in these communities by providing the local people with loans and financing for their enterprises.

INTERNATIONAL FINANCIAL BODIES AND FOREIGN AID  World bank- this is an international institution that provides financial and technical assistance to developing countries all over the world. The World Bank is actually composed of two development bodies- the International bank for Reconstruction and Development (IBRD) and the International development Association (IDA). The focus of IBRD is on the middle income sectors while the IDA focuses on the poorest countries.  International Monetary Fund- also called IMF, this international body is actually a specialized agency of the United Nations, the objective of which is to promote international monetary cooperation and the growth of the world trade, and coordinate multilateral payment arrangements among member states. It provides loans to member-countries who may have financial difficulties, but certain corrective measures must be first taken.  Foreign Loan Providers- these are countries which provide development loans or credit less developed countries or LDCs. Foreign aids from the most industrialized nations are estimated to be about $ 60 billion a year. Some of the major foreign loan providers are the United States, Denmark, Sweden, France, Canada, Germany, United kingdom, and Japan.

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The major recipients of these loans, on the other hand, include many nations in Asia and Africa.

Terms to Define 1. World bank 2. Monetary policy 3. Cooperative bank 4. Bank 5. Reserves 6. Rural bank 7. Pawnshop 8. Bartering 9. Peso 10. Medium of exchange 11. Government bond 12. MF 13. Monetary board 14. Discount rate 15. Cooperative 16. Money 17. Counterfeiting 18. Centavo 19. Immigrant 20. Reserve ratio 21. Microfinance bank 22. Universal bank 23. Open market operation 24. Thrift bank 25. Goldsmith 26. Legal tender 27. Central bank Follow –up Questions 1. What is monetary policy? How is it implemented/ 2. Describe the monetary policy of the Philippines as set by the Bangko Sentral pilipinas.

3. What can we expect in the future regarding our inflation?

4. Differentiate the types of banks in the Philippines banking system.

5. Give the roles of pawnshop and cooperatives in the monetary situation in the country.

6. Explain in your own words how banks originated.

7. What is money, in your opinion? How does it help as a medium of exchange?

8. Define the functions of money, and how money performs these functions.

9. Contracts the role of the monetary board with that of the BSP governor.

10. Describe the various features of money using our currency as basis.

I.

Multiple Choices: Encircle the correct answer.

1. The quantity that consumers are willing to purchase a. Demand c. supply b. Price d. elasticity 2. Examples of this are industries that products cars a. Pure competition c. pure monopoly b. Oligopoly d. monopolistic competition 3. Products that go hand in hand a. Pure competition c. pure monopoly b. Oligopoly d. monopolistic competition

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4. There is only one producer in the market a. Pure competition c. pure monopoly b. Oligopoly d. monopolistic competition 5. Has a slope going upward a. Supply curve c. substitute effect b. Income effect d. demand curve 6. Quantity of a product that producers are willing to seal a. Demand c. substitute effect b. Income effect d. demand curve 7. Products are bought based on differentiation a. Pure competition c. pure monopoly b. Oligopoly d. monopolistic competition 8. Goods that perform the same function a. Competitor goods c. substitute goods b. Consumed goods d. complementary products 9. Has a slope going downward a. Supply curve c. substitute effect b. Income effect d. demand curve 10. A large number of producers offer a standardized product a. Pure competition c. pure monopoly b. Oligopoly d. monopolistic competition 11. Using savings or money to earn more money a. Profit c. interest b. Investment d. inflation 12. High-skilled workers in low-wage jobs a. Employment c. employment rate b. Underemployment d. unemployment 13. The interest also earns additional interest a. Income c. interest b. Savings d. compounding 14. Happens with an excess demand for goods a. Inflation rate c. cost-push inflation b. Law of demand d. demand-pull inflation 15. Used to measure inflation a. GNP c. GDP b. CPI d. BSP 16. Total goods produced within the country‘s boundaries a. GNP c. GDP b. CPI d. BSP 17. Money earned a. Income c. interest b. Savings d. compounding 18. A general rise in the level of prices a. Deflation c. inflation b. National income d. CPI 19. Happens with a general rise in the cost of production a. Inflation rate c. cost-push inflation b. Law of demand d. demand-pull inflation 20. Too high rate of inflation a. Hyperinflation c. inflation rate b. Deflation d. demand-pull inflation 21. Levied against income of businesses a. Tariff c. individual income tax Young Ji International School / College

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b. Sales tax d. corporate income tax 22. Collects taxes at various stages of production a. Value-added tax c. sales tax b. Property tax d. capital gains tax 23. Main source of government revenue a. Fines c. taxes b. Service fees d. sale of assets 24. Tax from the sale of real estate a. Value-added tax c. sales tax b. Property tax d. capital gains tax 25. Government agency responsible for tax collection a. DBM c. bureau of Customs b. BIR d. COA 26. Approves the national budget of the country a. COA c. congress b. GOCC d. DBM 27. Plan for a country‘s expenses for a given year a. Fiscal policy c. depression b. National budget d. auditing 28. Levied against foreign goods a. Tariff c. individual income tax b. Sales tax d. corporate income tax 29. Examines how the national budget was spent a. COA c. congress b. GOCC d. DBM 30. Government agency that collects tariffs a. DBM c. bureau of Customs b. BIR d. COA 31. Include private development banks a. National banks c. thrift banks b. Cooperatives d. commercial banks 32. Based on a country‘s fiscal policy a. Inflation c. monetary policy b. Money d. discount rate 33. The foremost function of money a. Barter c. medium of exchange b. Store of value d. measure of value 34. Banks originated from their storehouses a. Pawners c. bankers b. Governor d. goldsmiths 35. Central banking authority in the Philippines a. BSP c. CBP b. IMF d. LDC 36. A tool of monetary policy a. Foreign aid c. exchange rate b. Deposit d. open market operations 37. Producing fake money a. Piracy c. reducing reserves b. Counterfeiting d. banking 38. Declares money as legal tender a. Government c. market b. Consumers d. businesses 39. Provides financial aid to less developed countries a. BSP c. CBP Young Ji International School / College

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II.

b. IMF d. LDC 40. Interest on loans of commercial banks a. Inflation c. monetary policy b. Money d. discount rate Acronyms 1. WB 2. IBRD 3. IDA 4. IMF 5. LDCs 6. BSP 7. GOCCs 8. CPI 9. BIR 10. BOC

III.

Explain the following questions. (5 point each) 1. Describe your understanding of the price elasticity of demand and the price elasticity of supply.

2. Why is equilibrium termed as a ―market-clearing‖ situation?

3. How does interest serve as an incentive for those who want to save?

4. What does the unemployment rate of a country indicate?

5. Elaborate on the importance of the national budget.

6. What can we expect in the future regarding our inflation?

IV.

Identification: Identify the following questions. _____________1. This is an international institution that provides financial aid and technical assistance to developing countries all over the world. _____________ 2. Part of the acceptability of money is its being recognizable by all sectors of the economy. _____________ 3. The basic unit of monetary value in the Philippines _____________ 4. This is the foremost function of money. It is readily accepted as payment in almost all economic transition in a given market, and is honored and taken as a responsibility by the central bank. _____________ 5. It provides small loans to people on the basis of a physical collateral or guarantee, such as jewelry or household appliance. _____________ 6. It is the latest in the banking system and focus on providing loans and financial services for the micro-enterprises of low-income individuals and families. _____________ 7. It consists of savings and mortgage banks, private development banks, stock savings and loan association and microfinance thrift banks. _____________ 8. These have the largest resources and offer the widest services. _____________ 9. The central bank also charges interest on these loans. _____________10. It consists of the actions and decisions made by a government to create appropriate monetary conditions or to change the money supply to achieve economic objectives such as full employment and a lower and stable of inflation.

Lesson 10 THE AGRICULTURAL SECTOR: AGRICULTURE, FISHERIES, AND FORESTRY Agriculture in the Philippines employs 32% of the Filipino workforce as of 2013, according to World Bank statistics. Agriculture accounts for 12% of Filipino GDP as of 2013, according to the World Bank.

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The Philippines is the 8th largest rice producer in the world, accounting for 2.8% of global rice production. The Philippines was also the world's largest rice importer in 2010.

In 2010, nearly 15.7 million metric tons of palay (pre-husked rice) were produced. In 2010, palay accounted for 21.86% percent of gross value added in agriculture and 2.37% of GNP. Rice production in the Philippines has grown significantly since the 1950s. Improved varieties of rice developed during the Green Revolution, including at the International Rice Research Institute based in the Philippines have improved crop yields. Crop yields have also improved due to increased use of fertilizers. Average productivity increased from 1.23 metric tons per hectare in 1961 to 3.59 metric tons per hectare in 2009. 

Sugar There are at least 19 provinces and 11 regions that produce sugarcane in the Philippines. A range from 360,000 to 390,000 hectares is devoted to sugarcane production. The largest sugarcane areas are found in Negros which accounts for 51% of sugarcane areas planted. This is followed by Mindanao which accounts for 20%; Luzon, 17%; Panay islands, 7% and Eastern Visayas, 4%.

It is estimated that as of 2012, the industry provides direct employment to 700,000 sugarcane workers spread across 19 sugar producing provinces.

Sugar growing in the Philippines pre-dates Spanish contact. Sugar became the most important agricultural export of the Philippines between the late eighteenth century and the mid1970s.]During the 1950s and 60s, more than 20 percent income of Philippine exports came from the sugar industry] Between 1913 and 1974, the Philippines sugar industry enjoyed favored terms of trade with the US, with special access to the protected and subsidized U.S. sugar market. 

Coconuts Coconuts plays an important role in the national economy of the Philippines. According to figures published in December 2009 by the Food and Agriculture Organization of the United Nations, it is the world's largest producer of coconuts, producing 19,500,000 tons in 2009. Production in the Philippines is generally concentrated in medium-sized farms.

There are 3.5 million hectares dedicated to coconut production in the Philippines, which accounts for 25 per cent of total agricultural land in the country.

In 1989, it was estimated that between 25 percent and 33 percent of the population was at least partly dependent on coconuts for their livelihood. Historically, the Southern Tagalog and Bicol regions of Luzon and the Eastern Visayas were the centers of coconut production. In the 1980s, Western Mindanao and Southern Mindanao also became important coconut-growing regions.  Fruit

A rubber plantation worker in Mindanao, 1984.

The Philippines is the world's largest producer of pineapples, producing 2,198 thousand metric tons in 2009.

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The Philippines was in the top three banana producing countries in 2010, including India and China. Davao and Mindanao contribute heavily to the total national banana crop.

Mangoes are the third most important fruit crop of the country based on export volume and value next to bananas and pineapples. 

Corn Corn is the second most important crop in the Philippines. 600,000 farm households are employed in different businesses in the corn value chain. As of 2012, around 2.594 Million ha of land is under corn cultivation and the total production is 7.408 million metric ton (MMT). 

Rubber There are an estimated 38,000 families dependent upon the cultivation of rubber trees.

Rubber is mainly planted in Mindanao, with some plantings in Luzon and the Visayas.

Bureau of Fisheries and Aquatic Resources The Philippines' Bureau of Fisheries and Aquatic Resources (Filipino:Kawanihan ng mga Pangisdaan at mga Yamang-Tubig, abbreviated as BFAR), is an agency of the Philippine government under the Department of Agriculture responsible for the development, improvement, management and conservation of the Philippines' fisheries and aquatic resources.

When the Civil Government was established on July 4, 1901, the Philippine Commission proposed the creation of an Office under the Department of Interior to take charge of the conservation, promotion and development of the country's fishery resources. This was not carried out, due to limited funds. The Secretary of the Interior continued to stir interest in the development of fisheries and, finally, in 1907, studies in fisheries began following the arrangement made by the Secretary of Interior for the services of the United States Fish Commission fisheries research vessel USS Albatross to work in Philippine waters for 18 months and the employment of an American specialist in fisheries in the Bureau of Science, formerly known as Bureau of Science to take charge of all work pertaining to fisheries.

On January 1, 1933, by virtue of General Memorandum Order No. 4 dated December 5, 1932 of the Secretary of Agriculture and Commerce, the Division of Fisheries and Division of Zoology of the Bureau of Science together with the Division of Forest Fauna and Grazing of the Bureau of Forestry were fused into one special division known as the Fish and Game Administration, which was placed under the direct administrative jurisdiction of the Department of Agriculture and Commerce. Under this arrangement, the fish and Game Administration operated under the provisions of the Fisheries Act (Act No. 4003) and Act No. 2590, entitled "An Act for the Protection of Game and Fish." By subsequent reorganization effected on September 27, 1934, the Fish and Game Administration was returned to the Bureau of Science. The reason for its return was to strengthen the office through the use of equipment, personnel and appropriation of the Bureau.

On July 1, 1941, under the provisions of General Administrative Order No. 15, the Fish and Game Administration was reorganized as an independent unit under the Department of Agriculture and Commerce and renamed Division of Fisheries. The functions pertaining to forest fauna and grazing was returned to the Bureau of Forestry and those of the Division of Zoology to the Bureau of Science.

The Divisions of Fisheries as a special division under the Department of Agriculture and Commerce functioned up to the outbreak of the war in 1941. During the early days of World War II, the Division of Fisheries was fused with the Bureau of Forestry and then known as the Bureau of Forestry and Fishery. In the latter part of the enemy occupation, however, the Division of Fisheries was converted into an independent office known as the Bureau of Fisheries.

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Taking cognizance of the increasing importance of effectively administering and conserving our fishery and other aquatic resources in our efforts to rehabilitate our prostrate economy, the Congress of the Philippines enacted Republic Act No. 177 creating the present Bureau of Fisheries which took effect on July 1, 1947. The Division of Fisheries and all sections, field districts, experimental stations and all activities and agencies of the National Government connected with fishery work have been incorporated in the Bureau of Fisheries.

As organized on July 1, 1947, the Bureau of Fisheries had seven functional divisions, namely, (1) Administrative Division, (2) Division of Fish Culture and Fisheries Biology,(3) Division of Commercial Fisheries, (4) Division of Fisheries Technology, (5) Division of Licenses and Regulations, (6) Division of Investigation and Inspection, and (7) Philippine Institute of Fisheries Technology offering a 2½ year course in fisheries on collegiate level. Subsequently, branches of this Institute offering a 4 years secondary course in fisheries were established in the following seven provinces: Samar, Cebu, Albay, Iloilo,Zamboanga City, Antique and Batangas.

The entire Philippines were divided into 10 fishery districts with a District Fishery Officer as head of each District. The headquarters of the fishery districts were located in strategic places in the different fishing regions as follows; Fishery District No. 1-Aparri, Cagayan; 2-Dagupan City, 3Manila; 4-Naga City; 5-Catbalogan City, Samar; 6-Iloilo City; 7-Coron, Palawan; 8-Cebu City; 9Davao City and 10-Zamboanga City.

Under the reorganization Plan No. 30-A reorganizing the Department of Agriculture and Natural Resources as implemented by Executive Order No. 216, dated November 17, 1956, the Bureau of Fisheries has been reorganized again effective January 16, 1957 such that functional divisions of the Bureau had been reduced from seven to five, namely, (1) Licenses and Regulations Divisions; (2) Marine Fisheries Division; (3) Fisheries Research Division; (4) Inland Fisheries Division; and (5) Administrative Services Division.

BFAR Asian Fisheries Academy at the National Integrated Fisheries Training and Development Center, Bonuan Binloc, Dagupan City - June 5, 2013

Multi-Species Fish and Invertebrate Breeding and Hatchery, (Oceanographic Marine Laboratory in Alaminos) Lucap, Alaminos, Pangasinan, Philippines, Department of Agriculture, Bureau of Fisheries and Aquatic Resources, Regional Mariculture Technodemo Center (RMaTDeC) - April 20, 2011.

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Alaminos Regional Mariculture Technodemo Center (RMaTDeC) - April 20, 2011 The Philippine Institute of Fisheries Technology had been transferred to the University of the Philippines. The seven secondary schools of fisheries in the provinces previously mentioned had been transferred to the Department of Education under the administration of the Bureau of Public Schools. On March 20, 1963, R. A. 3512 reorganized it into the Philippine Fisheries Commission. On September 30, 1972, under the Integrated Reorganization Plan, the Philippine Fisheries Commission was reverted to the Bureau of Fisheries. By virtue of Presidential Decree No. 461 signed on May 17, 1974, which reorganized the Department of Agriculture, and the Department of Natural Resources, the Philippine Fisheries Commission was renamed Bureau of Fisheries and Aquatic Resources and placed under the Ministry of Natural Resources.

On June 30, 1984, BFAR was transferred from the Ministry of Natural Resources to the Ministry of Agriculture and Food, in compliance with Executive Order 967 mandating the conversion of BFAR as a staff Bureau and integrating its Regional Offices with the Regional Offices of the Department of Agriculture. The staff functions of the Central Office and the integration of BFAR's Regional Offices into Regional Offices of the Department of Agriculture was fully implemented with the issuance of Executive Order 116 signed by President on January 30, 1987.

