Agricultural Economics PDF

INTRODUCTION e. FEUDALISM – agrarian; with diff. societal classes TERMS ECONOMICS – the science of how people use ECONOMIC THEORIES scarce/limited productive resources (land, labour, capital, goods); “OIKONOMIA” - household mgt....

INTRODUCTION e. FEUDALISM – agrarian; with diff. societal classes TERMS ECONOMICS – the science of how people use ECONOMIC THEORIES scarce/limited productive resources (land, labour, capital, goods); “OIKONOMIA” - household mgt. 1. prehistory - as developed by various thinkers/writers MACROECON VS. MICROECON Macroecon deals with whole econ while microecon 2. classical econ deals with individual households/firms - market reaches equilibrium when full employment; POSITIVE VS NORMATIVE ECON market is stable when monetary conditions are stable; Positive econ is unbiased and based on causality while changes in money quality cause changes in aggregate D. Normative econ is based on ideals a. ADAM SMITH – wrote wealth of nations (1776); ECONOMIC MODEL – conceptualization of assumptions laissez faire (no gov’t interference) on occurrence of economic activity b. DAVID RICARDO – labor theory of value; in “Principles AGRICULTURAL ECONOMICS - 1st taught @ Harvard & of Political Econ. & Tax” widened theory of value, tax, @ Uni. of Wisconsin in 1903; Bureau of Ag.Econ. was Int’l trade formed under USDA in 1921 c. THOMAS MALTHUS – correlated econ. Prob w/ pop’n PRODUCTION POSSIBILITIES FRONTIER (PPF) d. JOHN STUART MILL – heir to Ricardo in “Principles of -all possible combinations of the maximum amounts of Political Econ. & Tax” two goods & services that can be produced w/ a given amount of resource 3. neoclassical econ -negative slope means OPPORTUNITY COST - value depends on both costs of Prod’n (supply) and -Inside PPF (inefficient resource use); Outside PPF Utility (demand); development of MICROECON; use of (infeasible resource use) Statistics CETERIS PARIBUS-all things equal OPPORTUNITY COST – the value of best forgone a. LEON WALRAS – introduced gen. econ. System; alternative created demand/supply schedule & calc. of equilibrium DIMINISH RETURNS – amount increases @ a b. ALFRED MARSHAL - Principles of Economics,” decreasing rate; emphasized that P & Q are determined by S & D consumption: Law of Diminishing Marginal Utility Production: Law of Diminishing Marginal Product 4. Keynesian econ MARGINALITY – additional/incremental unit JOHN MAYNARD KEYNES – father of MACROECON; Gen. ECONOMIC RESOURCE – Scarce w/ non-zero price Theory of Employment, Interest & Money (1930) NATURE & SCOPE 5. Post-keynesian/mainstream econ - hybrid of neoclassical and Keynesian econ 1. “econ is a social science” 6. Socialist Econ 2. basic economic problems a. KARL MARX – Das Kapital; modeled the collapse of a. what to produce? capitalism; co-authored communist manifesto b. how much to produce? b. FRIEDRICH ENGELS – Marx’ collaborator in c. when to produce? communism; co-authored communist manifesto d. How to produce? e. for whom to produce? 3. economic goals? a. full employment b. equity (equitable wealth distribution) c. efficiency (min. opportunity cost) d.economic growth (expansion of production) e. economic freedom (free to do anything legal) f.price stability (no inflation and fluctuations) g. econ. Dev’t (better life quality) h. econ. Security (fulfilled needs of every member) 3. Foundation of Economics - based on SELF INTEREST, SCARCITY, & CHOICE 4. Ideologies a. CAPITALISM – free enterprise; no central plan; private b. COMMUNISM – command/classless,; central planning c. SOCIALISM - free private, & overseeing public sector d. FASCISM – junta dictatorship; monopolies all over MICROECONOMICS Perfectly competitive – so many buyers/sellers; all are PRICE TAKERS - is the study of how households and firms make decisions and how they interact in markets DEMAND Qty demanded – amount willingly purchased What Economics Is All About Law of demand – Qd α 1/P Scarcity: the limited nature of society’s Demand Schedule – relationship between price and Qd resources Market Demand – sum of individual Qd Economics: the study of how society manages its scarce resources, e.g. – how people decide what to buy, how much to work, save, and spend – how firms decide how much to produce, how many workers to hire – how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs TEN PRINCIPLES OF ECONOMICS Demand Determinants (NIPTE) a. Number of buyers: Nb α Qd How to make decisions b. Income: 1. people face tradeoffs – efficiency vs. equality; I α Qd; normal good equality means reduced incentive to work/produce I α 1/Qd: inferior good 2. to get because you give up – opportunity cost c. Price of related Goods: 3. PRG α Qd: Subtitute 4. incentives means response – people react to PRG α 1/Qd: Complement prospects of reward d. Taste e. Expectations – (variable determinant) How people interact 5. trade makes better – specialize and exchange SUPPLY 6. markets are organized – determined what, how, how Qty supplied – amount willingly sold much, and who gets produce Law of supply – Qs α P 7. Gov’t improve markets – policies toward market Supply schedule – relationship between price and Qs success Market supply – sum of individual Qs How whole economy works 8. productivity means country stature –productivity (amt produced per unit labor) 9. much money means high prices – Inflation: faster money-making, greater inflation rate 10. short-run tradeoff between inflation and unemployment – policies cause negative correlation CIRCULAR-FLOW DIAGRAM - dollar flow among households and firms Supply Determinants a. Number of sellers: Ns α 1/Qs b. Input prices: PI α 1/Qs c. Technology: T α 1/Qs c. Expectations – (variable determinant) PRICE & QUANTITY EQUILIBRIUM (P* & Q*) MARKET FORCES OF SUPPLY AND DEMAND Market – group of buyers/sellers of given product Competitive market – many buyers/sellers; each has no effect on price ELASTICITIES OF DEMAND AND SUPPLY -responsiveness of Qd/Qs to ∆ in the determinants -measures: Point Elasticity (|Ƹ| for a single point); And arc elasticity (|Ƹ| for two points) -Values: Values Description/Interpretation |Ƹ| = 0 Perfectly inelastic; vertical; same Q for any P |Ƹ| < 1 Inelastic; nearly same Q when P changes |Ƹ| = 1 Unitary elastic; Q and P are proportional |Ƹ| > 1 Elastic; steep; diff. Q when P changes |Ƹ| = ∞ Perfectly elastic; horizontal; diff. Q for same P Types of Elasticity 1. Own-price Elasticity of Demand/Supply %∆𝑑/𝑠 𝑄2𝑑/𝑠 − 𝑄1𝑑/𝑠 𝑃2 − 𝑃1 Ƹ𝑑/𝑠 = =( ÷ ) %∆𝑃 𝑄2𝑑/𝑠 + 𝑄1𝑑/𝑠 𝑃2 + 𝑃1 NOTES: Applications: -more substitutes, greater Elastic P: lower |Ƹ| Total Revenue (TR) -more uses, greater |Ƹ| Inelastic P: higher -large in budget share, (TR) greater |Ƹ| Unit elastic: no -longer time, greater |Ƹ| change in TR -location along demand curve 2. Cross Price Elasticity of Demand (Ƹij) -%∆ in Qd of one product for every 1% ∆ in P of another product %∆𝑄𝑖 Ƹ𝑖𝑗 = %∆𝑄𝑗 NOTES: -if Ƹij > 0, the goods are substitutes -if Ƹij < 0; the goods are complementary 3. Income Elasticity of Demand (Ƹy) - %∆ in Qd for every 1% ∆ in income %∆𝑄𝑑 Ƹ𝑦 = %∆𝑌 NOTES: If Ƹy > 0; goods are normal If 0 < Ƹy< 1 (decimal); necessity If Ƹy> 1; luxury If Ƹy < 0; goods are inferior SURPLUS – (excess supply); Qs > Qd ∆𝐐 Marginal product of Labor (MPL): ∆𝐋 ; slope of production function …hopefully P still falls until P*, Q* SHORTAGE – (excess demand); Qs < Qd Note: MPL diminishes because of fixed input (ex. More workers but same land-holding means less...hopefully P still rise until P*, Q* productive labor) Dimishing marginal product: Qinput α 1/MP TERMS: ∆𝐓𝐂 ∆S – due to supply determinant; shift in S curve Marginal Cost (MC) = 𝑴𝑪 = ∆𝐐 ∆Qs – movement along fixed S curve; due to P ∆D – due to demand determinant; shift in D curve ∆Qd – movement along fixed D curve; due to P THE COSTS OF PRODUCTION PROFIT = TOTAL REVENUE (TR) – TOTAL COST (TC) Explicit cost (EC) – requires money outlay (wages, rent, income, interest) Implicit cost (IC) – no money outlay (opportunity cost) Accounting profit (AP) – TR - ECtotal; (ignores IC) Note: if MC< revenue of add’l output, then produce Economic profit (EP) – TR – [TC + (EC + IC)] more to profit Production function – relation between Qinputs & Qoutputs Fixed Cost (FC) – does not vary with Qoutput Variable Cost (VC) – vary with Qoutput Ex. Rice farmer jack has 5 has. and can hire as many Total cost (TC) – FC + VC Average Total Cost (ATC) = AFC + AVC Marginal Product (MP): increase in output due to add’l unit of input SHAPE OF ATC CURVE: U-SHAPED -DS occurs when orgs. are too large to coordinate; (mgt - as Q rises, AFC pulls ATC down (remember, ATC is stretched, uncontrolled costs); common when Q is decreases with Qoutput) BUT rising AVC pushes ATC up high (because AVC increases with Qoutput) FIRMS OF COMPETITIVE MARKETS -Efficient Scale: the qty. that