Unit 2 - Growth and Development Concepts

OVERVIEW:

There are several meanings attached to the idea of development; the term is complex,
contested, ambiguous, and elusive. However, in the simplest terms, development can be defined
as bringing about social change that allows people to achieve their human potential. An important
point to emphasize is that development is a political term: it has a range of meanings that depend
on the context in which the term is used, and it may also be used to reflect and to justify a variety
of different agendas held by different people or organizations. The idea of development declared
by the World Bank, for instance, is very different from that promoted by Greenpeace activists.
This point has important implications for the task of understanding sustainable development,
because much of the confusion about the meaning of the term 'sustainable development' arises
because people hold very different ideas about the meaning of 'development' (Adams 2009).
Another important point is that development is a process rather than an outcome: it is dynamic in
that it involves a change from one state or condition to another. Ideally, such a change is a positive
one - an improvement of some sort (for instance, an improvement in maternal health).
Furthermore, development is often regarded as something that is done by one group (such as a
development agency) to another (such as rural farmers in a developing country). Again, this
demonstrates that development is a political process because it raises questions about who has
the power to do what to whom.

COURSE OUTCOME: After the completion of this unit, the students will be able to:

1. Identify the classification, diversity & common characteristics of developing countries.

2. Understand the tools to measure economic development.

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COURSE MATERIAL:

THE EDITORIAL
Mario Pezzini Director, OECD Development Centre, 2020

The world is changing fast. The Coronavirus (COVID-19) crisis has impacted our lives in previously
unimaginable ways. The way we choose to adapt to this new reality – together or apart, accelerating
our efforts to address existing challenges or deferring them – will shape our reality in the years to
come.

The OECD Development Centre believes the international response to COVID-19 must combine
immediate and coordinated efforts to confront the health crisis and protect the most vulnerable with
a medium-term and long-term commitment, to enhance resilience by strengthening the local
economic and industrial base and improving national health and social protection systems.

As we survey current policy responses across the globe, we echo the voices from across the private
sector that call for avoiding protectionism and facilitating the continuous flow of goods and services,
including food, drugs, and medical supplies. There are increasing concerns that as COVID-19 will
continue spreading across the globe, further trade restrictions could affect badly needed medical
supplies and generate supply-chain disruptions in food or other essential goods and services. The
repercussions of this would be particularly severe for developing countries.

Heterogeneity across developing economies and uncertainty as to the length and depth of the
effect of COVID-19 make it difficult to estimate the full impact of the crisis. There is a risk that the
global slowdown and the shutdown of domestic economic activities can erase years of hard-won
progress towards poverty reduction and worsen pre-existing structural challenges and inequalities,
compromising the already difficult. compromising the already difficult trajectory to the Sustainable
Development Goals (SDGs). While the situation is severe, this extraordinary context could also be an
opportunity to have governments and other stakeholders work hand in hand to rebuild social trust
and implement the long-term policy reforms needed to strengthen fiscal capacities, increase
resilience, and promote a more inclusive recovery.

This edition of the Business Insights on Emerging Markets comes at a critical time and is a welcome
contribution to the discussion on the policy levers that can bring about this recovery. It provides
private sector perspectives on existing barriers and potential enablers for business in areas that can
contribute to long-term investment and sustainable growth across emerging markets, from new
technologies in Latin America and smart cities in Asia to production transformation in Africa. Despite
the pandemic, it will be more important than ever before to remain focused on pending structural
reform agendas included in this report, such as improving the investment climate, promoting
innovation, enhancing hard and soft infrastructure, and closing the digital gap in terms quality and
coverage.

Even as we address aspects of immediate concern, we must not lose sight of this long-term view.
Once we have managed this crisis, the challenges that existed before it will remain, or will be
exacerbated. The Development Centre will continue to promote a dialogue across countries at
different levels of development, together with a multiplicity of economic actors, including the private
sector, to design a truly global and sustainable recovery. (Mario Pezzini Director, OECD
Development Centre, 2020)

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 Lesson 4 – Development Concepts

Growth can best be described as a process of transformation. Whether one examines an

economy that is already modern and industrialized or an economy at an earlier stage of
development, one may still find that the process of growth is uneven and unbalanced. Economic
historians have attempted to develop a theory of stages through which each economy must pass
as it grows. Early writers, given to metaphor, often stressed the resemblance between the
evolutionary character of economic development and human life—e.g., growth, maturity, and
decadence. Later writers, such as the Australian economist Colin Clark, have stressed the
dominance of different sectors of an economy at different stages of its development and
modernization.