On February 25, 1998 President Fidel V. Ramos signed into law Republic Act No. 8550, entitled, "An Act Providing For the Development, Management and Conservation of the Fisheries and Aquatic Resources, Integrating all laws pertinent thereto and for other purposes", otherwise known as the Philippine Fisheries Code of 1998. This law took effect on March 23, 1998.

On January 5, 2008, the Bureau of Fisheries and Aquatic Resources (Philippines) (BFAR) announced that a fish kill at Taal Lake (January 2 to 4) caused the 50 metric tons or P 3.25-million ($80,000) loss of cultured tilapia in the villages of Leviste and Balakilong in Laureland in Barangay Aya and Barangay Quiling in Talisay. 6,000 maliputo fishes (P 230,000) also died at Quiling. Toxic sulfur and high level of hydrogen sulfide in Ambulong while low dissolved oxygen caused the deaths. 

Current organization After undergoing series of reorganizations, the BFAR today has nine (9) functional divisions: the Fisheries Policy Research and Economics Division, Fishery Resources Administration Division, Fisheries Development and Support Services Division, Aquaculture Division, Fisheries Resources Research Division, EEZ Fisheries and Allied Services Division, Fishing Technology Division, Fisheries Regulation and Quarantine Division, and Post Harvest Technology Division. It also has eight (8) fisheries technology center under its wing: The National Marine Fisheries Development Center, National Brackishwater Aquaculture Technology Research Center, National Freshwater Fisheries Technology Research Center, Tanay Freshwater Experimental Station, Fisheries Biological Station Complex, National Fisheries Research and Development Center, National Seaweeds Technology and Development Center and the Mindanao Freshwater Fisheries Technology Center.

The Agricultural Sector- consisting of the agriculture, fisheries and forest sectors-are as equally important as the other economic sectors of the country. Agricultural activities play an important role in economic sustainability and development of the nation, and have been part of the Philippines continuing progress since the earliest times.

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Agriculture is practiced in most parts of the world. The following is a general description of how agriculture is utilized in various regions and countries around the globe.

Africa- only about one-third of the continent is used for farming because the rest of the land consists of deserts and forest. The main crops are corn, sorghum, and cassava. Cereals serve as Africa‘s main agricultural export.

Asia- almost half of the lands in Asia is used for agriculture. Millions of farms are in the continent and about 60 % of the workers are in farming. Many Asian courtiers lead in producing certain products. For example, china is the world‘s leading rice producer while Malaysia is the world leading producer of palm oil.

Australia- Farmland covers about 70 % of the continent but almost of these are used as pasture lands. Most of these farms are commercialized-that is- they are run as formal businesses with the intent of getting the most profit. Australia is one of the leading producers of wool and dairy products in the world.

Europe- half of Europe is abundant farmland and most of these are seed to grow crops.

This is assisted by abundant rainfall and generally good climate conditions. The main agricultural crops in Europe include barely, potatoes, wheat, oats and fruits and vegetables.

South America- more than third of South America‘s land has been utilized for farming, while a fourth of the workers earn their living in farms. Farming is commercialized in many territories, but poor farmers have their own lands through land reform measures. Some of the main crops in the region are banana, coffee, cocoa, and sugar cafe, while most produce large volume of cattle for food.

North America- The continent consists mostly of the United States and Canada. In the US more than half of the area is used for farming, but in Canada, it is only about 10 %. Scientific farming methods and processes have been used to come up with better agricultural output. Most farmlands in the region are privately-owned, although the government owns and manages grazing lands.

Agriculture in the Philippines The Philippine contains many fertile areas, and this is the reason why agriculture plays a big part in its economy. Almost half of the labor force in into agriculture, and the industry covers 25% of the GDP. The right combination of climate, land, topography, and natural vegetation has predisposed the country to developing agriculture.

Another factor which had the Philippines going for agriculture is the fact that agricultural products serve as food for the general population. The staple food is rice in most areas, which is replaced by corn in some localities. It is no wonder that these are the two main crops. Other crops grown by farmers are bananas, cassava, sweet potatoes, mangoes, pineapples, sugar cane, tobacco, and coconuts.

Most of the farmers rent their land through a product-sharing scheme by which the owners of the land will have their percentage of the harvest. There are very few farmers who own their own land, and various administrations since the 1960s have instituted program on Reform Program (CARP) under the Aquino government. These programs, however, have yet to emancipate the farmers from their plight.

Current Agricultural Performance in the Country The Philippines Department of Agriculture has reported that agriculture grew 2.24 percent in 2005, and has managed to better its 2004 record. Some of the problems encountered during the year were mild El Nino in the first quarter and the prevalence of typhoons.

Generally, the prices of agricultural products move up, especially with sugarcane, mango, abaca, and garlic, as well as dairy products.

Major Temporary and Permanent Crops Major temporary crops that were actively perused by farmers include palay, the top major temporary crop with 3.9 million hectares of farm area, corn, with 2.4 million hectares, and sugarcane, with 344 thousand hectares.

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Livestock Hog raising, as usual, was the major livestock raising activity throughout the country in 2005 with 8.6 million hogs raised, many from the Central Luzon and CALABARZON areas. This was followed by duck raising, with 11.2 million heads tended. The gross production of poultry was valued at about 108 million pesos.

The reported growth for livestock was pegged at 2 percent, with 3 percent each for ho and goat raising. The total value of livestock production was estimated to e 154 billion pesos.

Poultry The raisin of chicken remained s the top poultry rising activity in 2005, with about 127 million chickens raised, many of which came from central Luzon, CALABARZON, and Northern Mindanao. This was followed by duck raising, with 11.2 million heeds tended. The gross production of poultry was valued at about 108 million pesos.

Farms By 2002, total agricultural land in the Philippines was about 32 percent (roughly one-third) of the country‘s total land area. Almost 4.8 million agricultural farms were registered, covering 9.7 million hectares. There was decrease of about 3 percent from the total from area a decade earlier.

The average farmland today is about 2 hectares per farm.

Ornamental Growing One type of activity not being given notice for its value is ornamental growing. In fact, ornamental growing and flower gardening are very common in the country, and many agricultural workers were involved in these types of activities: honeybee production, silkworm production, ornamental and flower gardening, and orchid growin.

THE FISHERIES SECTOR Fishing as an Industry The fisheries sector is a very important industry in an economy. It provided the main source of food for many people, and serves as a source of jobs. All the source of jobs. All the processes involved in the production of fish and fish products are considered part of the fishing industry, including the catching, processing, and marketing of these products.

Fish is one of the biggest sources of protein, a main ingredient in nutrition and it is also one of the main courses in any meal, aside from the usual meat or vegetables. Thus, with the growing population comes a growing demand for fish an fish products.

Sources of Fish Fish are caught from any sources:  Seas- these provide the single largest sources of nay fisheries. Most of the world‘s commercial fish catch come from the sea- about 84 percent of the total-which is nearly a hundred million metric tons of fish. Types of fish caught in seas include the mackerel, cod, herring, tuna, sardine, barracuda, and hobi.  Inland waters- about 16 percent of the total commercial fish catch are from inland waters such as lakes, rivers, ponds, streams,a nd fish farms. The types of fish caught in these waters are catfish, crap, tilapia, buffalo fish, gourami, and whitefish.  Fish Farms- More than 20 million metric tons of fish are sourced from fish farms. Fish farming, also known as aquaculture, is a controlled raising of fish, lessening the pollutants and other environmental factors that may affects them in open seas. Fish farms usually provide milkfish, salmon, tilapi, and trout. Osyster and prawns are also raised in fish farms.

These many sources of fish provide many people with work in the fisheries sector and ensure that the supply of fish will always satisfy the demand for the product.

Processing and Marketing Fish Because fish spoil quickly after dying, people have found means to process them in such a way as to prevent spoilage. For example, fish may be dried and then cured with salt, or dried and then smoked. In the Philippines, we know fish processed in these ways as either tuyo or daing.

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Fish may also be canned to lighten their storage and to easily market them even in far locations. Favorite canned fish include sardines, mackerel, nd tuna. Fresh fish are usually marketed immediately after the catch to prevent spoilage. They are then immediately brought to markets to be sold.

Terms to Define 1. Crop 2. Agriculture 3. Timber 4. CARP 5. Wildlife 6. Forestry sector 7. Aquaculture 8. Poultry 9. Deforestation 10. Cereal grins 11. Kaingin 12. Fishing industry 13. Fisheries sector 14. Recreation re 15. Livestock 16. Inland waters 17. Agriculture sector 18. Ornamental growing 19. Exports 20. Imports Follow up Questions 1. What comprises the agriculture sector of the economy?

2. Give some changes in human society after agriculture was developed.

3. Elaborate on the importance of agriculture s way of life then and as an industry today.

4. In what manner does agriculture affect your personally? Give examples of agricultural products that you use.

5. Illustrate agriculture‘s role in the country‘s economy.

6. Describe ornamental growing. What do you think are its prospects as a business?

7. How important is fishing as an industry? Elaborate.

8. If fish comes mostly from seas and inland waters, do you think there is still a need for fish farms?

9. Elaborate on aquaculture, its role in the fisheries sector in particular, and on the economy in general.

Activity 1. Create a collage of pictures and illustrations in n illustration board that would show the agricultural sector and its role in Philippine economy.

2. Create groups with five members each. Then have each group chose a key problems in the agricultural sector.

Research on the following: a. Present state of the problem b. How the problem affects the economy c. Government actions to solve the problem d. Proposed solutions by the group to solve the problem Submit a report of your recommendations.

Lesson 11

Business and Industry

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Business, trade, and industry comprise very important sector in the economy. It complements the primary sector of resource gathering-such s agriculture and fisheries. What business does it to process these resources and from and reform them into products and goods that could be utilized by people as consumers.

SCOPE OF BUSINESS ND INDUSTRY In general usage, business usually refers to a company or a corporation, and may refer to particular trade, such as computer business, or a restaurant business. The business community usually refers collectively to the totality of business in a given locality.

As we have studied, a business is a legal entity, recognized in n economically free country, and may come in the form of a single proprietorship, partnership, or corporation. Except the government institutions, non-profit or financial return for its owners.

Business A business, also known as an enterprise or a firm, is an organization involved in the trade of goods, services, or both to consumers.[1] Businesses are prevalent in capitalist economies, where most of them are privately owned and provide goods and services to customers in exchange for other goods, services, or money. Businesses may also be not-forprofit or state-owned. A business owned by multiple individuals may be referred to as a company.

The etymology of "business" stems from the idea of being busy, and implies socially valuable and rewarding work. Business can refer to a particular organization or, more generally, to an entire market sector, e.g. "the music business". Compound forms such as agribusiness represent subsets of the word's broader meaning, which encompasses all activity by suppliers of goods and services.

Basic forms of ownership Forms of business ownership vary by jurisdiction, but several common forms exist: Sole proprietorship: A sole proprietorship, also known as a sole trader, is owned by one person and operates for their benefit. The owner may operate the business alone or with other people. A sole proprietor has unlimited liability for all obligations incurred by the business, whether from operating costs or judgments against the business. All assets of the business belong to a sole proprietor, including, for example, computer infrastructure, any inventory, manufacturing equipment and/or retail fixtures, as well as any real property owned by the business.

Partnership: A partnership is a business owned by two or more people. In most forms of partnerships, each partner has unlimited liability for the debts incurred by the business. The three most prevalent types of for-profit partnerships aregeneral partnerships, limited partnerships, and limited liability partnerships.

Corporation: The owners of a corporation have limited liability and the business has a separate legal personality from its owners. Corporations can be either government-owned or privately owned. They can organize either for profit or as not-for-profit organizations. A privately owned, for-profit corporation is owned by its shareholders, who elect a board of directors to direct the corporation and hire its managerial staff. A privately owned, for-profit corporation can be eitherprivately held by a small group of individuals, or publicly held, with publicly traded shares listed on a stock exchange.

Cooperative: Often referred to as a "co-op", a cooperative is a limited liability business that can organize for-profit or not-for-profit. A cooperative differs from a corporation in that it has members, not shareholders, and they share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

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Classifications Agriculture and mining businesses produce raw material, such as plants or minerals.

Financial businesses include banks and other companies that generate profits through investment and management of the capital.

Information businesses generate profits primarily from the sale of intellectual property and include movie studios, publishers and internet and software companies.

Manufacturers produce products, from raw materials or from component parts, then sell their products at a profit. Companies that make tangible goods such as cars, clothing or pipes are considered manufacturers.

Real estate businesses sell, rent, and develop properties including land, residential homes, and other buildings.

Retailers and distributors act as middlemen and get goods produced by manufacturers to the intended consumers, and make their profits by marking up their price. Most stores and catalog companies are distributors or retailers.

Service businesses offer intangible goods or services and typically charge for labor or other services provided to government, consumers, or other businesses. Interior decorators, consulting firms and even entertainers are service businesses.

Transportation businesses deliver goods and individuals to their destinations for a fee.

Utilities produce public services such as electricity or sewage treatment, usually under a government charter.

Management The efficient and effective operation of a business, and study of this subject, is called management. The major branches of management are financial management, marketing management, human resource management, management, production, operations management, service management and information technology management.

Owners may administer their businesses themselves, or employ managers to do this for them.

Whether they are owners or employees, managers administer three primary components of the business' value: its financial resources, capital or tangible resources, and human resources. These resources are administered in at least five functional areas: legal contracting, manufacturing or service production, marketing, accounting, financing, and human resources.

Restructuring state enterprises In recent decades, various states modeled some of their assets and enterprises after business enterprises. In 2003, for example, the People's Republic of China modeled 80% of its state-owned enterprises on a company-type management system. Many state institutions and enterprises in China and Russia have transformed into joint-stock companies, with part of their shares being listed on public stock markets.

Business process management (BPM) is a holistic management approach focused on aligning all aspects of an organization with the wants and needs of clients. It promotes business effectiveness and efficiency while striving for innovation, flexibility, and integration with technology.

BPM attempts to improve processes continuously. It can therefore be described as a "process optimization process." It is argued that BPM enables organizations to be more efficient, effective and capable of change than a functionally focused, traditional hierarchical management approach.

Organization and government regulation Most legal jurisdictions specify the forms of ownership that a business can take, creating a body of commercial law for each type.

The major factors affecting how a business is organized are usually: The size and scope of the business firm and its structure, management, and ownership, broadly analyzed in the theory of the firm. Generally a smaller business is more flexible, while larger businesses, or those with wider ownership or more formal structures, will usually tend to be organized as corporations or (less often) partnerships. In addition, a business that wishes to raise Young Ji International School / College

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money on a stock market or to be owned by a wide range of people will often be required to adopt a specific legal form to do so.

The sector and country. Private profit-making businesses are different from governmentowned bodies. In some countries, certain businesses are legally obliged to be organized in certain ways.

Limited Liability Companies (LLC), limited liability partnerships, and other specific types of business organization protect their owners or shareholders from business failure by doing business under a separate legal entity with certain legal protections. In contrast, unincorporated businesses or persons working on their own are usually not so protected.

Tax advantages. Different structures are treated differently in tax law, and may have advantages for this reason.

Disclosure and compliance requirements. Different business structures may be required to make less or more information public (or report it to relevant authorities), and may be bound to comply with different rules and regulations.

Many businesses are operated through a separate entity such as a corporation or a partnership (either formed with or without limited liability). Most legal jurisdictions allow people to organize such an entity by filing certain charter documents with the relevant Secretary of State or equivalent and complying with certain other ongoing obligations. The relationships and legal rights of shareholders, limited partners, or members are governed partly by the charter documents and partly by the law of the jurisdiction where the entity is organized. Generally speaking, shareholders in a corporation, limited partners in a limited partnership, and members in a limited liability company are shielded from personal liability for the debts and obligations of the entity, which is legally treated as a separate "person". This means that unless there is misconduct, the owner's own possessions are strongly protected in law if the business does not succeed.

Where two or more individuals own a business together but have failed to organize a more specialized form of vehicle, they will be treated as a general partnership. The terms of a partnership are partly governed by a partnership agreement if one is created and partly by the law of the jurisdiction where the partnership is located. No paperwork or filing is necessary to create a partnership, and without an agreement, the relationships and legal rights of the partners will be entirely governed by the law of the jurisdiction where the partnership is located. A single person who owns and runs a business is commonly known as a sole proprietor, whether that person owns it directly or through a formally organized entity.

A few relevant factors to consider in deciding how to operate a business include: General partners in a partnership (other than a limited liability partnership), plus anyone who personally owns and operates a business without creating a separate legal entity, are personally liable for the debts and obligations of the business.

Generally, corporations are required to pay tax just like "real" people. In some tax systems, this can give rise to so-called double taxation, because first the corporation pays tax on the profit, and then when the corporation distributes its profits to its owners, individuals have to include dividends in their income when they complete their personal tax returns, at which point a second layer of income tax is imposed.

In most countries, there are laws which treat small corporations differently from large ones.

They may be exempt from certain legal filing requirements or labor laws, have simplified procedures in specialized areas, and have simplified, advantageous, or slightly different tax treatment.