minimizes ATC (lowest 1. many buyers/sellers point of the curve) 2. goods offered are largely the same 3. firms come and go in the market RELATIONS OF ATC & MC Note: because of 1 & 2, all are PRICE TAKERS - when MC < ATC, ATC falls; when MC > ATC, ATC rises - the MC curve intersects ATC curve at the Efficient scale Revenues of a Competitive firm (the ATC’s lowest point) - Total Revenue (TR): TR = P x Q - Average Revenue (AR): AR = TR/Q = P COSTS IN THE SHORT RUN & LONG RUN - Marginal Revenue (MR): MR = ∆TR/∆Q Very Short run: all inputs fixed Short run: some inputs are fixed (e.g. factories, land) MR = P for a Competitive Firm Long run: all inputs are variable ; ATC per Q, is based on -firm may increase efficient mix/combination of inputs for Q (factory size Q w/o affecting with lowest ATC) market price -increase in Q Long-run Average Total Cost (LRATC) means R rises by P Comparison of various factories of diff. sizes ( ex. Small, -MR = P is only medium, Large) each with their own Short-run Average true for firms in Total Cost (SRATC). competitive ex. Three diff. factories markets with SRATC each, and two different products Profit Maximization (QA & QB) - is simply the Q that maximizes profit Generally, factory size - increase in Q means revenue rise by MR and cost rises will vary on the choice of by MC production -if MR>MC: Say, increase Q to raise -if the firm wants to produce less than QA, then profit choose size S; -if the firm wants to produce between QA and QB, -if MR MR; reduce Q to own SRATC curve) raise P - At Q1, MC = MR; Changing Q would lower profit HOW ATC CHANGE WITH CHANGES IN PROD’N SCALE (based on the previous line graph for LRATC) (Note: MR is parallel to Q; while MC is upward sloping) Economies of Scale: -if P rises to P2, profit- ATC falls as Q increases maximizing Q rises to Q2 Constant returns to - MC curve determines the Scale: ATC is same as Q firms Q at any price increases -hence, MC curve IS the Diseconomies of Scale: firms supply curve ATC rises as Q increases ES CRS DS Firm’s short-run Decision to Shut Down Notes: - Cost of Shutting Down: Revenue Loss = TR -ES occurs when increased Prod’n allows greater - Benefit of Shutting Down: cost savings = VC (variable specialization (workers are efficient when tasks are cost) narrow); this common when Q is low - Shutdown when TR < TC, or, divide by Q, TR/Q < VC/Q, Shutdown when P < AVC Firm’s Short Run Supply (SRS) Curve Entry & Exit in the Long Run -SRS curve: - No. of firms change due to Entry/Exit in the Long run Portion of MC curve - New firms Enter when old firms earn positive Above AVC. economic Profit; causing SR market supply to shift right, but P to fall (eventually reducing profit and inducing slow entry) - some old firms exit when losses are incurred; causing SR market supply to shift left, but P to rise (eventually reducing losses and inducing entry) Zero Profit Condition Firm’s Long-Run Decision to Exit/Enter Long-run Equilibrium: -Cost of exiting the market: Revenue Loss = TR - Entry or exit complete; remaining firms earn zero -Benefit of exiting the market: Cost savings = TC (zero FC profit in the long run) -zero economic profit occurs when P = ATC - Firm exit when TR < TC, or, divided by Q, TR/Q < TC/Q, -firms produce where P = MR = MC, Exit if P < ATC -zero-profit condition is P = MC = ATC, - Firm enter when TR >TC, or divided by Q, TR/Q > TC/Q, -recall that MC intersects ATC at minimum ATC Enter if P > ATC -hence, in the long run, P = minimum ATC (considered as the break-even point) Long term Supply (LRS) Curve Why firms remain in business when profit = 0 -Economic Profit (EP) = R – TC (including implicit costs or The firm’s LRS Curve is opportunity cost) The portion of MC Curve - even when economic profit is zero, notwithstanding Above the LRATC implicit costs, Accounting profit will still be positive Long Run Market Supply (LRMS) Curve Identify a firm’s profit Identify a firm’s Loss Short term and Long term Effects of Increase in Demand Short Run Market Supply (SRMS) Curve - as long as P ≥ AVC, firm will produce profit-maximing Q were MR = MC - recall that at each price, Qs of the market is the sum of Monopoly – sole seller of a product w/o close Qs by all firms subtitutes; has market power Oligopoly – only a few sellers offer similar products Monopolistic competition – many firms sell similar but unidentical products Comparison of Perfect & Monopolistic Competition MACROECONOMICS 2. FACTOR INCOME APPROACH 𝑮𝑵𝑷/𝑮𝑫𝑷 = 𝑵𝑰 + 𝑰𝑩𝑻 + 𝑫 - performance of economy as a whole (gov’t, firms, Where, households) NI = W(wage) + I(interests) + R(rents) + P -explains fluctuating economy, w/c give rise to the (profits) business model IBT = indirect business TAX net of subsidies D = DEPRECIATION/ capital consumption NATIONAL INCOME ACCOUNTING allowance - keeps finger on economic pulse Components of Nat’l Income based on Nat’l Income - growth, steady, stagnation Accounts of the Philippines: - basis for policy-making -Employee compensation (salary) -net operation surplus CIRCULAR FLOW DIAGRAM -Depreciation -Indirect taxes 3. VALUE-ADDED APPROACH (INDUSTRIAL ORIGIN) 𝐺𝑁𝑃/𝐺𝐷𝑃 = 𝐺𝑉𝐴1 + 𝐺𝑉𝐴2 + 𝐺𝑉𝐴3 +... +𝐺𝑉𝐴𝑁 + 𝐼𝐵𝑇 Where: 1….n = industry 1 up to n Real and Nominal GNP/GDP Nominal – value of output in a given period based on then-prevailing prices (in Pesos) Real – change in physical output between two time periods based on the same price 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝑁𝑃 𝑅𝑒𝑎𝑙 𝐺𝑁𝑃 = × 100 𝐺𝑁𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 Note: Transfer payments are transactions wherein one party is not obliged to deliver a good or service in return Problems of GNP/GDP Measurement for the payment (e.g. retirement benefits) 1. some outputs not measured because they weren’t traded in the market (unseen transactions) Exports – sales of domestically produced goods to other 2. difficult to account quality improvement countries; reflected as payment from rest of the world 3. some activities adding to REAL GNP represent use of to firms resources against criminality Imports – goods bought from other countries; reflected as payment of purchasing firm to the rest of the world National Income Determination Macroeconomic Equilibrium Indicators of Aggregate Output: - when Aggregate Expenditure (AE) = Agg. Income (Y) GNP – market value of FINAL goods/services produced 𝐴𝐸 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀 by filipinos at a given time GDP – market value of FINAL goods/services produced EQUILIBRIUM MEANS: in the Philippines at a given time (foreigner or national) 𝒀 = 𝑨𝑬 NET FACTOR INCOME THE REST OF THE WORD (NFIRW) – difference between filipino earning the world over, and foreign earnings in the Philippines 𝑮𝑫𝑷 = 𝑮𝑵𝑷 – 𝑵𝑭𝑰𝑹𝑾 Characteristics of GNP/GDP - flow concepts (Q of final good over given period) Consumption, Savings, Income -monetary in terms - Consumption Function: - of final goods/services relation of consumption to disposable income; straight -of produce w/in accounting year line graph with slope 0, 𝑏 < 1 1. FINAL EXPENDITURE APPROACH Where; 𝑮𝑵𝑷/𝑮𝑫𝑷 = 𝑪 + 𝑰 + 𝑮 + (𝑿 − 𝑴) a = consumption Where, b = MPC C = HOUSEHOLD CONSUMPTION Yd = Income I = FIRM INVESTMENTS - Savings Function: G = GOVERNMENT EXPENDITURE Relation of savings to different income levels X – M = NET EXPORT TO FOREIGN SECTOR 𝑌 = 𝐶 + 𝑆; 𝑆 = 𝑌 − 𝐶 From, 𝐶 = 𝑎 + 𝑏(𝑌𝑑), the savings functions is derived budget surplus - revenue exceed expenditures as budget deficit - revenues are less than expenditures 𝑺 = −𝒂 + (𝟏 − 𝒃)𝒀𝒅 Financing account - national govt’s borrowing. Note: MPS = 1-b (Marginal Propensity to Save) ∆𝑺 Government Revenues 𝑴𝑷𝑺 = ∆𝒀 𝒅 ∆𝑪 Tax revenues - govt’s earnings from taxes 𝑴𝑷𝑪 = ∆𝒀𝒅 Non-tax Revenues - earnings from services 𝑴𝑷𝑪 + 𝑴𝑷𝑺 = 𝟏 Major sources of tax revenues Determination of Equilibrium Income in a Two-Sector 1. Taxes on net income and profits Economy 2.Taxes on goods and services -assumes that aggregate expenditure equals 3. Taxes on international trade and transactions consumption plus investment 𝑨𝑬 = 𝑪 + 𝑰 Component of Government Spending -suggests that macroeconomic equilibrium means 1. Personal Services (salaries and benefits) aggregate income equals aggregate expenditures 2. Transfer Payments (grants and subsidies, benefits and 𝒀 = 𝑪+𝑰 gratuities) 3. Debt Service Simple Income Determination (National Income) 4. MOOE (day to day operations) 𝒀 = 𝑪 + 𝑰; 𝑪 = 𝒂 + 𝒃𝒀𝒅; 5. Capital Outlay (infrastructure and investment) 𝒀 = (𝒂 + 𝒃𝒀𝒅) + 𝑰 𝒀 = 𝒂 + 𝒃𝒀 + 𝑰; 𝒀𝒅 = 𝒀 EQUILIBRIUM INCOME IN A THREE-SECTOR ECONOMY 𝒀 − 𝒃𝒀 = 𝒂 + 𝑰 AE = C + I + G or I + G = S + T 𝒀(𝟏 − 𝒃) = 𝒂 + 𝑰 Where: C = a + bYd ; Yd = Y - T ; T = tax 𝒂+𝑰 𝒂+𝑰 𝒀= ; 𝒐𝒓 𝒀 = 𝟏−𝒃 𝑴𝑷𝑺 Disposable income (Yd) households income that are free to spend and save. Investment multiplier - helps predict response of Y* to ∆I (investment) 𝟏 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑴𝒖𝒍𝒕𝒊𝒑𝒍𝒊𝒆𝒓 (𝜶𝑰 ) = Inflation 𝟏−𝒃 increase in the general price level Change in Y* is equal to product of multiplier and ∆I ∆𝐘 = 𝛂𝑰 × ∆𝐈 Types of Inflation 1.Demand-Pull Inflation - excess demand for GOVERNMENT IN THE MACROECONOMY commodities push prices up. role in the economy. 