Economic growth is usually distinguished from economic development, the latter term being
restricted to economies that are close to the subsistence level. The term economic growth is
applied to economies already experiencing rising per capita incomes (Household’s income).

What is Economic Development?

It is defined as a sustained increase in the economic standard of living of a country’s

population, normally accomplished by increasing its stock of physical and human capital and
improving its technology.
A famous American journalist Caleb Silver (2023) summarized the world’s top economies
below. However, there are distinctions between the two concepts. The U.S., China, Japan,
Germany, and India are some of the top economies in the world, based on gross domestic
product (GDP). GDP is an estimate of the total value of finished goods and services produced
within a country’s borders during a specified period, usually a year. GDP is popularly used to
estimate the size of a country’s economy and its impact on the global economy. GDP is most
commonly measured by using the expenditure method, which calculates GDP by adding up
spending on new consumer goods, new investment spending, government spending, and the
value of net exports.

Throughout most of the world, countries’ GDPs fluctuate with the phases of different economic
cycles, against a backdrop of longer-term economic growth over time. However, despite these
ups and downs, the top economies as measured by GDP don’t budge easily from the positions
that they hold.

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 (Top Ten Countries by Nominal GDP as of 2022

Note:

Gross domestic product (GDP) is the total value of finished goods and services produced within a country’s
borders during a specified period.

 There are different ways to measure GDP, such as nominal GDP, real GDP, GDP per capita, and
purchasing power parity.
 The U.S. has the largest GDP in the world and China has the second largest.

The above table summarizes only the ten (10) countries but it was noted that there ha been
some big movers within the list in the last 20-plus years. China was in 13th place in 2000, but
has been sitting in second place since 2010. Countries began to recover in 2021 from massive
GDP drops in 2020 due to the COVID-19 pandemic, which had a major impact on economies
around the world. Overall, countries continued that growth in 2022, which saw global GDP go
from $96.88 trillion in 2021 to $100.56 trillion in 2022.

There are several popular ways to measure GDP, all of which are drawn from the World Bank
database:

 Nominal GDP in Current U.S. Dollars: This is the most basic and common way of
measuring and comparing GDP among countries, using local prices and currencies
converted into U.S. dollars by using currency market exchange rates. This is the number
that was used to determine the countries’ rankings in the top 25 list (World Bank List).

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  Purchasing Power Parity (PPP) Adjusted GDP in Current International Dollars: This is an
alternative way of comparing nominal GDP among countries, adjusting currencies based
on what basket of goods they could buy in those countries rather than currency exchange
rates. This is a way to adjust for the difference in the cost of living among countries.
 GDP Growth: This is the annual percentage growth rate of nominal GDP in local prices
and currencies, which estimates how fast a country’s economy is growing.
 GDP Per Capita, in Current U.S. Dollars: This is nominal GDP divided by the number of
people in a country. GDP per capita measures how much a country’s economy produces
per person, rather than in total. This can also act as a very rough measure of income or
standard of living for individuals living in a country.

Throughout this list and article, the term GDP refers to nominal GDP in current U.S. dollars
unless otherwise specified.

LEARNING ACTIVITY/:

The students will be asked to do a research output about countries with emerging economies. A
SOFT copy is expected to be submitted before midterm via google drive following the PESTEL
format below.

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READINGS:

Read Business Insights on Emerging Markets (Pls click https://bit.ly/2RTd1wy) and

http://www.oecd.org/dev/

MEASUREMENT:

The students are scheduled to take the online quiz as per Course Guide.

REFERENCE:
Payumo, C.S., Ronan, J.R., Maniego, N.L. & Camba, A.L. (2012). Understanding Economics.
Alteo Digital & Printers: Manila. Part 3. 145-236.

Todaro, M. P., & Smith, S. (2015). Economic Development (12th ed.). Pearson: New York, United
States. Chapter 13. 678-705.
https://www.google.com/search?q=characteristic+of+an+emerging+economy&oq=characteristic
+of+an+emerging+economy&aqs=chrome..69
https://www.google.com/search?q=what+is+development+in+economics&oq=What+is+develop
ment+in+

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 Lesson 5 – Growth Concepts

LEARNING MATERIAL:

John Maynard Keynes John Maynard Keynes, detail of a watercolor by Gwen Raverat, about
1908; in the National Portrait Gallery, London. Courtesy of the National Portrait Gallery, London

Theories of Growth

In discussing theories of growth a distinction must be made between theories designed to

explain growth (or the lack of growth) in countries that are already developed and those concerned
with countries trapped in circumstances of poverty. Most of what follows will be confined to the
former.