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"Going public" through a process known as an initial public offering (IPO) means that part of the business will be owned by members of the public. This requires organization as a distinct entity, and compliance with a tighter set of laws and procedures. Most public entities are corporations that have sold shares, but increasingly there are also public LLCs that sell units (sometimes also called shares), and other more exotic entities as well, such as, for example, real estate investment trusts in the USA, and unit trusts in the UK. A general partnership cannot "go public."

Commercial law

Offices in the Los Angeles Downtown Financial District A very detailed and well-established body of rules that evolved over a very long period of time applies to commercial transactions. The need to regulate trade and commerce and resolve business disputes helped shape the creation of law and courts. The Code of Hammurabi dates back to about 1772 BC for example, and contains provisions that relate, among other matters, to shipping costs and dealings between merchants and brokers. The word "corporation" derives from the Latin corpus, meaning body, and the Maurya Empire in Iron-Age India accorded legal rights to business entities.

In many countries it is difficult to compile all the laws that can affect a business into a single reference source. Laws can govern treatment of labor and employee relations, worker, discrimination on the basis of age, gender, disability, race, and in some jurisdictions, sexual orientation, and the minimum wage, as well as unions, worker compensation, and working hours and leave.

Some specialized businesses may also require licenses, either due to laws governing entry into certain trades, occupations or professions, that require special education, or to raise revenue for local governments. Professions that require special licenses include law, medicine, piloting aircraft, selling liquor, radio broadcasting, selling investment securities, selling used cars, and roofing. Local jurisdictions may also require special licenses and taxes just to operate a business.

Some businesses are subject to ongoing special regulation, for example, public utilities, investment securities, banking, insurance, broadcasting, aviation, and health care providers.

Environmental regulations are also very complex and can affect many businesses.

Capital

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Mexican Stock Exchange in Paseo de la Reforma, Mexico City When businesses need to raise money (called capital), they sometimes offer securities for sale.

Capital may be raised through private means, by an initial public offering or IPO on a stock exchange, or in other ways.

Major stock exchanges include the Shanghai Stock Exchange, Singapore Exchange, Hong Kong Stock Exchange, New York Stock Exchange and Nasdaq(USA), the London Stock Exchange (UK), the Tokyo Stock Exchange (Japan), and Bombay Stock Exchange (India). Most countries with capital markets have at least one.

Businesses that have gone public are subject to regulations concerning their internal governance, such as how executive officers' compensation is determined, and when and how information is disclosed to shareholders and to the public. In the United States, these regulations are primarily implemented and enforced by the United States Securities and Exchange Commission (SEC).

Other Western nations have comparable regulatory bodies. The regulations are implemented and enforced by the China Securities Regulation Commission (CSRC) in China. In Singapore, the regulation authority is the Monetary Authority of Singapore (MAS), and in Hong Kong, it is the Securities and Futures Commission (SFC).

The proliferation and increasing complexity of the laws governing business have forced increasing specialization in corporate law. It is not unheard of for certain kinds of corporate transactions to require a team of five to ten attorneys due to sprawling regulation. Commercial law spans general corporate law, employment and labor law, health-care law, securities law, mergers and acquisitions, tax law, employee benefit plans, food and drug regulation, intellectual property law on copyrights, patents, trademarks and such, telecommunications law, financing.

Other types of capital sourcing includes crowd sourcing on the internet, venture capital, bank loans and debentures.

Intellectual property Businesses often have important "intellectual property" that needs protection from competitors for the company to stay profitable. This could require patents, copyrights, trademarks or preservation of trade secrets. Most businesses have names, logos and similar branding techniques that could benefit from trademarking. Patents and copyrights in the United States are largely governed by federal law, while trade secrets and trademarking are mostly a matter of state law. Because of the nature of intellectual property, a business needs protection in every jurisdiction in which they are concerned about competitors. Many countries are signatories to international treaties concerning intellectual property, and thus companies registered in these countries are subject to national laws bound by these treaties. In order to protect trade secrets, companies may require employees to sign non-compete clauses which will impose limitations on an employee's interactions with stakeholders, and competitors.

The scope of business and industry is wide, and the following are only some of the major types of businesses.  Agriculture and Mining Businesses- these deal with the production of raw materials, such as plants, timber, fuel, or minerals, which are then processed by other businesses.

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

  

   

Manufacturers- these businesses processes raw materials or parts to come up with a final product. Usually, these offer wide range of physical goods, such as television sets and other electronic appliances, processed foods, canned goods, steel roofing toys, and a lot more.

Service Businesses- these offer intangible goods and not actual or physical goods. These types of businesses generate profits by providing services such as painting, massage, or writing, which depend on the ―talent‘ or capacity of their human resources.

Financial Service Businesses- these are forms of service businesses which cater specifically to providing financial services or management. These include banks and other financial institutions that provide storage for and management of funds.

Retailers and Distributors- these act as the link between manufacturers and the customers. They get products from manufacturers and deliver them to customers, gathering a profit as a result. They take care of transporting the goods and distribution them. Most stores and export companies are included in this type of business.

Real Estates- these are businesses which do selling and development of land, buildings, and other properties. Companies that develop subdivisions and homes are into this type of business.

Information Businesses- are those that sell intellectual property in the form of data and information, databases, and knowledge bases. These include movie production output, television networks, software companies, database providers, and the like.

Transportation Businesses- these deliver people or products from one point to another, and charge particular cost for that service. Public utility vehicles and electrical railway transits are examples of this business.

Utilities- these companies provide basic necessities, such as electricity and water, and are usually regulated by the government in certain aspects.

The Concept of Business Organizations All these companies and businesses make up an organization, which requires a fir amount of corporation among members to be able to succeed. To understand the concept of businesses as having form of organization, we need to know why there is a need for business organizations in the first place.

Why Business Organization?

Any individual can produce some of the products that are made by businesses, but in many ways it cn be limited. Modern economics depend on business organizations- large and organized groups that work for common goal. A brand new car, for example, is impossible to be manufactured by an individual working alone. He has to have some assistance from other people that would provide other functions for the car to be produced.

A business organization already has the factors of production ready- the land or building is there, equipment or capital is set up, personnel are prepared, and the entrepreneurial ability already exists in type way the business has been organized by its owners.

Also, a division of labor is put up in a business organization whereby a complex task is divided into series of simpler functions, which re done by a specialist or somebody who is an expert on that part. Because of this, production is better than if only one person tries to do everything on his own.

How Businesses are organized Businesses, specifically companies and corporations, are usually managed by a Board Directors heeded by chairman. The Board sets up policies and directors for the company to follow.

The Board also selects various people to occupy key posts within a company, from the president to the lowest top-level managers. Middle managers and lower managers are usually hired by the top-level officers and not by the Board.

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Companies perform various functions in order to meet its needs. These functions are performed by specific departments, which may include the following:  Procurement or Purchasing- this involves the acquisition of goods or services necessary for the business, such as raw materials for production, and supplies needed by personnel during the manufacturing or processing stage.  Production or Service- this function turns the raw materials into goods or services that can be sold or delivered. This is the function whereby the materials are manufactured or processed to come up with a final product or good.  Marketing and Sales- this take care of selling the goods and services to the customer, and included advertising and distribution functions. It may also include some form of customer relations and positioning in the market.  Human Resources- this is responsible for the overall management of personnel in the organization. This included the hiring of people, their trainings, as well as their payroll and benefits. This function may also include mediating in labor disputes and settling issues and differences between employees.  Finance and Accounting- this handles the financial aspects of business, specifically its bookkeeping and financial controls, management of funds, and the rising of capital or money to run the business or expand it by putting up additional branches or new businesses.  Information Technology- because we are now in the information are, most businesses us computer and information technology for various aspects of its operations. Data on employees, sales, and customers are now stored and accessed quickly using computers.

Most businesses process and functions using computers and automation.  Corporate Affairs- this takes care of internal and external communications, public relations, events management, and corporate social responsibility. This functions as the mouthpiece or spokesman for the whole organization.  Internal Audit- this is n independent function that checks how the different departments are performing and then reports their findings to the top management of n organization. This function serves to prevent abuses with the different functions. 

Business development comprises a number of tasks and processes generally aiming at developing and implementing growth opportunities between multiple organizations. It is a subset of the fields of business, commerce and organizational theory. Business development is the creation of long-term value for an organization from customers, markets, and relationships.

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Overview In the limited scholarly work available on the subject, business development is conceptualized as or related to discrete projects, specific modes of growth, and organizational units, activities, and practices. Sorensen integrates these different perspectives with insights from chairmen and managing directors (CMDs), senior business developers, and venture capitalists from successful high-tech firms from Europe, North America, and India into one general construct. In this perspective, business development refers to: the tasks and processes concerning analytical preparation of potential growth opportunities, the support and monitoring of the implementation of growth opportunities, but does not include decisions on strategy and implementation of growth opportunities These tasks and processes are performed by "business developers." Given the nature of business development activities, the business development function is typically organized as a staff function.

Business Development 

Background

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The term business development and its actor, the business developer, have evolved into many usages and applications. Today, the applications of business development and the business developer’s tasks across industries and countries, cover everything from IT-programmers, specialized engineers, advanced marketing or key account management activities, and sales and relations development for current and prospective customers. Business development had its origins in the Industrial Revolution. 

Professionals The business developer is concerned with the analytical preparation of potential growth opportunities for the senior management or board of directors as well as the subsequent support and monitoring of its implementation. Both in the development phase and the implementation phase, the business developer collaborates and integrates the knowledge and feedback from the organization‘s specialist functions, for example, R&D, production, marketing, and sales to assure that the organization is capable of implementing the growth opportunity successfully. The business developers' tools to address the business development tasks are the business model answering "how do we make money" and its analytical backup and roadmap for implementation, the business plan.

Business development professionals frequently have had earlier experience in financial services, investment banking or management consulting; although some find their route to this area by climbing the corporate ladder in functions such as operations management or sales. Skill sets and experience for business-development specialists usually consist of a mixture of the following (depending on the business requirements):  Finance  Marketing  Mergers and acquisitions  Legal  Strategic management  Proposal management or capture management  Sales experience The "pipeline" refers to flow of potential clients which a company has started developing.

Business-development staff assign to each potential client in the pipeline a percent chance of success, with projected sales-volumes attached. Planners can use the weighted average of all the potential clients in the pipeline to project staffing to manage the new activity when finalized.

Enterprises usually support pipelines with some kind of customer relationship management (CRM) tool or CRM-database, either web-based solution or an in-house system.

Sometimes business development specialists manage and analyze the data to produce sales management information (MI). Such MI could include:  reasons for wins/losses  progress of opportunities in relation to the sales process  top performing sales people/sales channels  sales of services/products For larger and well-established companies, especially in technology-related industries, the term "business development" often refers to setting up and managing strategic relationships and alliances with other, third-party companies. In these instances the companies may leverage each other's expertise, technologies or other intellectual property to expand their capacities for identifying, researching, analyzing and bringing to market new businesses and new products. Business-development focuses on implementation of the strategic business plan through equity financing, acquisition/divestiture of technologies, products, and companies, plus the establishment of strategic partnerships where appropriate.

Business Cycles Businesses run for the purpose of profit. But each business performs differently. Some gain great profits while others get modest returns only. While others have no profit at all and even have Young Ji International School / College

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losses. Generally, businesses experience swings in profit and gains, which are connected to economic activities.

When businesses run t full swings or t n expensive rate, it is called a boom. A business boom typically involves most businesses getting good profits, resulting to their expansion of products and branches. On the other hand, when businesses run low, it may be called downswing. A downswing occurs when most businesses do not in enough to continue operating their businesses, resulting to either a decrease in the number of employees, downsizing in terms of products or branches, or the closure of businesses themselves.

The combination of booms and downswings constitutes the movement of economic activity, and is known as the business cycle. Times of boom are also known as periods of expansion, where there is a erase in production output, employment, as well as in the prices of goods. On the other hand, a time of downturn or downturn or depression consists of decline in reproduction output and employment, but prices may rise or fall depending on the circumstances. Business cycles are not regular cycles of rise and fall. These cycles are very unpredictable and occur t irregular times.

Booms and depression may be caused by various factors, such s abrupt spending for war, good prospects for the economy; a decline in the number of business investors, the direction of monetary and fiscal policies of the government; and other different situations. The government usually tries to institute sound measures to minimize downswings in n economy, which cn affect business and industries in a number of ways.

Lesson 12 Business Organizations in the Philippines The Philippines has thousands of businesses and industries that offer various kinds of products and services. A majority of these businesses are local companies, but there are also foreign-owned companies, called multinationals, that do business in many countries.

Local Manufacturing and Mining The following shows some important information on the performance of businesses in the Philippines as a whole, specifically in local manufacturing and mining, in the year 2005, as reported by the Department of Trade and Industry (DTI), the premier government agency tasked with empowering businesses and industries in the country.  Manufacturing- manufacturing establishments reached a total of 5, 899. A total of 960 of these establishments re food manufacturers; 700 are wearing apparel markers, and 378 are makers of chemical products.  Mining- The Department of Trade and Industry has identified 23 mining projects to be developed up to 2010. Some of the major projects are the Palawan HPP Project, a $ 180million nickel mining project; the Rapu-Rapu Polymetllic Project, Multinational Corporation and the Economy Multinational Corporation is companies that operate in several nations or nationalities.

These firms are also called transnational corporations. Most of the time, they have their head offices in their mother country, and then establish branches in various parts of the world. Most multinational are U.S. firms, and the others are from Germany, Japan, UK, France, and Korea.

These multinational come to the country to take advantage of the abundance of raw materials, as well as the lower cost of labor or manpower. Because of this, they can earn better profits than they would if they operate mainly in their head office. The government also provides incentives for them to maintain operations in the country.

Multinationals help the country‘s economy as whole by adding to foreign investments, and stimulation business activities. They also provide jobs and opportunities to many Filipinos.

However, critics say that these firms compete with local firms that provide similar goods and services. There is also chance that the country becomes a market for second-hand or obsolete machineries that are not anymore usable in a foreign country.

Business and Trade Institutions and Agencies To support the business, trade, and industry sector, including all local and foreign firms, there are various institutions and agencies that exists that have this particular function.

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Among the government agencies that support business and trade are the Securities and Exchange Commission (SEC) and the Department of Trade and Industry (DTI) The Securities and Exchange Commission or SEC seeks to strengthen the corporate and capital market infrastructure of the Philippines, and maintain regular system, based on international best standards and practices, that promote the interest of investors in a free, fair and competitive business environment. It regulates and monitors the creation and operation of business enterprises and organizational as whole. The SEC is an independent body that is not under the control of the national government because it has its own mandate.

On the other hand, the Department of Trade and Industry or DTI is primary department or agency of the government that serves s the primary coordinate, primitive, and facilitative arm for trade, industry and investment activities. It acts as the catalyst that intensifies private sector activity to accelerate and sustain economic growth.

The origins of DTI cn be traced back to June 23, 1898, when then President Aguinaldo formed four government agencies, namely the Departments of Navy, Commerce, Agriculture, and manufacturing. These became the Department of Commerce and Police under the American administration, the Department of Commerce and Industry during the time of President Roxas, the Ministry of Trade and Industry during Marco‘s regime, and the Department of Trade and Industry starting with President Corazon Aquino.

Some of the objectives of the Department of Trade and Industry re the following:  A comprehensive industrial growth strategy;  A progressive and socially responsible liberalization and deregulation program;  The expansion and diversification of both domestic and foreign trade;  The promotion and development of small and medium enterprises (SMEs)  Preparing for the knowledge economy,  Lowering the cost of doing business;  Ensuring that consumes get the best value for their money; The end goal of DTI is to grow and expand Philippine trade and industry as the means to generate jobs and raise incomes, so that Filipino may enjoy continuing improvement in their quality of life.

Privatization and Nationalization Two concepts that are about control of business or company are referred to as privatization and nationalization. In privatization control of business goes to a private organization, while in nationalization; the government is the one that actually takes over a business.

Privatization Privatization is the sale of government assets, particularly firms or companies, to private groups or organizations. It may also apply to all other assets, such as land, roads, water services, as well as health, sanitation, or education services.

Governments go into privatization for various reasons. As an example, it may tap private funds in implementing infrastructure projects because it may lack funds to do so. It may also be because the government wants to take advantage of the private sector‘s expertise or efficiency. It may also be part of a government‘s fiscal policy of generating funds to help the economy.

Modes of Privatization Privatization may be done through the following means:  Share Issue Privatization (SIP)- In this method, the shares of the government firm sold on the stock market. Control then goes to the buyer of majority shares. This type of privatization is very common, but it may have political and currency risks that deter local and foreign investors.  Asset Sale Privatization (ASP)- This is the selling of the entire government firm, usually through n auction or a bidding process. This is the surest way to rise funds, and thus, this is the more common method of privatization used in developing countries.

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Voucher Privatization (VP)- This is when the shares of ownership are distributed to all citizens. The shares are given for free or at very low price. This method has been mainly used in Russia, Poland, and other former eastern European countries, as part of their transition from communism to capitalism.

Rehabilitate-Operate-Transfer (ROT)- This gives the opportunity for private investors to rehabilitate state-owned companies that may be in financial or organization distress, operate them for a time, and then transfer them to the government again once a certain profit or return is realized.