2. Cost-Push Inflation - increases in the costs 1. buys good and services for day-to- of prod’n push prices up day operations 2. participates in the financial market via measures of the inflation rate: borrowing and lending, and collects taxes. a) headline inflation rate - uses the (CPI) 3. policies, or lack thereof, affects economic agents and their transactions. b) core inflation rate - uses a price index excluding Government Budget - public sector’s expenditure and volatile commodities sources of finance. Deflation -decreasing price; rise in purchasing power The Budget Deficit and the Budget Surplus Disinfation-rising price @ decreasing rate; decreasing National Government Net Budgetary position - inflation rate difference between govt revenues and expenditures Consumers Price Index 5. Current operation surplus - weighted average of the cost of goods purchased by a typical household in one year relative to the base year EMPLOYMENT I. Labor force -pop’n of 15-64 yr old which contribute to prod’n II. Employed - people who worked in a reference period III. Unemployment -inefficient ulitilization of productive resources MONETARY POLICY -Unemployed: member of the labor force w/o work or Assets –anything which that store value over time. business real assets – physical -labor force: refers to people of a certain age who are: financial assets – financial a) working / in the business; and Money - medium of exchange; standard or deferred b) not working/ in business but looking for work payment Functions of Money 1. Unit of Account (country’s currency) 2. Medium of Exchange Types of unemployment 3. Store of Value or Standard of deferred payment 1. frictional (time it takes to find a job) 2. structural (layoff due to new economy) The Demand for Money 3. Cyclical (due to business cycle) 1. Transaction Motive (daily transactions) 4. Disguised (much labor force for a given fixed input) 2. Precautionary Motive (for contingency) 5. Seasonal (seasonal jobs) 3. Speculative/portfolio allocation motive (investment) 6. Discouraged (not seeking) The Supply of Money IV. Underemployment M1 –narrow definition: currency in circulation plus employed person who works for = 40 hrs/wk RM –reserve money; liabilities of the BSP to the public but wants add’l work (currency in circulation) and to the banking sector (cash reserves). V. Not in labour force -15 yr old and over but neither un/employed THE ROLE OF MONETARY INSTITUTIONS IN THE ECONOMY Effects of Unemployment and Inflation The Bangko Sentral ng Pilipinas - June 15, 1948 No. 265 1. Debtors & profit-earners benefit from inflation; or R.A. 265; the lender of the last resort Creditors & fixed income individuals lose from inflation. objectives 2. inflation reduce value of savings (a) maintain the monetary stability (b)preserve the international value of the peso Monetary Policy and Fiscal Policy (c) to promote rising level of prod’n, employ’t, and real income The Central Bank -regulates the monetary and financial systems. Financial Institutions Banks are classified as: FISCAL POLICY 1. universal and commercial banks; fiscal system - combined operation of public 2. rural banks; and expenditure, tax and debt. 3. thrift banks which include savings and mortgage public finance - financing public expenditures. study of banks, private development banks, microfinance the fiscal system. institutions, stock savings, and loan associations Component of National Budget non-banks institutions: 1. Total Revenue : taxes and non-tax revenue 1. contractual savings institutions (insurance) 2. Current Operation Expenditures: day-to-day 2. investment institutions (financing) 3. Capital Outlays: Infra, capital, Net lending 3. securities market institutions (sec. broker) 4. Overall deficit :borrowing Importance of financial or monetary institutions Taxation and Tax Burden 1. allocate/ channel savings efficiently from savers to Types borrowers; 1. direct (income tax) 2. provide info, liquidity, and risk-sharing services; 2. indirect (excise tax) 3. provide flexibility, divisibility