As the British economist John Maynard Keynes pointed out in the 1930s, saving and
investment are not usually done by the same persons. The desire to save does not necessarily
generate investment. If savers attempt to save a larger share of their income than before (thereby
consuming less) and if this is not matched by an equal increase in the desire of others to invest,
total spending will decline. A natural reaction on the part of business will be to cut back on
production, thereby reducing the income earned from production. The final effect may be
a cumulative movement downward as total demand becomes insufficient to employ all of the labor
force. This break in the circular flow of income and expenditure suggests the possibility of a
capitalist economy alternately experiencing periods of prolonged and
severe unemployment (when desired savings at full employment exceed what the economy
wishes to invest at full employment) and periods of serious inflation (when the inequality is

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reversed). This situation had not been the case historically for developed economies until the
early 1970s. In the following discussion, some attention will be paid to the ways in which the
various theories of growth account for this important historical fact.

 Role of the Entrepreneur

Modern growth theory can be said to have started with Joseph A. Schumpeter. Unlike
most Keynesian or pre-Keynesian theorists, Schumpeter laid primary stress on the role of
the entrepreneur, or businessman. It was the quality of his performance that determined
whether capital would grow rapidly or slowly and whether this growth would
involve innovation and change—i.e., the development of new products and new
productive techniques. Differences in growth rates between countries and between
different periods in any one country could be traced largely to the quality of
entrepreneurship. The latter in turn reflected certain historical and cultural values carried
by the business class. Schumpeter also attributed much of the growth of technical
progress and of the supply of labor to the entrepreneur. Thus, in more modern
terminology, Schumpeter’s explanation of why demand and supply have grown at the
same rate would be that supply adjusted to demand while demand in turn reflected the
activities and investments of the entrepreneur.

Schumpeter believed that capitalism by its very success “sows the seeds of its own
destruction.” The American economist Alvin H. Hansen argued in the late 1930s that
capitalism was in trouble in the United States for other reasons. According to Hansen, the
closing of the geographic frontier, the decline in the rate of population growth, and the
capital-saving character of recent innovations had all worked to increase the likelihood of
stagnation by reducing the need for investment. The savings available in a mature
economy would tend to exceed the amount that the economy would want to invest (at
levels of full employment) and by progressively larger amounts as time went on. This
condition naturally would lead to increasing rates of unemployment as the discrepancy
between demand and potential output widened. Hansen’s views were very much colored
by the economic conditions of the 1930s. The record of the three decades after World War
II did much to overcome the pessimism generated by the Great Depression.

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 The role of Investment

In Keynes’s General Theory, investment played a key role in that it was presented as the
most important factor governing the level of spending in an economy, even though it
typically was only one-fifth to one-sixth of total spending. This paradox can be understood
in terms of a concept also developed in the 1930s, the multiplier. The multiplier was the
amount by which a change in investment would be multiplied in achieving its final effect
on incomes or expenditures. If, for example, investment increases by $10, the extra $10
of expenditures will generate, assuming unemployed resources, an extra $10 of
production and subsequently incomes in the form of wages and profit. This increase,
however, is hardly the end of the matter since most of the additional income earned will
be respent on consumer goods. If nine-tenths of any change in income is spent on
consumer goods and one-tenth is saved, consumption will increase by $9. But again, one
person’s expenditures are another person’s income, so that incomes now rise by $9 of
which $8.1 is respent on consumer goods. The process continues until expenditures,
incomes, and production have increased by $100, of which $90 is consumption and $10
the original change in investment. In this case the multiplier is 10.

But investment may be a source of instability if it is not maintained at a rate sufficient to

stimulate demand for the production it is creating. Is there any guarantee that supply or
productive capacity will grow at the same rate as demand so that neither excess capacity
nor excess demand results? The British economist R.F. Harrod and the American
economist E.D. Domar put this question in a very simple mathematical form. In their
equations, the rate of growth of supply (i.e., the production function as defined above) is
equal to the rate of growth of capital stock. Through investment this capital stock is
augmented. The rate of growth of demand depends upon the rate of growth of investment
or, more correctly, upon the rate of growth of non-consumption expenditures. Thus,
investment affects both demand and supply. But the Harrod–Domar analysis still did not
answer the question of what kept the system from becoming increasingly unstable.