Advantages and Disadvantages of Privatization Proponents and critics of privatization both have their particular reasons for supporting or criticizing privatization.

In general, proponents and supporters of privatization point to the following as their reasons for going for privatization.  Better Management- Private Companies, they say are managed in a better and more efficient manner. Government may improve a company‘s performance only if it has some political benefits. Improvements in a company run by the state may also be delayed due to some political maneuverings. This is different if the company is run by the private sector.  Wider Capital and Expansion- Privately-owned companies can raise capital more easily than those firms owned by the state. This is because investors have more faith in privatelyheld firms. They can also expand and put up more branches because of the profit motive.  Less External Stress- Companies in the private sector experience less external pounding than their state-owned counterparts. Consider the following: 1. Corruption of funds and equipment, which may deplete the resources of the company 2. Interference from politicians and government officials 3. As well as the expectation from consumers that they will get better products or services at a lower expense.

Taking into account the above reasons, it may be said that privatizations is good because the government or the state does not have enough reason or motivation to better manage and improve their enterprises. It is the private sector which has the better incentive-that of profit.

On the other hand, opponents and critics of privatization point also to certain reasons why they oppose privatization. These are the following:  Cuts in Essential Services- Critics say that private companies emphasize profit, and would give their best products and services to those who can pay much-and not to the general public. For example, a water service company that is privatized my cut back water services from those who cannot afford a certain fee.  Concentration of Wealth- A government firm that earns well may be privatized for other reasons. It then results in the profits going to the pockets of a few individuals and not to the general public.  Downsizing and Insecurity- Privatization provides a lot of insecurities- first to the employees of the privatized company. Privately-held companies are very efficient in terms of expenses vis-à-vis financial returns, and may thus cut back on the number of employees.

Privatization in the Philippines Privatization was not yet availed by the government from the past World War II period up to the martial law era. After the EDSA revolution, however, the political and economic climate necessitated privatization of some government assets.

After her assumption to office, then President Aquino fascinated the sale and disposition of non-performing government assets. These were the properties and firms surrender and sequesters from the so-called Marcos cronies. These companies were non-performing, which means that instead of aiming profits, their operations cost a lot to the government. So they were sold to become additional funds for the government.

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The different administration s that succeeded chose to venture and creates firms under the build-operate-transfer (BOT) scheme, and various contracts were entered into the fields of infrastructure, water, seaports, and airports. Later on, these were expanded to include postal services, pension funds, and housing.

Nationalization In contrast to privatization, nationalization is the act of taking assets or companies into state ownership or control. Sometimes nationalization is done using legal means, but payment may or may not be to the private owners. There are nationalization which are direct confiscations.

There are called expropriations and these usually happen after a revolution or a drastic change in government.

Nationalization may be crucial when some basic services are not being provided to the people by private companies. In such cases, government may have the legal right to buy these entities, at a proper price, so that the services may be duly given to the people. In some countries, basic services such as water, electricity and railroads are nationalized.

In the Philippines, during the time of martial law, President Marcos naturalized various firms such s the PLDT (a telephone company), Manila Electric Company (MERALCO), Philippine Airlines, and the Manila Hotel. These companies were given back to their owners after Marcos‘ rule.

Setting and Maintaining Standards The business and industry sector continues to be main part of the economy of nations. The sector has been doing its best in providing quality goods and services to consumers. With the help of government agencies, the sector has been growing through the years.

The Philippine today is privatizing pertinent industries to promote efficiency in the delivery of basic services. It has promoted demonopolization of the telephone and electricity industries and has privatized its oil firm Petron and deregulated the oil industry. The business and industry sector continues to grow in the country, and technology-based businesses such as Business Process Outsourcing (BPO), where foreign companies get our services in the form of call centers and medical transcription work, re slowly gaining headway.

Terms to Define 1. chairman 2. business community 3. purchasing department 4. multinationals 5. information businesses 6. DTI 7. boom 8. retailers 9. privatization 10. SEC 11. administration department 12. downswing 13. sales department 14. SP 15. BOT scheme Follow-up questions 1. Differentiate business from industry. Provide examples.

2. Contrast business community from industry.

3. What are manufacturers? Why do you think these are important as businesses?

4. Explain the role retailers in the distribution of products.

5. Why is there a need for business organizations? Defend your answer.

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6. Contrast nationalization and privatization. Which of these was used more extensively by the government in previous year?

7. Elaborate on the various ways by which government may privatize business.

8. Describe multinationals and their role in the Philippine economy.

Activity 1. Write a one-paragraph explanation of the advantages and disadvantages of privatization.

2. Research on other groups, institutions, and associations that assists business and industry in the country.

3. Interview a local businessman about business cycles. Ask him about personal experiences on booms and downswings.

Lesson 13

THE SERVICES AND ONFORML SECTORS

Aside from the agricultural and business and industry sectors, there are two more sectors that cn be considered as important components of the economy of any country. These are the services sector and the informal sector.

THE SERVICES SECTOR The services sector consists of those industries that perform the giving of services to consumers as well as to other businesses. This sector does not involve the production of physical goods. For this reason, this sector is also known as the tertiary sector of industry. Extraction of raw materials is the first or primary industry; the manufacturing of goods using these minerals is called the secondary industry; while the giving of services is considered as the tertiary industry.

Since the services sector involves the giving of services such as transport or distribution to other businesses, it can be said that the services sector is a very crucial part of any economy.

Consider the following example; If a business has already produced its goods, it must get the services of a transport service firm to deliver its goods to certain destinations; the services of marketing aim to market its must get legal services wherever there are any legal problems. While some of these functions re already handled by internal departments some companies get services from the outside.

No company usually products its own electricity, and thus most companies are dependent on the power services forms. The government, for its part, does checking and standardization services so that products will meet the accepted industry standards. Thus, the services sector permeates most businesses and industries in an economy.

The Scope of the Services Sector The services sector consists of many types of businesses, and in today‘s information are the services sector is becoming the major component of the economy. Some of the businesses and industries in the services sector are the following:  Banking and Insurance- This provides financial services and future guarantees to consumers.  Tourism- this takes care of the needs of locals and foreigners who are going about certain beautiful places as part of their rest and relaxation.  Retail and Wholesale Trade- This involves the distribution of goods and services to more specific clients. The big department stores (wholesale) as well s the local sari-sari store (retail) may be considered as part of this business. While there are physical goods involved, these are just distributed or transported, and no physical goods are actually produced.  Education- This involves the transmission of knowledge, information, and understanding by the teachers to students, as well as the creation of educational materials (educational publishing).  Restaurants- these include the right-end restaurants, as well as the popular fastfood chains, such as McDonald‘s and Jollibee. While these provide food as end-products, what they do is just prepare and serve the food, not manufacture it.

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Entertainment- this includes the record and music industry, which provides sons and music for everyone‘s entertainment; the radio and television industry, which provides real time shows and news, as well s the leisure industry, consisting of games and recreational activity providers, such as theme parks and entertainment centers.

Transport- the transport sector provides transport and delivery service for people and goods. This includes the public utility vehicles and the container vans and trucks. This services provider is very important in the distribution of goods.

Healthcare- This includes hospitals, clinics, and all other providers of medical and health care. Under these are the doctors, nurses, midwives, chiropractors, and other various health professionals.

Consulting Services- This is a major group comprising various experts such as lawyers, accountants, investment experts, and writers, who my provide freelance consulting assistance on their particular expertise.

Government Services- Government services as whole, including those provided by public utilities, is considered s part of the services sector. This includes the services rendered by soldiers, policeman, firemen, and other public service personnel.

Because the service sector offers services, they encounter problems and issues that are different from those encountered by those who sell goods.

One of these issues is the services re not tangible, which means it is not so easy to measure the quality or nature of the services rendered to a consumer. Customers, for example, will know exactly what they will get from a car manufacturer , but my have a hard time deter mining what kind of legal services that my get from lawyer.

The Services Sector in the Philippines The services sector in the Philippines continues to be promising component of the domestic economy.

The three major fastest growing industries in the Philippine services sector re those of telecommunications, outsourcing services and overseas jobs. 

Telecommunications- The Philippines is said to be the ―texting‖ capital of the world.

Previously, Filipinos were just content with calling loved ones through telephones. But when cellphone were introduced, they got every latest model and features available, and in time, cellphones are with almost every man and woman in every corner of this country.

Consider the statistics: the telecommunications industry has an average of about 6% growth in the last 10 years; many telecommunications companies have put up shop in the country because of robust sales. Cellphone subscribers grew from bout 100, 000 in 1993 to about 20 million by 2005. Funds re coming in for additional capital and investment in new devices, technology and equipment.

Outsourcing- Global enterprises and businesses are consistently outsourcing their functions, and thus is mainly due to the lower cost of having other firms perform some of their functions. It is estimated that the savings that may be generated in outsourcing functions range in billions of dollars.

The Philippines is one of the min players in outsourcing, and many global companies are looking towards the Philippines for its outsourcings functions. The Philippine advantage is mainly due to factors such as the English proficiency of Filipinos; a highly educated labor force; and investment incentives given by the government.

Most outsourced jobs re call center marketing work, and many call center companies have mushroomed in the Philippines‘ central business district, a testament to the booming outsourcings industry in the country.

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Overseas Filipino Workers (OFWs) – The OFWs are a potent economic force in the country, and it is estimated that about 8 million Filipinos are already working abroad s OFWs, with only about three fourths of these are registered or documented. Close to a million workers are developed abroad each year.

The contribution s of the OFWs cannot be underestimated. They bring in about $ 8 billion in remittance since 2003. These remittances that reach the country are like funds that water our depleted economy, especially during Christmas time.

The Philippine services sector continues to be min thrust of our economy, and while the other sectors are equally important, it is the services sector in the country that continues to bring in the much needed funds and revenue to revitalize the economy. The government must continue to support the sector by providing policies and goal that support the sector.

THE INFORMAL SECTOR Another important sector of the economy is the informal sector. The informal sector of the economy refers to businesses and markets that are unregulated by government and other institutions of society.

Nevertheless, it provides way for people to support themselves and gives them the ability to work.

The informal economy is more evident in developing nations. In the Philippines, it can be seen in the neighborhood sari-sari store, in the magtataho and ice cream vendor; the various stalls in Divisoria; the manang selling cigarettes on the streets; and the girl with the sampaguita.

The workers in the informal sector are varied, but one thing they have in common is that they are not regulated by government. Some of them will work part-time, while others will work fulltime; most will not declare their income to government or to any it‘s agencies to evade paying taxes; and a lot will not avail of any voluntary contributions to social security pension plans, such as the Social Security System or SSS. Nevertheless, the above workers may be described as helpful workers, keeping the economy moving in smaller scale, and having jobs and earning money that would provide for their families.

The Underground Economy- A Subsector The other half of the informal economy, however, is more hidden but more dangerous to society and to the nation. This sector is termed the underground economy, where ―under the table‖ arrangements are made. This special subsector of the informal economy is where big money and dirty money re exchanged.

The underground economy consists of the black market, where dollars and other currencies are exchanged in rates different form acceptable ones; the ―: business transactions‖ entered into by those tin legal trade; smuggling, drug trafficking, and a host of other unlawful activities and transactions.

This is the subsector-the underground economy-that has paralyzed many economies, laundering dirty money for the purpose of creating more illegal businesses; and siphoning needed dollars from banks and other legal entities. Governments have tried to put their foot down in the activities of the underground economy, but most of the time they fail because of the powerful connection of those in this trade.

Roots of the Informal Economy The informal economy has existed side by side with the regular sectors of the economy, in any country. Even the earliest economies such s those in Mesopotamia show evidence of informal sectors. This is because people since earliest times generally try to evade regulations or government control. This is especially true if government excessively regulates businesses. In this Young Ji International School / College

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case, businesses that are in the regular sectors my opt to transfer to the informal economy to escape regulations and fees.

Tapping Into the Informal Economy Because the informal economy is such a large component of the total economy of any nation, government must find ways to tap into the informal economy or organize it in such a way that it can be a major contribution to the development of society. Among the major objectives that may be undertaken by the government are the following: 1. To bring informal economy to the attention of major leaders in government especially the legislators, so that they can enact to support this sector.

2. To change people‘s perceptions of workers in the informal economy so that they will at themselves with dignity and try to work better for the development of their communities.

The informal sector, as studies suggest, will always be a part of any economy. People must face theirs fact, and try to involve themselves in making the informal sector visible in the furtherance society‘s economy goals.

Terms to Define 1. Healthcare 2. Informal sector 3. Wholesale 4. Transport sector 5. Restaurants 6. Education 7. OFW‘s 8. Underground economy 9. Services sector 10. Under the table 11. Consulting services 12. Tourism 13. Telecommunications 14. Retail 15. Government service Follow-up Questions 1. Describe the service sector and its role in an economy.

2. Differentiate the services sector in all other sectors of the economy. What distinguishes the services sector from all other economic sectors?

3. Explain the importance of the services sector. Support your answer by giving examples.

4. What services does tourism provide to people? Give ways by which tourism could be supported as a component of the services sector.

5. In what ways is education a part of the services sector?

6. How does the transport service sector assist all the other sectors of the economy?

7. Describe the states of the services sector in the Philippines today.

8. Give the tree major service industries in the Philippines today and describe how they play out in our economy.

9. Why is the Philippines said to be the ―texting capital‖ of the world? Do you find this to be true? Defend your answer.

10. Elaborate on the role and significance of OFWs in our present economy.

Activity 1. Write one-page essay about your particular experience with the informal sector in the country.

2. Research about the underground economy in the Philippines .

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3. Create a diagram showing the interplay of all sectors in the economy.

Lesson 14

Foreign Trade

People have traded with each other ever since the advent of civilization. Early traders brought their production, such s grins, meat, and fabric to trading places and exchanged them for other products. Without money or any medium of exchange, they just exchanged their product for those of another. This way, they were able to get what they wanted and lacked using the surplus goods that they had.

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. It is the presupposition of international trade that a sufficient level of geopolitical peace and stability are prevailing in order to allow for the peaceful exchange of trade and commerce to take place between nations.

Ancient Silk Road trade routes across Eurasia Industrialization, advanced in technology transportation, globalization, multinational, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.

International trade is also a branch of economics, which, together with international finance, forms the larger branch called international economics. Trading is a value-added function: it is the economic process by which a product finds its market, in which specific risks are to be borne by the trader.

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History

Roman trade with India according to the Periplus Maris Erythraei, 1st century CE. The history of international trade chronicles notable events that have affected the trade between various countries.

In the era before the rise of the nation state, the term 'international' trade cannot be literally applied, but simply means trade over long distances; the sort of movement in goods which would represent international trade in the modern world.

Models The following are noted models of international trade.

Adam Smith's model Adam Smith displays trade taking place on the basis of countries exercising absolute advantage over one another.

Ricardian model

The law of comparative advantage was first proposed by David Ricardo.

The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Ricardian model is based on the following assumptions:  Labor is the only primary input to production  The relative ratios of labor at which the production of one good can be traded off for another differ between countries and governments

Heckscher–Ohlin model In the early 1900s a theory of international trade was developed by two Swedish economists, Eli and Bertil Ohlin. This theory has subsequently been known as the Heckscher–Ohlin model (H–O model). The results of the H–O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply.

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intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H–O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.

The H–O model makes the following core assumptions:  Labor and capital flow freely between sectors  The amount of labor and capital in two countries differ (difference in endowments)  Technology is the same among countries (a long-term assumption)  Tastes are the same Applicability In 1953, Wassily Leontief published a study in which he tested the validity of the Heckscher-Ohlin theory. The study showed that the United States was more abundant in capital compared to other countries; therefore the United States would export capital-intensive goods and import labor-intensive goods. Leontief found out that the United States' exports were less capital intensive than its imports.

After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or by new interpretations. Leamer emphasized that Leontief did not interpret H-O theory properly and claimed that with a right interpretation, the paradox did not occur. Brecher and Choudri found that, if Leamer was right, the American workers' consumption per head should be lower than the workers' world average consumption. Many textbook writers, including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the validity of H-O model. After examining the long history of empirical research, Bowen, Hollander and Viane concluded: "Recent tests of the factor abundance theory [H-O theory and its developed form into many-commodity and many-factor case] that directly examine the H-O-V equations also indicate the rejection of the theory."

In the specific factors model, labor mobility among industries is possible while capital is assumed to be immobile in the short run. Thus, this model can be interpreted as a short-run version of the Heckscher-Ohlin model. The "specific factors" name refers to the assumption that in the short run, specific factors of production such as physical capital are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms.

Additionally, owners of opposing specific factors of production (i.e., labor and capital) are likely to have opposing agendas when lobbying for controls over immigration of labor. Conversely, both owners of capital and labor profit in real terms from an increase in the capital endowment.

This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

New Trade Theory New Trade Theory tries to explain empirical elements of trade that comparative advantagebased models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e., foreign direct investment) that exists. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost.

Although new trade theory can explain the growing trend of trade volumes of intermediate goods, Krugman's explanation depends too much on the strict assumption that all firms are symmetrical, meaning that they all have the same production coefficients. Shiozawa, based on much more general model, succeeded in giving a new explanation on why the traded volume increases for intermediate goods when the transport cost decreases.