of funds for the users Tax Burden – ratio of tax to payer’s income and sources of these funds; and Progressive tax – increasing tax rate 4. essential for ensuing capital and economic growth Regressive tax – decreasing tax rate SIMPLE MONEY CREATION Reserve Requirement - percentage of deposits set as INTERNATIONAL TRADE reserves for servicing day-today withdrawals and Reasons for Gains from trade: unexpected heavy withdrawals 1. mutual gains from voluntary exchange excess reserves - additional percentage of their deposits 2. increased competition kept in their vaults above the reserve requirement 3. division of labor 4. better use of skills and resources Money multiplier - factor by which money supply will change given a The Basis for Trade: Specialization change in monetary base, or in our example, given a A. The Principle of Absolute Advantage (by Adam Smith) change in deposits. premise: each country has absolute advantage in 1 of 2 mm = 1/rr commodities EXPORT ABSOLUTE ADVANTAGE AND IMPORT ABSOLUTE DISADVANTAGE B. The Law of Comparative Advantage (David Ricardo) ∆ money supply (M) is equal to the product of the premise: 1 country has absolute advantage in both money multiplier (mm) and the change in monetary commodities, and another has absolute disadvantage in base (MB) or deposits. both -1ST COUNTRY MUST EXPORT COMMODITY OF GREATER M = mm ∙ MB ABSOLUTE ADVANTAGE (ITS COMPARATIVE ADVANTAGE) AND IMPORT THE OTHER; 2ND COUNTRY MONETARY POLICY MUST EXPORT COMMODITY OF LESSER GREATER DISADVANTAGE (ITS COMPARATIVE ADVANTAGE) AND need to control money supply IMPORT THE OTHER -too much money in households/firms leads to overspending which leads to shortage then inflation. Neo – classical Theory of Trade (The Opportunity -little money means less revenue leading to shut-down Cost Theory (Haberler, 1936) then to unemployment Premise: 2 countries with varying levels of output in 2 commodities MONETARY INSTRUMENTS -COUNTRY WITH LOWER OPPORTUNITY COST IN A 1. Reserve Requirement COMMODITY (COMPARED TO OTHER COUNTRY) -increase the reserve requirement. contract money SHOULD EXPORT THAT COMMODITY supply (or “mop up excess liquidity) lesser funds will then be available for lending. Modern Theory of Trade (Hecksher – Ohlin Theory) - decrease the reserve requirement expand money -COUNTRY SHOULD EXPORT COMMODITY WITH supply; more funds will be available for lending. AVAILABLE BUT CHEAPER INPUTS AND IMPORT COMMODITY WITH SCARCE INPUTS 2. Rediscount Rate –interest charged by BSP - increase the rediscount rate; contract money supply; Factor Proportions Theory less funds for lending. -COUNTRY SHOULD EXPORT COMMODITY WITH LARGE - decrease rediscount rate expand money supply; AMOUNT OF LABOR INPUT encourage borrowing; more money for lending. Theory of commercial policy 3. Open Market Operations –buying and selling of Tariffs- are duties/taxes levied on imported goods as a government securities by the BSP source of revenue for the govt or to protect the local a. open market purchase - govt buying from industries/sectors private firms by BSP; expand money supply; cash for bonds Reasons for Imposing Tariffs b. open market sale - sale of govt securities 1. As a source of government revenue to private firms; contract money supply; 2. Infant industry argument bonds instead of cash. 3. Employment Argument Expand MS Contract MS Reserve req. Increase Decrease Types of Tariffs Rediscount rate Increase Decrease 1. Specific tariffs -fixed charged for each unit of good Open Mkt Op. Purchase Sale 2. Ad Valorem tariffs - fraction of the value of goods THE COSTS AND BENEFITS OF TARIFFS Consumer Surplus: consumer gain between the price he is willing to pay and what he actually pays for the product. area below the demand curve and above the equilibrium price 4. small/no effect on the price in the exporting country (If the importing country is small) Two efficiency losses due to tariff 1. Production distortion loss –tariff allows too much domestic production with higher domestic prices 2. Consumption distortion loss – higher domestic prices results to lesser consumption Producer Surplus producer gains between difference between the price benefits from a tariff he is willing to sell/dispose and the accrual price he 1. Government revenue receives 2, terms of trade gains (lower export prices is the area above the supply curve and below the But in large countries