 Demand and supply

Much contemporary growth theory can be viewed as an attempt to develop a theoretical

model that would bring the rate of growth of demand and the rate of growth of supply into
line, since a model implying that capitalist systems are inherently unstable would not
correspond to the historical facts. Models of growth may be classified according to whether

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 they emphasize adjustments in demand (supply-determined models) or adjustments in
supply (demand-determined models). One of the better-known examples of the supply-
determined model was developed by the British economist J.R. Hicks. Hicks assumed that
the spending propensities of consumers and investors were such as to cause demand to
grow at a rate in excess of the rate of growth of maximum output. This assumption meant
that during any “boom” the economy would eventually run into a “ceiling” that, while also
moving upward, was moving less rapidly than demand. The long-run rate of growth of the
economy would be determined by the rate of ascent of the ceiling, which in turn would
depend upon supply factors such as the rate of growth of the labor and the rate of growth
of technical progress or productivity. If for some reason these were to grow more rapidly,
then output would also grow more rapidly as demand adjusted upward to the more rapid
growth of supply.

An example of a demand-determined model of growth is one developed by the

American economist J.S. Duesenberry. In the Duesenberry model, spending propensities
of consumers and investors are such as to generate steady growth in demand. Assume
that instead of spending nine-tenths of any change in income on consumer goods, as in
the multiplier example above, they choose to spend 0.95. This increase will cause the rate
of growth of demand to increase. The question is whether it will also cause the rate of
growth of production to increase or whether it will merely result in price increases. If
productivity or technical progress responds to a higher rate of growth of demand, as
Duesenberry assumes, then production can grow more rapidly. Although in both the Hicks
and Duesenberry models demand and supply grow at the same rate, the adjustment
mechanisms are entirely different. In the Duesenberry model supply adjusts to demand;
in the Hicks model demand adjusts to supply.

 Economic Stagnation

The rise in unemployment rates and the slowdown in growth rates of GNP and per
capita incomes throughout the capitalist world beginning in the early 1970s is clearly a
case where demand and supply did not grow at similar rates. Many economists turned
their attention to developing theories to explain this prolonged period of stagnation. A
common theme in much of their work was the adverse effects of high unemployment and
low utilization of capital stock on investment and, therefore, on productivity growth.

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 The high unemployment rates for labor and capital are initially traced to policies
restricting aggregate demand that were pursued by monetary and fiscal authorities from
the first half of the 1970s. This policy response was widely interpreted by economists as
an effort by the authorities to reduce inflation rates that had begun to accelerate in the
latter 1960s. The continued use of restrictive policies is then related to fear on the part of
the authorities that any attempt to restimulate their economies would merely bring back
inflation.

Tighter labor markets resulting from any such stimulative policies are seen to increase
the bargaining power of labor, thereby leading to larger wage demands and settlements
that in turn feed into prices, causing price inflation to accelerate. This leads to yet higher
wage demands to protect real wages and thus an explosive wage–price spiral. In addition,
more stimulative aggregate demand policies are perceived to result in balance of
payments difficulties at existing exchange rates. But any attempt to avoid larger payments
deficits by reducing the exchange rate leads to the “importation” of inflation through higher
prices of imported goods. The result of such considerations is the reluctance of the
authorities to attempt to create full employment through stimulative policies.

What emerges from these theories is a chain of causation that describes the way in which,
in the period since World War II, inflation and growth have become causally connected
through the responses of governments to actual and anticipated inflationary pressures.
Inflation and the fear of inflation lead to slow growth and high unemployment because the
inability of governments to bring inflation under control at full employment by other
means—e.g., an income policy—constrains governments to implement restrictive policies
to combat or forestall inflationary pressures. Such responses lead, as they did in the early
1970s, not only to high rates of unemployment of capital and labor but also to low rates of
investment and productivity growth. Stagnation is the result, and such a scenario is a likely
prospect for capitalism in the future.

 Foreign trade

Little has been said about foreign trade. Yet growth in most economies is very much
dependent upon imports and the ability to export to pay for imports. The fact that some

13
 economies recovered relatively quickly from World War II and grew much more rapidly in
the postwar period than others has stimulated a great deal of comparative analysis in
growth theory. The exceptionally high growth rates in Japan and Germany compared to
the general sluggishness of the British economy are related to foreign trade. Economists
have pointed to the periodic balance of payments crises experienced by Britain and the
lack of such crises in Germany. During a boom, as incomes rise the demand for imports
will rise also as a natural feature of prosperity. But if exports do not also rise at the same
time, the authorities may be forced to take fiscal or monetary countermeasures and slow
down the economy to bring imports and exports back into balance. Or exports may fail to
grow sufficiently because labor costs are rising very rapidly and pushing up prices of
exports faster than in competing countries.