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Gravity model The Gravity model of trade presents a more empirical analysis of trading patterns. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis.

Ricardian theory of international trade (modern development) The Ricardian theory of comparative advantage became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes a presentation of Ricardo's example of a two-commodity, two-country model. A common representation of this model is made using an Edgeworth Box. This model has been expanded to many-country and many-commodity cases. Major general results were obtained by McKenzie and Jones, including his famous formula. It is a theorem about the possible trade pattern for N-country N-commodity cases.

Contemporary theories Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson. This formulation is employed for example by Matsuyama and others.

These theories use a special property that is applicable only for the two-country case.

Neo-Ricardian trade theory Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman (1941–) and Stanley Metcalfe (1946–).

They have criticized neoclassical international trade theory, namely the Heckscher-Ohlin model on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle). This was a second round of the Cambridge capital controversy, this time in the field of international trade.

The merit of neo-Ricardian trade theory is that input goods are explicitly included. This is in accordance with Sraffa's idea that any commodity is a product made by means of commodities.

The limitation of their theory is that the analysis is restricted to small-country cases.

Traded intermediate goods Ricardian trade theory ordinarily assumes that the labor is the unique input. This is a great deficiency as trade theory, for intermediate goods occupy the major part of the world international trade. Yeats found that 30% of world trade in manufacturing involves intermediate inputs. Bardhan and Jafee found that intermediate inputs occupy 37 to 38% of U.S. imports for the years 1992 and 1997, whereas the percentage of intra-firm trade grew from 43% in 1992 to 52% in 1997.

McKenzie and Jones emphasized the necessity to expand the Ricardian theory to the cases of traded inputs. In a famous comment McKenzie (1954, p. 179) pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England." Paul Samuelson coined a term Sraffa bonus to name the gains from trade of inputs.

Ricardo-Sraffa trade theory Economist John S. Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and postulated that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis".It took many years until Shiozawa succeeded in removing this deficiency. The Ricardian trade theory was now constructed in a form to include intermediate input trade for the most general case of many countries and many goods. Chipman called this the Ricardo-Sraffa trade theory.

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Based on an idea of Takahiro Fujimoto, who is a specialist in automobile industry and a philosopher of the international competitiveness, Fujimoto and Shiozawa developed a discussion in which how the factories of the same multi-national firms compete between them across borders.

International intra-firm competition reflects a really new aspect of international competition in the age of so-called global competition.

International Production Fragmentation Trade Theory Fragmentation and International Trade Theory widens the scope for "application of Ricardian comparative advantage". In his chapter entitled Li & Fung, Ltd.: An agent of global production (2001), Cheng used Li & Fung Ltd as a case study in the international production fragmentation trade theory through which producers in different countries are allocated a specialized slice or segment of the value chain of the global production. Allocations are determined based on "technical feasibility" and the ability to keep the lowest final price possible for each product.

An example of fragmentation theory in international trade is Li and Fung's garment sector network with yarn purchased in South Korea, woven and dyed in Taiwan, the fabric cut in Bangladesh, pieces assembled in Thailand and the final product sold in the United States and Europe to major brands. In 1995 Li & Fung Ltd purchased Inchcape Buying Services, an established British trading company and widely expanded production in Asia. Li & Fung supplies dozens of major retailers, including Wal-Mart Stores, Inc., branded as Walmart.

Largest countries by total international trade

Volume of world merchandise exports List of countries by exports and List of countries by imports Rank Country International Trade of Goods Date of % GDP (nominal) (Billions of USD) information -

World

37,706.0

2013 est.

50.5%

-

European Union

4,485.0

2013 est.

25.6%

1

China

4,150.0

2013 est.

43.8%

2

United States

3,908.7

2013 est.

23.3%

3

Germany

2,600.6

2013 est.

71.5%

4

Japan

1,548.3

2013 est.

31.6%

5

Netherlands

1,261.6

2013 est.

147.8%

6

France

1,260.7

2013 est.

44.9%

7

United Kingdom

1,196.9

2013 est.

47.4%

8

Hong Kong

1,157.8

2013 est.

422.3%

9

South Korea

1,075.2

2013 est.

81.1%

10

Italy

995.1

2013 est.

48.0%

11

Canada

932.6

2013 est.

51.1%

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12

Belgium

920.1

2013 est.

181.1%

13

Russia

866.3

2013 est.

41.3%

14

Singapore

783.3

2013 est.

262.8%

15

India

779.3

2013 est.

41.5%

16

Mexico

771.2

2013 est.

61.2%

17

Spain

655.5

2013 est.

48.2%

18

United Arab Emirates

630.0

2013 est.

156.7%

19

Taiwan

575.3

2013 est.

117.6%

20

Saudi Arabia

544.1

2013 est.

72.7%

Top traded commodities (exports) Rank Commodity

Value in US$('000)

Date of information

1

Mineral fuels, oils, distillation products, etc.

$2,183,079,941

2012

2

Electrical, electronic equipment

$1,833,534,414

2012

3

Machinery, nuclear reactors, boilers, etc.

$1,763,371,813

2012

4

Vehicles other than railway

$1,076,830,856

2012

5

Plastics and articles thereof

$470,226,676

2012

6

Optical, photo, technical, medical, etc. apparatus

$465,101,524

2012

7

Pharmaceutical products

$443,596,577

2012

8

Iron and steel

$379,113,147

2012

9

Organic chemicals

$377,462,088

2012

10

Pearls, precious stones, metals, coins, etc.

$348,155,369

2012

The Origin of Trade Trade developed as soon as agriculture was harnessed by people. With the extra grain, they are able to store extra supplies for later use. Because of this, they are able to exchange these supplies for other products. Because agriculture, they are also to have more time to work on the aspects of their lives, such as making better clothes or the like, or working on pottery or works of art. The additional work led to the production of more goods, products, and services that can be traced.

DETERMINING THE TERMS OF TRADE 1. PREFERENCES- The way people like a certain product at a particular time many determine the terms of trade. For example, during holidays there may be a great need for a particular product such as meat or sugar, and countries and companies may request for large quantities of these products as part of the terms of the trade.

2. Uncertainty- just like in simple businesses practice, uncertainly over a good or product might after trade because there would be less demand for an untested product. These could also be some way by which some nations could pull out of a trade if it believes that exporting or importing a particular good may be detrimental to its welfare.

3. Scarcity- the scarcity of some products may force some countries to modify existing trade arrangements with other countries.

4. Quality- the quality of a product will have a big influence on the terms of trade. For example, traders would naturally have some idea of the quality of the product they buy. If Young Ji International School / College

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the quality becomes lower than the acceptable standards, then they would lessen their orders or not order at all. Quality is important when deciding the terms of exchange.

5. Persuasion- in general, countries spends a considerable amount of effort and energy to try project image for the nation in general, and for the specific products of offers, in particular.

6. Expectations of Good Future Relationships- when countries expect a future good relationships with a trading partner, then they would attempt to trade in the most acceptable terms as possible, to ensure a future trading partner,.

Balance of Trade In understanding trade, a country may sell its products and services to another country. The act of selling products and services to another country is called exporting, and the products or goods are called exports. a country may also buy goods and services from another country. The act of buying or getting products from another country is termed importing, and the products themselves are called imports.

When trade comes the issues of whether a country has more exports than imports, or vice versa. The total sum of money derived from a country‘s exports minus the cost of buying imports forms part of the balance of payments, and this shows what the balance of trade is.

Terms to define 1. Quality 2. Imports 3. Balance of trade 4. Trading partner 5. Trade deficit 6. Trade surplus 7. Coercion 8. Importing 9. Trade 10. Exports 11. Uncertainty 12. NSCB 13. Foreign exchange rate 14. Exporting 15. Persuasion Follow up Questions 1. Elaborate on the concept of trade. Why do you think trade is important in people‘s lives/ 2. Explain how trade developed in early civilizations.

3. How does technology play role in foreign trade? Support your answer with details and examples.

4. What would explain the differences s in resources among countries?

5. Illustrate how rich countries have more advantages over poor countries in terms of production of goods.

6. Differentiate exports from exports.

7. Describe the mechanics of the foreign exchange trade.

Activity 1. Write a one-page essay about the important of exports and the value of imports

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Lesson 14

International economics

International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration.  International trade studies goods-and-services flows across international boundaries from supply-and-demand factors, integration, international, and policy variables such as tariff rates and trade quotas.  International finance studies the flow of capital across international financial markets, and the effects of these movements on exchange rates.  International monetary economics and macroeconomics studies money and macro flows across countries.  International political economy from international relations studies issues and impacts from for example international conflicts, international negotiations, and international sanctions; national security and economic nationalism; and international agreements and observance.

International trade  Scope and methodology The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labor. In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions.

The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardo‘s Theory of Comparative Advantage and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade analysis, on the other hand, depends mainly upon empirical analysis.

Classical theory The law of comparative advantage provides a logical explanation of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its exposition by David Ricardo the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage. However, extremely restrictive (and often unrealistic) assumptions have had to be adopted in order to make the problem amenable to theoretical analysis.

The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O) depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labor and capital (referred to as factor endowments). The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labor-intensive products. The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the Young Ji International School / College

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"Leontief Paradox" (the discovery that, despite its capital-rich factor endowment, America was exporting labor-intensive products and importing capital-intensive products) Nevertheless the theoretical techniques (and many of the assumptions) used in deriving the H-O model were subsequently used to derive further theorems.

The Stolper-Samuelson theorem, which is often described as a corollary of the H-O theorem, was an early example. In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the price of the other factor will fall (rise). In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it.

Another corollary of the H-O theorem is Samuelson's factor price equalization theorem which states that as trade between countries tends to equalize their product prices, it tends also to equalize the prices paid to their factors of production. Those theories have sometimes been taken to mean that trade between an industrialized country and a developing country would lower the wages of the unskilled in the industrialized country. (But, as noted below, that conclusion depends upon the unlikely assumption that productivity is the same in the two countries). Large numbers of learned papers have been produced in attempts to elaborate on the H-O and Stolper-Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns.

Modern analysis Modern trade analysis moves away from the restrictive assumptions of the H-O theorem and explores the effects upon trade of a range of factors, including technology and scale economies. It makes extensive use of econometrics to identify from the available statistics, the contribution of particular factors among the many different factors that affect trade. The contributions of differences of technology have been evaluated in several such studies. The temporary advantage arising from a country‘s development of a new technology is seen as contributory factor in one study.

Other researchers have found research and development expenditure, patents issued, and the availability of skilled labor, to be indicators of the technological leadership that enables some countries to produce a flow of such technological innovations and have found that technology leaders tend to export hi-tech products to others and receive imports of more standard products from them. Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies. The study further suggested that internationally traded goods fall into three categories, each with a different type of comparative advantage:  goods that are produced by the extraction and routine processing of available natural resources – such as coal, oil and wheat, for which developing countries often have an advantage compared with other types of production – which might be referred to as "Ricardo goods";  low-technology goods, such as textiles and steel, that tend to migrate to countries with appropriate factor endowments - which might be referred to as "Heckscher-Ohlin goods"; and,  High-technology goods and high scale-economy goods, such as computers and aero planes, for which the comparative advantage arises from the availability of R&D resources and specific skills and the proximity to large sophisticated markets.

There is a strong presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude the possibility that it may be harmful to others. However (on assumptions that included constant returns and competitive conditions) Paul Samuelson has proved that it will always be possible for the gainers from international trade to compensate the losers. Moreover, in that proof, Samuelson did not take account of the gains to others resulting Young Ji International School / College

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from wider consumer choice, from the international specialization of productive activities - and consequent economies of scale, and from the transmission of the benefits of technological innovation. An OECD study has suggested that there are further dynamic gains resulting from better resource allocation, deepening specialization, increasing returns to R&D, and technology spillover. The authors found the evidence concerning growth rates to be mixed, but that there is strong evidence that a 1 per cent increase in openness to trade increases the level of GDP per capita by between 0.9 per cent and 2.0 per cent.[17] They suggested that much of the gain arises from the growth of the most productive firms at the expense of the less productive. Those findings and others have contributed to a broad consensus among economists that trade confers very substantial net benefits, and that government restrictions upon trade are generally damaging.

Factor price equalization Nevertheless there have been widespread misgivings about the effects of international trade upon wage earners in developed countries. Samuelson‗s factor price equalization theorem indicates that, if productivity were the same in both countries, the effect of trade would be to bring about equality in wage rates. As noted above, that theorem is sometimes taken to mean that trade between an industrialized country and a developing country would lower the wages of the unskilled in the industrialized country. However, it is unreasonable to assume that productivity would be the same in a low-wage developing country as in a high-wage developed country. A 1999 study has found international differences in wage rates to be approximately matched by corresponding differences in productivity. (Such discrepancies that remained were probably the result of over-valuation or under-valuation of exchange rates, or of inflexibilities in labor markets.)

It has been argued that, although there may sometimes be short-term pressures on wage rates in the developed countries, competition between employers in developing countries can be expected eventually to bring wages into line with their employees' marginal products. Any remaining international wage differences would then be the result of productivity differences, so that there would be no difference between unit labor costs in developing and developed countries, and no downward pressure on wages in the developed countries.

Terms of trade There has also been concern that international trade could operate against the interests of developing countries. Influential studies published in 1950 by the Argentine economist Raul Prebischand the British economist Hans Singer suggested that there is a tendency for the prices of agricultural products to fall relative to the prices of manufactured goods; turning the terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries.

Their findings have been confirmed by a number of subsequent studies, although it has been suggested that the effect may be due to quality bias in the index numbers used or to the possession of market power by manufacturers. The Prelist/Singer findings remain controversial, but they were used at the time - and have been used subsequently - to suggest that the developing countries should erect barriers against manufactured imports in order to nurture their own ―infant industries‖ and so reduce their need to export agricultural products. The arguments for and against such a policy are similar to those concerning the protection of infant industries in general.

Infant industries The term "infant industry" is used to denote a new industry which has prospects of gaining comparative advantage in the long-term, but which would be unable to survive in the face of competition from imported goods. This situation can occur when time is needed either to achieve potential economies of scale, or to acquire potential learning curve economies. Successful identification of such a situation, followed by the temporary imposition of a barrier against imports can, in principle, produce substantial benefits to the country that applies it – a policy known as ―import substitution industrialization‖. Whether such policies succeed depends upon the governments‘ skills in picking winners, with reasonably expectations of both successes and Young Ji International School / College

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failures. It has been claimed that South Korea‘s automobile industry owes its existence to initial protection against imports, but a study of infant industry protection in Turkey reveals the absence of any association between productivity gains and degree of protection, such as might be expected of a successful import substitution policy. .

Another study provides descriptive evidence suggesting that attempts at import substitution industrialization since the 1970s have usually failed, but the empirical evidence on the question has been contradictory and inconclusive. It has been argued that the case against import substitution industrialization is not that it is bound to fail, but that subsidies and tax incentives do the job better. It has also been pointed out that, in any case, trade restrictions could not be expected to correct the domestic market imperfections that often hamper the development of infant industries.

Trade policies Economists‘ findings about the benefits of trade have often been rejected by government policy-makers, who have frequently sought to protect domestic industries against foreign competition by erecting barriers, such as tariffs and quotas, against imports. Average tariff levels of around 15 per cent in the late 19th century rose to about 30 percent in the 1930s, following the passage in the United States of the Smoot-Hawley Act. Mainly as the result of international agreements under the auspices of the General Agreement on Tariffs and Trade (GATT) and subsequently the World Trade Organization (WTO), average tariff levels were progressively reduced to about 7 per cent during the second half of the 20th century, and some other trade restrictions were also removed. The restrictions that remain are nevertheless of major economic importance: among other estimates the World Bank estimated in 2004 that the removal of all trade restrictions would yield benefits of over $500 billion a year by 2015 The largest of the remaining trade-distorting policies are those concerning agriculture. In the OECD countries government payments account for 30 per cent of farmers‘ receipts and tariffs of over 100 per cent are common. OECD economists estimate that cutting all agricultural tariffs and subsidies by 50% would set off a chain reaction in realignments of production and consumption patterns that would add an extra $26 billion to annual world income.

Quotas prompt foreign suppliers to raise their prices toward the domestic level of the importing country. That relieves some of the competitive pressure on domestic suppliers, and both they and the foreign suppliers gain at the expense of a loss to consumers, and to the domestic economy, in addition to which there is a deadweight loss to the world economy. When quotas were banned under the rules of the General Agreement on Tariffs and Trade (GATT), the United States, Britain and the European Union made use of equivalent arrangements known as voluntary restraint agreements (VRAs) or voluntary export restraints (VERs) which were negotiated with the governments of exporting countries (mainly Japan) - until they too were banned. Tariffs have been considered to be less harmful than quotas, although it can be shown that their welfare effects differ only when there are significant upward or downward trends in imports. Governments also impose a wide range of non-tariff barriers that are similar in effect to quotas, some of which are subject to WTO agreements. A recent example has been the application of the precautionary principle to exclude innovatory products.