only) equilibrium price of the product. tariff reduction Tariff reduction in agricultural products is one of the commitments under the Final Act of the UR. That is: for industrialized countries, tariffs must be reduced by 36% within six (6) years from the year of GATT implementation for developing countries, tariff reduction should be 24% within ten (10) years and for least developed countries, they are exempted from tariff reduction. expected effects of tariff reduction 1. domestic price declines and approach the world price 2. transfer of gains to consumers 3. Producer surplus decline 4. Consumer surplus increase 5.eliminate production distortion losses 6. eliminates consumption distortion losses. TRADE BARRIERS 1. TARIFF a) Revenue b) Protective 2. IMPORT QUOTA 3. NON – TARIFF BARRIERS a) Limiting the amount of foreign exchange Effects on the Domestic Economy (Importing Country) b) Import ceiling- max. amt. that an importer can buy 1. Increased local price c) International standards 2. consumers lose (consumer surplus declines) d) phyto/sanitary measures 3. producers gain (producer surplus increases) 4. VOLUNTARY EXPORT RESTRICTION 4. The government gains revenue JUSTIFICATIONS FOR TRADE BARRIERS Effect on the Foreign Country (The Exporting Country) 1. military self-sufficiency 1. imports decrease 2. increased domestic employment (fallacious) 2. demand decreases 3. Diversification-for-stability 3. decline in the price in the exporting country (if 4. Infant Industry importing country is big 5. Strategic trade policy 6. Anti-dumping 7. Anti-cheap foreign labour THE FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKET Foreign Exchange - currency of the rest of the world foreign exchange market -New York Foreign Exchange Market, London, Paris, Montreal, Tokyo etc. Functions of the Foreign Exchange Market a) International clearing- convert currency to pay int’l obligations. b) Hedging - avoidance of foreign exchange risks. It is a Effects of Deval’n/Dep’n on Imports and Exports means of protecting oneself against foreign exchange fluctuations. 1. Goods are now more expensive 2. imports will decrease (more expensive to locals) c) Speculation - buying/selling of foreign currencies for 3. exports will increase (less expensive to foreigners) the purpose of gaining profits Determinants of Exchange Rate Effects of Deval’n/Dep’n on the BOP 1. Changes in tastes -balance of payment will be improved eventually (due 2. relative income changes (currency depreciate if to increasing export and declining import) income is rapid) 3. relative price level changes BALANCE OF PAYMENT (BOP) - all the payments made by locals to foreigners. 4. relative interest rates 5. speculations BOP Components 1. The Current Account Instruments of Foreign Exchange 1. Cable or telegraphic transfers. -Exports and imports of goods 2. Bank Drafts (checks) -Export and imports of services 3. Letter of Credit (LC) -Investment income -Transfer payments (remittances) -Other services The Exchange Rate Systems 1) Flexible ER - solely determined by the forces of 2. Capital Account (measure of assets) supply and demand for the foreign currency 3. Official Reserves Transactions Account 2) Fixed/Pegged ER is a rate which is controlled by the BOP Deficit/Surplus Central Bank (CB) a) BOP deficit payments to the foreigners exceed the receipts from Changes in Exchange Rates them; accumulating debts abroad. 1) Changes in the supply and demand conditions for US b) BOP surplus dollars. Depreciation occurs - receipts from the rest of the world exceed the when there is a fall in payments made.; accumulating receivables the value of the Peso relative to the US Problems with Excessive BOP Deficits/Surplus excessive BOP deficit - “loss of foreign investors’ dollar confidence” botched projects may generate lesser profits causing loan deficits; because of deficits, foreign creditors may not give new loans, may even demand immediate Appreciation repayment of the previous loans; leading to the “loss of occurs foreign investors’ confidence” when the value of the Peso increases excessive BOP Surplus relative the US increase in foreign investment means lower domestic dollar investments in PPE lowering productive capacity; This leads to worsening unemployment lower national income; Countries with large BOP surplus also become the targets of discriminatory protectionist measures by 2) Central Banks’s