International finance  Scope and methodology The economics of international finance do not differ in principle from the economics of international trade but there are significant differences of emphasis. The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend many years into the future. Markets in financial assets tend to be more volatile than markets in goods and services because decisions are more often Young Ji International School / College

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revised and more rapidly put into effect. There is the share presumption that a transaction that is freely undertaken will benefit both parties, but there is a much greater danger that it will be harmful to others.

For example, mismanagement of mortgage lending in the United States led in 2008 to banking failures and credit shortages in other developed countries, and sudden reversals of international flows of capital have often led to damaging financial crises in developing countries.

And, because of the incidence of rapid change, the methodology of comparative statics has fewer applications than in the theory of international trade, and empirical analysis is more widely employed. Also, the consensus among economists concerning its principal issues is narrower and more open to controversy than is the consensus about international trade.

Exchange rates and capital mobility A major change in the organization of international finance occurred in the latter years of the twentieth century, and economists are still debating its implications. At the end of the Second World War the national signatories to the Bretton Woods Agreement had agreed to maintain their currencies each at a fixed exchange rate with the United States dollar, and the United States government had undertaken to buy gold on demand at a fixed rate of $35 per ounce. In support of those commitments, most signatory nations had maintained strict control over their nationals‘ use of foreign exchange and upon their dealings in international financial assets.

But in 1971 the United States government announced that it was suspending the convertibility of the dollar, and there followed a progressive transition to the current regime of floating exchange rates in which most governments no longer attempt to control their exchange rates or to impose controls upon access to foreign currencies or upon access to international financial markets. The behavior of the international financial system was transformed. Exchange rates became very volatile and there was an extended series of damaging financial crises. One study estimated that by the end of the twentieth century there had been 112 banking crises in 93 countries, another that there had been 26 banking crises, 86 currency crises and 27 mixed banking and currency crises many times more than in the previous post-war years.

The outcome was not what had been expected. In making an influential case for flexible exchange rates in the 1950s, Milton Friedman had claimed that if there were any resulting instability, it would mainly be the consequence of macroeconomic instability, but an empirical analysis in 1999 found no apparent connection. Economists began to wonder whether the expected advantages of freeing financial markets from government intervention were in fact being realized.

Neoclassical theory had led them to expect capital to flow from the capital-rich developed economies to the capital-poor developing countries - because the returns to capital there would be higher. Flows of financial capital would tend to increase the level of investment in the developing countries by reducing their costs of capital, and the direct investment of physical capital would tend to promote specialization and the transfer of skills and technology. However, theoretical considerations alone cannot determine the balance between those benefits and the costs of volatility, and the question has had to be tackled by empirical analysis.

A 2006 International Monetary Fund working paper offers a summary of the empirical evidence. The authors found little evidence either of the benefits of the liberalization of capital movements, or of claims that it is responsible for the spate of financial crises. They suggest that net benefits can be achieved by countries that are able to meet threshold conditions of financial competence but that for others, the benefits are likely to be delayed, and vulnerability to interruptions of capital flows is likely to be increased.

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Policies and institutions Although the majority of developed countries now have "floating" exchange rates, some of them – together with many developing countries – maintain exchange rates that are nominally "fixed", usually with the US dollar or the euro. The adoption of a fixed rate requires intervention in the foreign exchange market by the country‘s central bank, and is usually accompanied by a degree of control over its citizens‘ access to international markets.

A controversial case in point is the policy of the Chinese government who had, until 2005, maintained the renminbi at a fixed rate to the dollar, but have since "pegged" it to a basket of currencies. It is frequently alleged that in doing so they are deliberately holding its value lower than if it were allowed to float (but there is evidence to the contrary Some governments have abandoned their national currencies in favor of the common currency of a currency area such as the "eurozone" and some, such as Denmark, have retained their national currencies but have pegged them at a fixed rate to an adjacent common currency.

On an international scale, the economic policies promoted by the International Monetary Fund (IMF) have had a major influence, especially upon the developing countries.

The IMF was set up in 1944 to encourage international cooperation on monetary matters, to stabilize exchange rates and create an international payments system. Its principal activity is the payment of loans to help member countries to overcome balance of payments problems, mainly by restoring their depleted currency reserves. Their loans are, however, conditional upon the introduction of economic measures by recipient governments that are considered by the Fund's economists to provide conditions favorable to recovery.

Their recommended economic policies are broadly those that have been adopted in the United States and the other major developed countries (known as the "Washington Consensus") and have often included the removal of all restrictions upon incoming investment. The Fund has been severely criticized by Joseph Stiglitz and others for what they consider to be the inappropriate enforcement of those policies and for failing to warn recipient countries of the dangers that can arise from the volatility of capital movements.

International financial stability From the time of the Great Depression onwards, regulators and their economic advisors have been aware that economic and financial crises can spread rapidly from country to country, and that financial crises can have serious economic consequences. For many decades, that awareness led governments to impose strict controls over the activities and conduct of banks and other credit agencies, but in the 1980s many governments pursued a policy of deregulation in the belief that the resulting efficiency gains would outweigh any systemic risks. The extensive financial innovations that followed are described in the article on financial economics.

One of their effects has been greatly to increase the international inter-connectedness of the financial markets and to create an international financial system with the characteristics known in control theory as "complex-interactive". The stability of such a system is difficult to analyze because there are many possible failure sequences. The internationally systemic crises that followed included the equity crash of October 1987, the Japanese asset price collapse of the 1990s the Asian financial crisis of 1997the Russian government default of 1998 (which brought down the Long-Term Capital Management hedge fund) and the 2007-8 sub-prime mortgages crisis. The symptoms have generally included collapses in asset prices, increases in risk premiums, and general reductions in liquidity.

Measures designed to reduce the vulnerability of the international financial system have been put forward by several international institutions. The Bank for International Settlements made two successive recommendations (Basel I and Basel II[51]) concerning the regulation of banks, and Young Ji International School / College

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a coordinating group of regulating authorities, and the Financial Stability Forum, that was set up in 1999 to identify and address the weaknesses in the system, has put forward some proposals in an interim report.

Migration Elementary considerations lead to a presumption that international migration results in a net gain in economic welfare. Wage differences between developed and developing countries have been found to be mainly due to productivity differences which may be assumed to arise mostly from differences in the availability of physical, social and human capital. And economic theory indicates that the move of a skilled worker from a place where the returns to skill are relatively low to a place where they are relatively high should produce a net gain (but that it would tend to depress the wages of skilled workers in the recipient country).

There have been many econometric studies intended to quantify those gains. A Copenhagen Consensus study suggests that if the share of foreign workers grew to 3% of the labor force in the rich countries there would be global benefits of $675 billion a year by 2025. However, a survey of the evidence led a House of Lords committee to conclude that any benefits of immigration to the United Kingdom are relatively small. Evidence from the United States also suggests that the economic benefits to the receiving country are relatively small , and that the presence of immigrants in its labor market results in only a small reduction in local wages.

From the standpoint of a developing country, the emigration of skilled workers represents a loss of human capital (known as brain drain), leaving the remaining workforce without the benefit of their support. That effect upon the welfare of the parent country is to some extent offset by the remittances that are sent home by the emigrants, and by the enhanced technical know-how with which some of them return. One study introduces a further offsetting factor to suggest that the opportunity to migrate fosters enrolment in education thus promoting a "brain gain" that can counteract the lost human capital associated with emigration.

Whereas some studies suggest that parent countries can benefit from the emigration of skilled workers, generally it is emigration of unskilled and semi-skilled workers that is of economic benefit to countries of origin, by reducing pressure for employment creation. Where skilled emigration is concentrated in specific highly skilled sectors, such as medicine, the consequences are severe and even catastrophic in cases where 50% or so of trained doctors have emigrated.

The crucial issues, as recently acknowledged by the OECD, is the matter of return and reinvestment in their countries of origin by the migrants themselves: thus, government policies in Europe are increasingly focused upon facilitating temporary skilled migration alongside migrant remittances.

Unlike movement of capital and goods, since 1973 government policies have tried to restrict migration flows, often without any economic rationale. Such restrictions have had diversionary effects, channeling the great majority of migration flows into illegal migration and "false" asylumseeking. Since such migrants work for lower wages and often zero social insurance costs, the gain from labor migration flows is actually higher than the minimal gains calculated for legal flows; accompanying side-effects are significant, however, and include political damage to the idea of immigration, lower unskilled wages for the host population, and increased policing costs alongside lower tax receipts.

Globalization The term globalization has acquired a variety of meanings, but in economic terms it refers to the move that is taking place in the direction of complete mobility of capital and labor and their products, so that the world's economies are on the way to becoming totally integrated. The driving forces of the process are reductions in politically imposed barriers and in the costs of transport and communication (although, even if those barriers and costs were eliminated, the process would be limited by inter-country differences in social capital).

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It is a process which has ancient origins which has gathered pace in the last fifty years, but which is very far from complete. In its concluding stages, interest rates, wage rates and corporate and income tax rates would become the same everywhere, driven to equality by competition, as investors, wage earners and corporate and personal taxpayers threatened to migrate in search of better terms. In fact, there are few signs of international convergence of interest rates, wage rates or tax rates. Although the world is more integrated in some respects, it is possible to argue that on the whole it is now less integrated than it was before the first world war., and that many middleeast countries are less globalised than they were 25 years ago.

Of the moves toward integration that have occurred, the strongest has been in financial markets, in which globalization is estimated to have tripled since the mid-1970s. Recent research has shown that it has improved risk-sharing, but only in developed countries, and that in the developing countries it has increased macroeconomic volatility. It is estimated to have resulted in net welfare gains worldwide, but with losers as well as gainers. .

Increased globalization has also made it easier for recessions to spread from country to country. A reduction in economic activity in one country can lead to a reduction in activity in its trading partners as a result of its consequent reduction in demand for their exports, which is one of the mechanisms by which the business cycle is transmitted from country to country. Empirical research confirms that the greater the trade linkage between countries the more coordinated are their business cycles.

Globalization can also have a significant influence upon the conduct of macroeconomic policy. The Mundell–Fleming model and its extensions are often used to analyze the role of capital mobility (and it was also used by Paul Krugman to give a simple account of the Asian financial crisis). Part of the increase in income inequality that has taken place within countries is attributable - in some cases - to globalization. A recent IMF report demonstrates that the increase in inequality in the developing countries in the period 1981 to 2004 was due entirely to technological change, with globalization making a partially offsetting negative contribution, and that in the developed countries globalization and technological change were equally responsible.

Opposition Globalizations are seen as contributing to economic welfare by most economists – but not all. Professor Joseph Stiglitz of the Columbia Business School has advanced the infant industry case for protection in developing countries and criticized the conditions imposed for help by the International Monetary Fund. Professor Dani Rodrik of Harvard has noted that the benefits of globalization are unevenly spread, and that it has led to income inequalities, and to damaging losses of social capital in the parent countries and to social stresses resulting from immigration in the receiving countries. An extensive critical analysis of these contentions has been made

by Martin Wolf, and a lecture by Professor Jagdish Bhagwati has surveyed the debate that has taken place among economists Lesson 15

Current Economic Problems and Issues

Poverty is general scarcity or dearth, or the state of one who lacks a certain amount of material possessions or money. Absolute poverty or destitution refers to the deprivation of basic human needs, which commonly includes food, water, sanitation, clothing, shelter, health care and education. Relative poverty is defined contextually as economic inequality in the location or society in which people live.

After the industrial revolution, mass production in factories made production goods increasingly less expensive and more accessible. Of more importance is the modernization of agriculture, such as fertilizers, to provide enough yield to feed the population. Responding to basic needs can be restricted by constraints on government's ability to deliver services, such as corruption, tax Young Ji International School / College

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avoidance, debt and loan conditionality and by the brain drain of health care and educational professionals. Strategies of increasing income to make basic needs more affordable typically include welfare, economic freedoms, and providing financial services.

Poverty reduction is a major goal and issue for many international organizations such as the United Nations and the World Bank. The World Bank estimated 1.29 billion people were living in absolute poverty in 2008. Of these, about 400 million people in absolute poverty lived in India and 173 million people in China. In terms of percentage of regional populations, sub at 47% had the highest incidence rate of absolute poverty in 2008. Between 1990 and 2010, about 663 million people moved above the absolute poverty level. Still, extreme poverty is a global challenge; it is observed in all parts of the world, including developed economies. UNICEF estimates half the world‘s children (or 1.1 billion) live in poverty.

Etymology The word poverty comes from old French poverty (Modern French: pauvretĂŠ), from Latin paupertÄ s from pauper (poor).

The English word "poverty" via Anglo-Norman povert. There are several definitions of poverty depending on the context of the situation it is placed in, and the views of the person giving the definition.

Measuring poverty Definitions

Percentage of population living on less than $1.25 per day, per UN data from 2000-2006.

Percentage of population suffering from hunger, World Food Programmed, 2008

Life expectancy, 2008.

The Human Development Index, 2006

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The Gini coefficient, a measure of income inequality, 2014.

United Nations: Fundamentally, poverty is the inability of getting choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and clothe a family, not having a school or clinic to go to, not having the land on which to grow one‘s food or a job to earn one‘s living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living in marginal or fragile environments, without access to clean water or sanitation.

World Bank: Poverty is pronounced deprivation in well-being, and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity. Poverty also encompasses low levels of health and education, poor access to clean water and sanitation, inadequate physical security, lack of voice, and insufficient capacity and opportunity to better one‘s life.

Copenhagen Declaration: Absolute poverty is a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to social services. The term 'absolute poverty' is sometimes synonymously referred to as 'extreme poverty.'

Poverty is usually measured as either absolute or relative (the latter being actually an index of income inequality).

Absolute poverty Absolute poverty refers to a set standard which is consistent over time and between countries. First introduced in 1990, the dollar a day poverty line measured absolute poverty by the standards of the world‘s poorest countries. The World Bank defined the new international poverty line as $1.25 a day for 2005 (equivalent to $1.00 a day in 1996 US prices). But have recently been updated to be $1.25 and $2.50 per day. Absolute poverty, extreme poverty, or abject poverty is "a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services." The term 'absolute poverty', when used in this fashion, is usually synonymous with 'extreme poverty‘: Robert, the former President of the World Bank, described absolute or extreme poverty as, "...a condition so limited by malnutrition, illiteracy, disease, squalid surroundings, high infant mortality, and low life expectancy as to be beneath any reasonable definition of human decency". Australia is one of the world's wealthier nations. In his article published in Australian Policy Online, Robert Tanton notes that, "While this amount is appropriate for third world countries, in Australia, the amount required to meet these basic needs will naturally be much higher because prices of these basic necessities are higher."

However as the amount of wealth required for survival is not the same in all places and time periods, particularly in highly developed countries where few people would fall below the World Bank's poverty lines, countries often develop their own National poverty lines.

An absolute poverty line was calculated in Australia for the Henderson poverty inquiry in 1973. It was $62.70 a week, which was the disposable income required to support the basic needs Young Ji International School / College

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of a family of two adults and two dependent children at the time. This poverty line has been updated regularly by the Melbourne Institute according to increases in average incomes; for a single employed person it was $391.85 per week (including housing costs) in March 2009. In Australia the OECD poverty would equate to a "disposable income of less than $358 per week for a single adult (higher for larger households to take account of their greater costs).

For a few years starting 1990, The World Bank anchored absolute poverty line as $1 per day. This was revised in 1993, and through 2005, absolute poverty was $1.08 a day for all countries on a purchasing power parity basis, after adjusting for inflation to the 1993 U.S. dollar. In 2005, after extensive studies of cost of living across the world, The World Bank raised the measure for global poverty line to reflect the observed higher cost of living. Now, the World Bank defines extreme poverty as living on less than US$1.25 (PPP) per day, and moderate poverty as less than $2 or $5 a day (but note that a person or family with access to subsistence resources, e.g. subsistence farmers, may have a low cash income without a correspondingly low standard of living – they are not living "on" their cash income but using it as a top up). It estimates that "in 2001, 1.1 billion people had consumption levels below $1 a day and 2.7 billion lived on less than $2 a day." A dollar a day, in nations that do not use the U.S. dollar as currency, does not translate to living a day on the equivalent amount of local currency as determined by the exchange rate. Rather, it is determined by the purchasing power parity rate, which would look at how much local currency is needed to buy the same things that a dollar could buy in the United States.]Usually, this would translate to less local currency than the exchange rate in poorer countries as the United States is a relatively more expensive country.

The poverty line threshold of $1.25 per day, as set by The World Bank, is controversial.

Each nation has its own threshold for absolute poverty line; in the United States, for example, the absolute poverty line was US$15.15 per day in 2010 (US$22,000 per year for a family of four), while in India it was US$1.0 per day and in China the absolute poverty line was US$0.55 per day, each on PPP basis in 2010. These different poverty lines make data comparison between each nation's official reports qualitatively difficult. Some scholars argue that The World Bank method sets the bar too high, others argue it is low. Still others suggest that poverty line misleads as it measures everyone below the poverty line the same, when in reality someone living on $1.2 per day is in a different state of poverty than someone living on $0.2 per day. In other words, the depth and intensity of poverty varies across the world and in any regional populations, and $1.25 per day poverty line and head counts are inadequate measures.

The proportion of the developing world's population living in extreme economic poverty fell from 28 percent in 1990 to 21 percent in 2001. Most of this improvement has occurred in East and South Asia. In East Asia the World Bank reported that "The poverty headcount rate at the $2-aday level is estimated to have fallen to about 27 percent [in 2007], down from 29.5 percent in 2006 and 69 percent in 1990." In Sub-Saharan Africa extreme poverty went up from 41 percent in 1981 to 46 percent in 2001, which combined with growing population increased the number of people living in extreme poverty from 231 million to 318 million.

In the early 1990s some of the transition economies of Central and Eastern Europe and Central Asia experienced a sharp drop in income.[32] The collapse of the Soviet Union resulted in large declines in GDP per capita, of about 30 to 35% between 1990 and the trough year of 1998 (when it was at its minimum). As a result poverty rates also increased although in subsequent years as per capita incomes recovered the poverty rate dropped from 31.4% of the population to 19.6%.

World Bank data shows that the percentage of the population living in households with consumption or income per person below the poverty line has decreased in each region of the world since 1990: Region $1 per day $1.25 per day Young Ji International School / College

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1990

2002

2004

1981

2008

East Asia and Pacific

15.40% 12.33% 9.07%

77.2% 14.3%

Europe and Central Asia

3.60% 1.28% 0.95%

1.9%

0.5%

Latin America and the Caribbean 9.62% 9.08% 8.64%

11.9% 6.5%

Middle East and North Africa

2.08% 1.69% 1.47%

9.6%

South Asia

35.04% 33.44% 30.84% 61.1% 36%

Sub-Saharan Africa

46.07% 42.63% 41.09% 51.5% 47.5%

World

52.2% 22.4%

2.7%

Life expectancy has been increasing and converging for most of the world. Sub-Saharan Africa has recently seen a decline, partly related to the AIDS epidemic. Graph shows the years 1950–2005.

According to Chen and Ravallion, about 1.76 billion people in developing world livedabove $1.25 per day and 1.9 billion people lived below $1.25 per day in 1981. The world's population increased over the next 25 years. In 2005, about 4.09 billion people in developing world lived above $1.25 per day and 1.4 billion people lived below $1.25 per day (both 1981 and 2005 data are on inflation adjusted basis). Some scholars caution that these trends are subject to various assumptions, and not certain. Additionally, they note that the poverty reduction is not uniform across the world; economically prospering countries such as China, India and Brazil have made more progress in absolute poverty reduction than countries in other regions of the world.

The absolute poverty measure trends noted above are supported by human development indicators, which have also been improving. Life expectancy has greatly increased in the developing world since World War II and is starting to close the gap to the developed world Child mortality has decreased in every developing region of the world. The proportion of the world's population living in countries where per-capita food supplies are less than 2,200 calories (9,200 kilojoules) per day decreased from 56% in the mid-1960s to below 10% by the 1990s.

Similar trends can be observed for literacy, access to clean water and electricity and basic consumer items.

Relative poverty

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This graph shows the proportion of world population in extreme poverty1981–2008 according to the World Bank.

Relative poverty views poverty as socially defined and dependent on social context, hence relative poverty is a measure of income inequality. Usually, relative poverty is measured as the percentage of population with income less than some fixed proportion of median income. There are several other different income inequality metrics, for example the Gini coefficient or the Theil Index.

Relative poverty is the "most useful measure for ascertaining poverty rates in wealthy developed nations." Relative poverty measure is used by the United Nations Development Program (UNDP), the United Nations Children‘s Fund(UNICEF), the Organization for Economic Co-operation and Development (OECD) and Canadian poverty researchers.[43][44][45][46][47] In the European Union, the "relative poverty measure is the most prominent and most–quoted of the EU social inclusion indicators."

"Relative poverty reflects better the cost of social inclusion and equality of opportunity in a specific time and space."

In 1776 Adam Smith in the Wealth of Nations argued that poverty is the inability to afford, "not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without."

In 1958 J. K. Galbraith argued that, "People are poverty stricken when their income, even if adequate for survival, falls markedly behind that of their community."

In 1964 in a joint committee economic President's report in the United States, Republicans endorsed the concept of relative poverty. ‖No objective definition of poverty exists... The definition varies from place to place and time to time. In America as our standard of living rises, so does our idea of what is substandard."

Children of the Depression-era migrant workers, Arizona, 1937 In 1965 Rose Friedman argued for the use of relative poverty claiming that the definition of poverty changes with general living standards. Those labeled as poor in 1995, would have had "a higher standard of living than many labeled not poor" in 1965.

Relative poverty measures are used as official poverty rates by the European Union, UNICEF and the OEDC. The main poverty line used in the OECD and the European Union is based on "economic distance", a level of income set at 60% of the median household income.

Other aspects Economic aspects of poverty focus on material needs, typically including the necessities of daily living, such as food, clothing, shelter, or safe drinking water. Poverty in this sense may be understood as a condition in which a person or community is lacking in the basic needs for a minimum standard of well-being and life, particularly as a result of a persistent lack of income.

Analysis of social aspects of poverty links conditions of scarcity to aspects of the distribution of resources and power in a society and recognizes that poverty may be a function of Young Ji International School / College

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the diminished "capability" of people to live the kinds of lives they value. The social aspects of poverty may include lack of access to information, education, health care, or political power.

Poverty levels are snapshot picture in time that omits the transitional dynamics between levels. Mobility statistics supply additional information about the fraction who leave the poverty level. For example, one study finds that in a sixteen-year period (1975 to 1991 in the U.S.) only 5% of those in the lower fifth of the income level were still in that level, while 95% transitioned to a higher income category. Poverty levels can remain the same while those who rise out of poverty are replaced by others. The transient poor and chronic poor differ in each society. In a nine-year period ending in 2005 for the U.S., 50% of the poorest quintile transitioned to a higher quintile.

Poverty may also be understood as an aspect of unequal social status and inequitable social relationships, experienced as social exclusion, dependency, and diminished capacity to participate, or to develop meaningful connections with other people in society. Such social exclusion can be minimized through strengthened connections with the mainstream, such as through the provision of relational care to those who are experiencing poverty.

An early morning outside the Opera Tavern in Stockholm, with a gang of beggars waiting for delivery of the scraps from the previous day. Sweden, 1868.

The World Bank's "Voices of the Poor," based on research with over 20,000 poor people in 23 countries, identifies a range of factors which poor people identify as part of poverty. These include:  Abuse by those in power  Dis-empowering institutions  Excluded locations  Gender relationships  Lack of security  Limited capabilities  Physical limitations  Precarious livelihoods  Problems in social relationships  Weak community organizations Asset poverty is an economic and social condition that is more persistent and prevalent than income poverty. It can be defined as a household‘s inability to access wealth resources that are sufficient enough to provide for basic needs for a period of three months. Basic needs refer to the minimum standards for consumption and acceptable needs .[1] Wealth resources consist of home ownership, other real estate (second home, rented properties, etc.), net value of farm and business assets, stocks, checking and savings accounts, and other savings (money in savings bonds, life insurance policy cash values, etc.).

[2] Wealth is measured in three forms: net worth, net worth minus home equity, and liquid assets. Net worth consists of all the aspects mentioned above. Net worth minus home equity is the same except it does not include home ownership in asset calculations. Liquid assets are resources that are readily available such as cash, checking and savings accounts, stocks, and other sources of savings.

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There are two types of assets: tangible and intangible. Tangible assets most closely resemble liquid assets in that they include stocks, bonds, property, natural resources, and hard assets not in the form of real estate. Intangible assets are simply the access to credit, social capital, cultural capital, political capital, and human capital.

Characteristics The effects of poverty may also be causes, as listed above, thus creating a "poverty cycle" operating across multiple levels, individual, local, national and global.

A Somali boy receiving treatment for malnourishment at a health facility.

One third of deaths – some 18 million people a year or 50,000 per day – are due to povertyrelated causes: in total 270 million people, most of them women and children, have died as a result of poverty since 1990. Those living in poverty suffer disproportionately from hunger or even starvation and disease. Those living in poverty suffer lower life expectancy. According to the World Health Organization, hunger and malnutrition are the single gravest threats to the world's public health and malnutrition is by far the biggest contributor to child mortality, present in half of all cases.[72] Almost 90% of maternal deaths during childbirth occur in Asia and subSaharan Africa, compared to less than 1% in the developed world.

Those who live in poverty have also been shown to have a far greater likelihood of having or incurring a disability within their lifetime. Infectious diseases such as malaria and tuberculosis can perpetuate poverty by diverting health and economic resources from investment and productivity; malaria decreases GDP growth by up to 1.3% in some developing nations and AIDS decreases African growth by 0.3–1.5% annually.

A pair of studies of the influence of poverty on the ability to reason about complicated issues requiring an immediate solution found that poverty directly impedes cognitive function.

Financial worries appear to put a severe burden on one's mental resources so that they are no longer fully available for solving complicated problems. The reduced capability for problem solving can lead to suboptimal decisions and further perpetuate poverty.

Hunger Malnutrition

A poor woman in India.

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People who earn their living by collecting and sorting garbage and selling them for recycling, Payatas,Manila, Philippines.

Rises in the costs of living making poor people less able to afford items. Poor people spend a greater portion of their budgets on food than richer people. As a result, poor households and those near the poverty threshold can be particularly vulnerable to increases in food prices. For example, in late 2007 increases in the price of grains led to food riots in some countries.

The World Bank warned that 100 million people were at risk of sinking deeper into poverty.

Threats to the supply of food may also be caused by drought and the water crisis. Intensive farming often leads to a vicious cycle of exhaustion of soil fertility and decline of agricultural yields.

Approximately 40% of the world's agricultural land is seriously degraded.[86][87] In Africa, if current trends of soil degradation continue, the continent might be able to feed just 25% of its population by 2025, according to United Nations University's Ghana-based Institute for Natural Resources in Africa. Every year nearly 11 million children living in poverty die before their fifth birthday. 1.02 billion people go to bed hungry every night.

Education Research has found that there is a high risk of educational underachievement for children who are from low-income housing circumstances. This is often a process that begins in primary school for some less fortunate children. Instruction in the US educational system, as well as in most other countries, tends to be geared towards those students who come from more advantaged backgrounds. As a result, children in poverty are at a higher risk than advantaged children for retention in their grade, special deleterious placements during the school's hours and even not completing their high school education. There are indeed many explanations for why students tend to drop out of school. One is the conditions of which they attend school. Schools in poverty-stricken areas have conditions that hinder children from learning in a safe environment.

Researchers have developed a name for areas like this: an urban war zone is a poor, crime-laden district in which deteriorated, violent, even war-like conditions and underfunded, largely ineffective schools promote inferior academic performance, including irregular attendance and disruptive or non-compliant classroom behavior. For children with low resources, the risk factors are similar to others such as juvenile delinquency rates, higher levels of teenage pregnancy, and the economic dependency upon their low income parent or parents. Families and society who submit low levels of investment in the education and development of less fortunate children end up with less favorable results for the children who see a life of parental employment reduction and low wages.

Higher rates of early childbearing with all the connected risks to family, health and well-being are major important issues to address since education from preschool to high school are both identifiably meaningful in a life.

Poverty often drastically affects children's success in school. A child's "home activities, preferences, mannerisms" must align with the world and in the cases that they do not these students are at a disadvantage in the school and most importantly the classroom. Therefore, it is safe to state that children who live at or below the poverty level will have far less success educationally than children who live above the poverty line. Poor children have a great deal less healthcare and this ultimately results in many absences from the academic year. Additionally, poor children are much more likely to suffer from hunger, fatigue, irritability, headaches, ear infections, flu, and colds. These illnesses could potentially restrict a child or student's focus and concentration. for a child to grow up emotionally healthy children under three need ―A strong, reliable primary caregiver who provides consistent and unconditional love, guidance, and support. Safe, Young Ji International School / College

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predictable, stable environments. Ten to 20 hours each week of harmonious, reciprocal interactions. This process, known as attunement, is most crucial during the first 6–24 months of infants' lives and helps them develop a wider range of healthy emotions, including gratitude, forgiveness, and empathy. Enrichment through personalized, increasingly complex activities‖ Harmful spending habits mean that the poor typically spend about 2 percent of their income educating their children but larger percentages on alcohol and tobacco (For example, 6 percent in Indonesia and 8 percent in Mexico) Housing

Street child in Bangladesh.

Poverty increases the risk of homelessness. Slum-dwellers, who make up a third of the world's urban population, live in a poverty no better, if not worse, than rural people, who are the traditional focus of the poverty in the developing world, according to a report by the United Nations.

There are over 100 million street children worldwide. Most of the children living in institutions around the world have a surviving parent or close relative, and they most commonly entered orphanages because of poverty. Experts and child advocates maintain that orphanages are expensive and often harm children's development by separating them from their families. It is speculated that, flush with money, orphanages are increasing and push for children to join even though demographic data show that even the poorest extended families usually take in children whose parents have died.

Utilities Water utility subsidies tend to subsidize water consumption by those connected to the supply grid, which typically skewed towards the richer and urban segment of the population and those outside informal housing. As a result of heavy consumption subsidies, the price of water decreases to the extent that only 30%, on average, of the supplying costs in developing countries is covered. This results in a lack of incentive to maintain delivery systems, leading to losses from a leak annually that is enough for 200 million people. This also leads to a lack of incentive to invest in expanding the network, resulting in much of the poor population being unconnected to the network. Instead, the poor buy water from water vendors for, on average, about five to 16 times the metered price. However, subsidies for laying new connections to the network rather than for consumption have shown more promise for the poor.

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Similarly, the poorest fifth receive 0.1% of the world‘s lighting but pay a fifth of total spending on light, accounting for 25 to 30 percent of their income. Indoor air pollution from burning fuels kills 2 million, with almost half the deaths from pneumonia in children under 5. Fuel from Bamboo burns more cleanly and also matures much faster than wood, thus also reducing deforestation. Additionally, using solar panels is promoted as being cheaper over the products' lifetime even if upfront costs are higher.

Violence According to experts, many women become victims of trafficking, the most common form of which is prostitution, as a means of survival and economic desperation. Deterioration of living conditions can often compel children to abandon school to contribute to the family income, putting them at risk of being exploited. For example, in Zimbabwe, a number of girls are turning to sex in return for food to survive because of the increasing poverty.

Causes of Poverty The onset of poverty in countries has been attributed to various factors, such as the following, or a combination of the following:  Corruption and Abuse of Political Power- many leaders and former leaders of various countries have looted and corrupted their nations treasuries-leading to the devastations of their economies and preventing the progress of their nations. 

Crime- this is both a cause and effect of poverty. A poor individual, or example, may resort crime to feed him. However, those not yet in poverty who resort to crime to earn more may find themselves at odds with the law and consequent imprisonment may result to poverty.



Historical Factors (Colonialism and Imperialism) – Colonial powers like Spain, Britain, and United States have left their former empires and colonies in economic dissarry. Most of these economies just colonies of abuse and manipulation, and the colonizing power got all the resources they could get from the colony.



Overpopulation- Too much population in region or country naturally leads to depletion of resources in that particular location. There will also be competition for available jobs, shelter, and various other opportunities among many people. India, China, and other overpopulated countries suffer from poverty in various degrees.



War and Conflict- These turbulent conditions and situations often lead to the displacement of business and industry, and the daily lives of people, as their sources of livelihood are destroyed and their work compromised. Frequently, it is the woman and children who are mostly affected by these situations.



Lack of Education- poverty indeed puts people into a various cycle. For example, poor people do not have the opportunity to study and educate themselves for their future. Thus, there are few opportunities available. They are then unable to give their children the education needed, and they are also stuck in poverty like their parents. This goes on and on throughout many generations.



Agricultural and Business Cycle- farming, fisheries, businesses, and other economic activities go through booms or downswings, and it is during downswings when people sometimes lose their sources of income, putting them and that families into poverty.

Sometimes natural causes can devastate fields, destroying crops worth millions of money.

Eliminating Poverty Because poverty in one of the most pervasive economic problems in the world today, leaders are trying their best to come up with various ways to eliminate or minimize it. International Young Ji International School / College

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organizations like the United Nations and the World Bank are coming up with different ant-poverty programs that will have great effects in diminishing poverty and its effects.

World Bank. For example, has been trying to reduce poverty in countries through the implementation of programs to promote economic growth in these locations. However, these have not resulted to an effective solution. On the other hand, the United Nations and several rich countries have embarked on giving direct id to nations suffering from forms of poverty.

Different international groups are into providing affordable housing, such as the group habitat for Humanity, community organizing which involves the holding of livelihood seminars and the like, and financial assistance to poor families to help them put up small businesses.

The United Nations has formulated the Millennium Development Goals, which are objectives targeted to be achieved on or before the year 2015. The main thrust of these goals is the total eliminations of poverty by the year 2015, demonstrated by the following objectives:  Eliminate school fees and free school meals for children 

Provide access to information on sexual and reproductive health, AIDS, and the like



Upgrade slums and provide land for public housing



Facilitate access to electricity, water, and sanitation



Plant trees and revitalize

For their part, poor or developing nations have created their own poverty reduction strategies in order to help in poverty alleviation in their location. In the Philippines, the government has embarked on various policies to try minimizing poverty. Among these policies are the following: 

The inclusion of poverty reduction strategy in the government‘s economic plan, which focuses on the redistribution of economic and political resources, such as land and capital, to provide the opportunities for people to escape poverty.