action through devaluation or the trading partners with external deficits. revaluation Devaluation - when the CB’s official reserves are not TRADE RELATED ISSUES enough to support fixed ER, reduce the value of the GATT – UR – WTO Peso against the dollar GATT :General Agreement on Tariffs and Trade. Revaluation When there is excess supply of dollars, 1947 ; Geneva; 23 countries in attendance; promote increases the value of the peso against the dollar. in multilateral coop’n in trade and investments. the economy Seven more rounds of meetings since 1947 until finally the Uruguay Round Negotiations 09/1986  After eight years of negotiations, final agreements led  Cambodia and Laos PDR are still officially regarded as to Final Act of the Uruguay Round on April 15, 1994 in “last developed states” Marrakesh, Morocco by 111 countries (90% of world trade members). ASEAN Objectives It generally calls for a more liberalized trade,  To accelerate the economic growth, social progress cultural development in the region The economic framework of GATT – WTO:  To promote regional peace and stability 1. Tariffication of quantitative restrictions (QRs)  To promote active collaboration and mutual 2. Reduction of tariffs on all agricultural products assistance in the economic, social, cultural, technical, 3. Reduction of domestic price subsidies and administrative spheres 4. Reduction of Export subsidies 5. Market access commitments, and Four key characteristics/pillars and core 6. Harmonization of sanitary and phyto – sanitary elements of the AEC Blueprint measures A. Single Market and Production Base Uruguay Round (UR) 1. Free flow of goods is the eight most ambitious rounds of GATT 2. Free flow of services negotiations. It seeks to expand world trade based on 3. Free flow of investment comparative advantage in four ways: 4. Freer flow of capital 1. Wider and deeper tariff cuts 5. Free flow of skilled labor 2. strong, more effective GATT 6. Priority integration sectors 3. Eliminating exceptions to GATT’s universal coverage 7. Food, agriculture and forestry of goods 4. Expanding coverage to make more relevant to the B. Competitive Economic Region global trading environment 1. Competition policy 2. Consumer protection UR General Goal 3. Intellectual priority rights 1. Reducing the barriers to gain free market access 4. Infrastructure development 2. Clear and stable rules toward transparency and 5. Taxation predictability 6. E-commerce 3. Formation of WTO with stronger powers C. Equitable Economic Development Provisions of the Agreement on Agriculture (AOA) C1. SME development 1. Conversion of all quotas and QRs into tariffs C2. Initiative for ASEAN Integration 2. Tariff cuts 3. Reduction of domestic subsidies D. Integration into the Global Economy 4. Reduction of export subsidies 1.Coherent approach toward external economic 4. Harmonization of pyto/ sanitary measures (SPS) relations 5. Continuation of the reform process 2. Enhanced participation in global supply networks The blueprint contains 17 “core elements” and 176 WTO priority actions, to be implemented within a Strategic World Trade Organization; permanent institution to Schedule of four periods (2008–2009, 2010–2011, replace GATT ; stronger. 2012–2013, and 2014–2015). 1. trade negotiations agreement on varying speeds of liberalization of 2. trade dispute settlement a goods, capital, and (skilled) labor flows according to 3. trade policy review mechanism member countries’ readiness, national policy objectives, global policy coherence. and levels of economic and financial development. Results of GATT – UR – WTO Philippine industries situationer for ASEAN 1. Liberalized trade 1.Ready/not, ASEAN creates free-for-all single market. 2. Administrative reforms 2. free-market idea in a region with 600 M pop’n scares phil. industries ASEAN Economic Integration 3. Sectors able to compete is led by BPO, construction, -It is the most durable and successful regional grouping meat processors, and beverage sector. in the developing world; Established in 1967; 4.Agri. sector and banking is at the losing end. - great internal diversity, high economic growth, no strong supranational structure. Overview of ASEAN Economies Singapore is the richest country.  In term of economic size: Indonesia is the dominant followed by Thailand.  Three intermediate ranked economies, Malaysia Singapore, and the Philippines.