Some of the major programs under this policy are the Fisheries and Aquatic reform law, the Urban Development and Housing Act (for socialized housing),the Comprehensive Agrarian Reform Program (CARP) and the Indigenous people‘s Rights Act.



The promotion of human development services and the delicvery of basic social services and needs to the poor like water, health services, electricity, and waste management.



The furtherance of social protection to provide protection to the poor against unwanted economic shocks such s bi time competitions mnd sudden economic turnarounds.



The implementation of security from violence, particularly for those working under the informal business sectors such as the sidewalk vendors, as these people are the ones most victimized by persons in authority.

With these programs, the Philippines government is hoping that poverty and its forms will be minimized if not totally eradicated in the next decade. This is the country‘s contribution to the UN‘s goal of eradicating poverty. Critics, however, are quick to point out that the government has failed in its objectives regarding the eradication of poverty.

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With all the forms and effect of poverty, it seems that this menace will continue to rear its ugly head. Individuals, nations, and the international community must go hand in hand to eradicate this continue in problem.

BRAIN DRAIN Brain Drain descries the way people who are educated, talented or otherwise trained in specific skills emigrate to another country to look for better opportunities. These people do this because of various reasons, the most important of which is the lack of opportunity in their own country. in some instances there may also be conflict, health problems, and other concerns in areas where they live, which make it more preferable to seek jobs abroad. The result is a significant decrease in skilled people in country o region, hence the term brain drain.

Brain drain is hard to measure and quantify, since it‘s difficult to actually determine the effects of the coming of human capital to certain nation. Its effects have been debated, and many economists argue for its bad effects. There are some, however, who say that it may have some positive impact on the country where it is happening.

The greatest impact brain drain may have on a country is the loss of talent and skills needed for its own grown. This is the case with developing countries, where the lack of needed funds for development and employment compels people to seek jobs elsewhere. In the Philippines, for example, there is growing increase in the number of workers going abroad. This is particularly true with nurses, doctors, and other medical workers, who usually go to the United States, Canada, and European nations because hospitals in these countries pay higher. However, what is happening is a grim prospect, with hospitals in the Philippines almost running out of doctors, nurses, and other personnel. The result is n impending breakdowns of medical care in the country.

Some economists, however, are saying that the so-called brain drain may have, in fact. , some benefits. One of these is that oversees workers usually bring in much-needed dollars that help the country where they come from. Another is that overuses workers are trained abroad and they may bring their expertise back to their home country. Thus, the ―brain drain‖ may become a ―brain gin‖ later on.

SUSTAINABLE DEVELOPMENT One of the most pressing global concerns today is the issue of sustainable development.

Indeed, countries need to have development, but why should be sustainable development? What is sustainable development and why do we need to have this type of development?

According to a 1987 United Nations report, sustainable development is a type of redevelopments that ―meets the needs of the present without compromising the ability of future generations to meet their own needs.‖ Thus, sustainable development considered the needs of the present generation. However, it cautions against abusing resources to the extent that people in the future would be lacking in those, severely compromising their capacity to live decently.

The Environment and Sustainable development One of the more important considerations in sustainable development is the way individuals and countries take care of their environment. While many natural resources re renewable, such as air, water, plants, and animals, they can be exhausted to point where replenishment could take a lot of time. Some natural resources, on the other hand, are not renewable, s in the case of petroleum. In the future, these resources would not be enough for ll people‘s needs. Thus, taking care of the environments and the earth‘s resources is crucial to having sustainable development.

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Today, there are many individuals and groups that work to promote concern for the environment. Countries have environment. Countries have established plants and programs for the sustained and responsible development of earth as a planet and as a home.

Economic Factors Our taking care of the environment boils down to the economics of it. What really is needed by us, as individuals and as a people? Businesses usually produce goods and services according to the demand of its consumers. These companies have profit as their bottom line.

For example, a logging company will not be very concerned about the way forests are dwindling, as long s there are demands for log and wood. In the same manner, food companies will not hesitate to produce food stuff in great quantities when needed. The problem is when raw materials start to dwindle and there would be no more things to work with.

People must contribute in their own little way to sustainable development by being responsible for their use of resources, particularly in terms of water, electricity, gasoline, and other basic necessities.

LABOR AND OUTSOURCING Businesses have always relied on human resources to provide the main energy and power to drive their industries. Labor or human resources have been given importance by business and industry as the prime movers of the economy, and every business must, it some way, provide for labor or personnel to be able to operate.

Governments have also given much importance to labor. Laws, and legislation have been enacted to provide comfort and safety to labor and personnel. Labor, however, has not felt very important, and it has regarded the government and the business sector s abuses of their capacities and abilities. This is especially true in developing of the capacities and abilities. This is especially true in developing countries like the Philippines, although government has always tried to foster good relations between labor and business. 

Some of the more common issues facing labor today are the following: Contractualization- this is a common method employed by businesses in hiring personnel.

They are given fixed contracts of usually 5 months, so in effects they are not regularized as employees. On the side of labor, this is unfair as they are easily separated from the job, without hope of being returned back. They also find it difficult to find another job, with the stiff competition among job hunters.

On the side of business owners, this is just a practical thing to do because of the uncertainly of business cycles, which means that they would not really know what will happen with their business, or their future profits, so by contructualizing they cn minimize personnel cost by not rehiring personnel. 

Automation- the coming of technology has provided business with ways and machine through which they can produce goods and services in a much more efficient manner. This has given labor some problems. In many companies in different countries, new devices and functions have replaced people and may have lost jobs due to technology. On the side of labor, this again is very unfortunate happening as personnel lose jobs, with the graet possibility of not having it again in other companies, which are also utilizing automation. On the side of business and business owners, the bottom line is profit and if new technology and labor-saving devices would lessen operational cost, promote efficiency, and give them larger profits, and then they would not hesitate to install such technology in their businesses.

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

Outsourcing- this is another phenomenon or labor issue today. Outsourcing is when companies or businesses outsourcing do it for them. For example, an American firm might just close its marketing department and outsource its functions, such as promoting its products, to another firm. This will save them money especially when they outsource it to firm in another country with cheaper labor.

THE ECONOMICS OF TERRORISM The recent year‘s incidents of terrorism have escalated throughout the world. While previously terrorism was limited to isolated incidents in different countries and locations, it has now become a global problem, affecting people from all around the world in very wide scale. The fast transmission of news in mass media has made terror a part of everyday news as terroristic actions have noted in various parts of the world almost every day.

Terrorism is the act of systematic violence in furthering political aims. This includes groups that aim to overthrow a regime in their own country or the furtherance of a religious agenda, as shown by Christian, Islamic, and other religious extremists. Osama Bin Laden and his group Al-Qaeda has been pointed out by Western powers such as the United States as one of the leading terrorists groups in the world.

Terrorism became part of the world‘s consciousness after the so called- 9-11 attack in New York, United States, on September 11, 2001. On that date, two airplanes rammed into World Trade Center twin towers, destroying both buildings, killing more than three thousand people, and shocking the world. After that event, the fear of terrorism has never been the same, with the United States and other Western powers becoming very strict with security and with a war on terror created, eventually leading to the attack on Afghanistan and the conquest of Iraq, s these countries were allegedly hiding terrorists and weapons of mass destruction.

Some of the economic effects of terrorism are the following: 1. The war on terror and the accompanying preparations was big financial burden-the war machines and the soldiers that were commissioned for the war, plus the casualties and lost lives and opportunities; the additional security measures in important facilities, and the increased budget for intelligence needed to track agents of terrorism. All of these necessitated more funds, depleting money that should have been directed to more useful purpose such s education and health.

2. Many businesses, especially those on the airline, travel and tourism industries, suffered great losses. Terrorism gave people enough fear to just stay in their homes, especially in the first few months after 9/11. Some airline companies even had to downsize their personnel just to be able to survive. Strict security measures discouraged tourists from travelling to their favorite parts of the world. The effect was such that it cannot even be conceived in terms of billions of dollars.

3. After the 9/11 attacks, there were also many terrorist actions in many parts of the world, including Indonesia and the Philippines. This discouraged investors from putting their money in many countries affected by terrorism. The government of these countries promised to handle terrorism, but the business and investor confidence was very low.

Presently, the economies of the world are trying their best to go or n and many have been succeeding despite the threat of terrorism. International organizations are also helping by managing terrorism as group, helping them significantly in their attempt to curb the menace. The Young Ji International School / College

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fate of the economies of the future depends on the way governments are able to handle terrorism in the future.

THE ADVENT OF E-COMMERCE The coming of the World Wide Web gave a chance for people to communicate and research information using the Internet. However, it also gave them the chance to conduct businesses over the Internet, in a concept called electronic commerce (e-commerce). Ecommerce allows people to buy and sell goods and services over the Internet, and the market is large, s customers and buyers come from all around the world.

The seller usually has to have a website where he can offer goods or services. The website is a type of marketing tool that displays the product and provides its description so that the customers can entice to buy. Customers are surfers of the Internet who happen to look at the website, one way or another. When customer wants to buy, he just click on few buttons on the screen, type some information, and the product will shipped to his door in few days. Payments may be made through credit cards or in many Internet payment schemes.

Because of the relatively fast manner by which transaction are accomplished over the Internet, many have already utilized e-commerce as their form of business. However, s in any other business, there are still many problems and issues that bog e-commerce, such as the prevalence of fraud (fake products, invalid payments and the like) selectivity of products (as not all products cn be sold over the Internet), and quality assurance and warranties.

In time, more business will venture into e-commerce as this becomes the market of the future. There will also be many other issues in economics that will arise in the future, that may involve some changes on our part, or some adaptations to laws or environment. The student of economics should be well aware of these issues all the time- he must be vigilant, studying the news and watching the prevailing situations and market conditions-s these might have a significant effect on the lives of people in his community, in his country and the world.

Terms to Define 1. CARP 2. Poverty line 3. Contractuliztion 4. Brain drain 5. Overpopulation 6. War on terror 7. Terrorism 8. Millennium Development Goals 9. Website 10. 9-11 attacks 11. Sustainable development 12. Labor 13. Poverty 14. Automation 15. Corruption 16. Outsourcing 17. E-commerce 18. Aquatic Reform Law Follow-up Questions 1. Define what poverty is. Why do you think it is considered as the most fundamental economic problem in the world today?

2. Can you see poverty in your own country? Show poverty in the Philippines by pointing our situations and examples.

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3. What does the world poverty statistics provided by the World Bank tell us about the status of poverty in the world today?

4. Enumerate and explain some of the causes of poverty. What do you think is the biggest single factor that causes poverty among all the causes provided. Defend your answer.

5. What are the Millennium Development Goals? Give some of these objectives. How could these goals help in minimizing poverty?

6. Give some measures undertaken by the Philippine government to minimize poverty in the country.

7. Describe brain drain and its impact on the economy.

8. What are some of the arguments brought forth to support brain drain? Do you think this is true in the case of the Philippines?

9. How does the United Nations define sustainable development? Differentiate this from ordinary development.\ 10. Explain the environment factor in sustainable development.

11. Describe the dilemma of supporting both sustainable development and business profits.

12. Elaborate on the role of labor in the economy.

13. What is automation effects on labor?

14. Explain the effects of terrorism on the economies of nations.

Activity 1. Write one-page essay about the most significant economic issues today.

2. Create groups with five members each. Each group will comprise the World Economic Policy Team. They will research on the following. a. b. c. d. e.

Poverty Brain Drain Sustainable Development Labor\terrorism E-commerce

I. MULTIPLE CHOICES: Encircle the correct answer.

1. It is the economic system in which the means of production, distribution, and exchange of goods are privately owned and operated for private profit. a. Socialism b. capitalism c. Communism d. Feudalism 2. It is a field of study which deals with the production, distribution, conservation, and consumption of goods and commodities to satisfy human wants. a. Commerce b. Sociology c. marketing d. Economics 3. It is an economic system in which the ownership of property or means of production, distribution, and supply belonged to the whole classless society according to State disposition. a. Communism b. Social Justice c. Egalitarianism d. Equilibrium 4. It is the common term for wares, merchandize, and other movable properties. a. Goods b. ownership c. Property d. Gains 5. It refers to the excess of income over expenditures in a particular business transaction. a. Savings b. Income c. Expense d. Profit 6. It is the ultimate purpose in establishing or operating a business or commercial institution. a. to have business venture b. to earn profit c. to save income d. to realize a return of investment 7. It is the process of actually using, disposing, or utilizing goods and commodities for a particular purpose. a. Conservation b. Distribution c. Consumption d. Production 8. It is the process of manufacturing goods and commodities to serve the needs of the people. a. Consumption b. Production c. Storaging d. Distribution 9. It is the thing which has value, in limited supply, and demanded by the purchasers. a. Commodity b. Stocks c. Property d. Ownership Young Ji International School / College

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10. It is an economic theory which advocates the ownership of the means of production and control of equal distribution of goods to the community. a. Capitalism b. Socialism c. Feudalism d. Mercantilism 11. It is the agreed earnings of money deposited in a bank or lent to a borrower for a define period of time. a. Capital b. Gains c. Interest d. Exchange rate 12. It is an interest or share of profits payable to shareholders on stock or bonds. a. Dividend b. Market up price c. Patronage refund d. Return of Investment 13. It is a group of person composed of at least five, but not more than fifteen, directors who have specific number of stocks and common purpose and is vested with legal personality. a. Proprietorship b. Partnership c. Enterprise d. Corporation 14. It refers to the coins, notes, and other tokens in circulating as means of exchange. a. Currency b. Check c. cash band d. Surety 15. It is the medium of exchange for goods and services, either in metal or paper form, with value and recognized by the authorities and the using public. a. Treasury Bond b. Check c. Money d. Sock certificate 16. It is the expansion of industries and the mechanization of all forms of production in order to have sufficient supply of goods which are needed by the industry. a. Industrialization b. Privatization c. Divestiture d. Contracting 17. It is the process where the government signs a contract that allows private corporations or concessionaires to manage the productions of goods and services. a. Industrialization b. Privatization c. Divestiture d. Contracting 18. Selling or transfer of business operation from the government control to the hands of the private corporations, provided that it is an income generating corporations. a. Industrialization b. Privatization c. Divestiture d. Contracting 19. It is the transfer of ownership and management of corporation from the government to the private sector. a. Industrialization b. Privatization c. Divestiture d. Contracting 20. Building of structures like factories, high rise buildings, and warehouses. a. Mining b. Services c. Manufacturing d. Construction

II. ACRONYMS: 1. CARP ____________________________________________________________________________ 2. NAPOCOR ______________________________________________________________________ 3. PCSO __________________________________________________________________________ 4. NARRA _________________________________________________________________________ 5. LTA ____________________________________________________________________________ 6. MTPDP _________________________________________________________________________ 7. ERAP __________________________________________________________________________ 8. NIC ____________________________________________________________________________ 9. ICT ____________________________________________________________________________ 10. RGCs _________________________________________________________________________ 11. SSS __________________________________________________________________________ 12. GSIS _________________________________________________________________________ 13. NCMB ________________________________________________________________________ 14. CBA __________________________________________________________________________ 15. BOT _________________________________________________________________________ III. Answer the following questions. (5 points each) 1. In what ways does contractualization discriminate against labor and favor business owners?

2. Elaborate on the role of labor in the economy?

3. What is automation‘s effect on labor?

4. Why companies prefer outsourcing today? Give the effects of outsourcing on different ways?

5. In what way did advances in science and technology boost local and national economies? Elaborate.

IV. IDENTIFICATION: Identify the following questions. __________________________ 1. It is an economic condition that manifests the capacity and ability of a country to produce more products from raw materials of agriculture. __________________________ 2.It refer to monetary remuneration of workers according to contract and on an hourly, daily or piecework basis including commission and other benefits and is computed with the use of wage rate.

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__________________________ 3. It is an organization that provides assistance and protection to the workers. __________________________ 4. It is the lowest wage to be paid to workers, which is approved by the government. __________________________ 5. It is the method of settling issues through collective and united actions of both parties. __________________________ 6. It is the temporary work stoppage of workers. __________________________ 7. It consists of slowing down the production to make the company suffer in terms of profit. __________________________ 8.It is the exchange of products and services of one country to another. __________________________ 9. It refers to the exchange and distribution of goods and services for local consumption. __________________________10. It is a condition where our nation produces more with less cost. __________________________11. It refers to comprehensive statement of accounts, which includes the demand and supply for foreign currencies. __________________________12. It was popularized by Theodore Levitt, an American economist in 1983, but the world globalization is already circulating in the economic world way back in 1944. __________________________13. It was established in 1947 as a multilateral trading system through fair and effective rules on trade. __________________________14.It is concerned with technological advances and proportion of population using particular inventions. __________________________15. It deals with the inward and outward direct investments.

V. Enumeration 1-4 Effects of Globalization 5-12 Agricultural Concerns/Problems 13-20 Lands that are not under the CARP

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