A policy of encouraging growth has the effect of keeping the demand for imports high and
making labor markets tight, thereby tending to push up money wage rates. At the same
time, such a policy also tends to encourage innovations and investment projects that are
very productive, particularly if the demand pressures are sustained. A “stop” policy
naturally has just the opposite effects, both good and bad from the point of view of a
country’s balance of payments. The question is which policy will in the long run result in
less rapidly rising costs and prices. Many writers have argued that if demand pressures
are maintained the response or adjustment of productivity and therefore of supply to these
pressures will be such that the country will soon find itself in a more competitive position.
Running an economy “flat out,” however, is likely to cause a short-run balance of payments
crisis and lead to devaluation of currency.

A presentation of effect in the economy

Economic Development
Economic
Growth

Effect Brings qualitative and quantitative changes in the Brings

economy quantitative

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 changes in
the economy

Development relates to growth of human capital Growth

Growth indexes, a decrease in inequality, figures, and refers to a
structural changes that improve the general gradual
population’s quality of life. increase in
one of the
components
of Gross
Domestic
Product,
consumption,
government
spending,
investment,
net exports.

Economic Development usually relates to the Economic

Utilization utilization and development of unused resources in growth
the under –developed countries. usually
relates to
optimum
utilization
and
development
of under-
utilized
resources of
developed
countries.

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 It implies changes in income, saving and investment It refers to an
Implication along with increase in
Progressive changes in socio-economic structure of the real
country (institutional and technological changes) output of
goods and
services in
the country
like increase
the income in
savings, in
investment
etc.

Scope Concerned with structural changes in the economy. Growth is

concerned
with
increases in
the
economy’s
output.

Below is a table showing the comparison of Development and Growth.

1. Economic growth is a narrower concept than economic development

2. Economic growth can be measured by an increase in country’s GDP (gross domestic
product).
3. Economic growth does not take into account the size of the informal economy also
known as “Black Economy” which is an unrecorded economic activity.
4. Economic growth does not take into account the depletion of natural resources which
might lead to pollution, congestion and desease.
5. Development alleviates people from low standards of living into proper employment with
suitable shelter.

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 6. Development however is concerned with sustainability which means meeting the needs
of the present without compromising future needs.
7. Those environmental effects are becoming more of a problem for Governments now that
the pressure has increased on them due toGlobal warming.

LEARNING OUTCOME:

An oral evaluation of cuntries in South East Asia (Group Report)

MEASUREMENT:

The students will take the on line quiz via Google form.

REFERENCES:

Payumo, C.S., Ronan, J.R., Maniego, N.L. & Camba, A.L. (2012). Understanding Economics.
Alteo Digital & Printers: Manila. Part 3. 145-236.

https://app.bitly.com/Bk6l6rWpH4k/bitlinks/2GiKcaj

https://www.un.org/sustainabledevelopment/economic-growth/

17
 Lesson 6 - The Role of Government and Financial Institutions

COURSE MATERIAL:

The students must realize that the government is the only biggest entity that influences the
level of aggregate demand. In the same manner, the biggest spender and income earner in the
economy. Through the national budget, the government outlines its spending plans for the year,
and through taxation, its spending plan is funded.

The government sources its funds based on the taxes levied from the income of people,
business, and property, enough to understand why it is called the lifeblood of the government.
The government pays the salaries and wages of its civilian workers and the Armed Forces. It
spends on infrastructure projects and pays for the delivery of Government services. It subsidizes
selected industries and effect transfer payments to several entities and individuals in the
economy. It finances its spending through tax collection and other sources.

Display slide 1, to show the government’s multi-faceted role in the economy.

1. As an income earner. The government generates earnings through its various agencies
and government-owned and controlled corporations such as BIR, Customs, License-
issuing agencies, Local Government Units, it receives dividends from government-held
corporations such as PNB, GSIS, SSS, DBP, Ports and Airports Authorities, etc.

2. As a consumer. The government buys various supplies and equipment for its numerous
agencies, e.g., computers, bond papers, binding machines, cars and trucks, books, and
many others.

3. As an employer. The government employs millions of people in various positions in the

different government agencies and corporations including those in the military.

4. As an investor. The government invests mostly in areas where private investors shy away
from, either because of high risk involved, or because very huge capital is required, or
because there is long gestation period before a particular project generates income, e.g.,
railways, airports and seaports, dams, power plants, etc.

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 5. As a borrower. Just like any economic entity, government also borrows, either directly from
the public, e.g., bonds and other government securities; or from the banks, both local and
foreign; and from multilateral financial institutions, e.g., World Bank, ADB, etc.

Spending Purposes

Display slide 2, Government spends money for a variety of reasons, including supply of
goods and services that the private sector would fail to do, such as public goods, including
defense, roads and bridges; merit goods, such as hospitals and schools; and welfare payments
and benefits, including unemployment and disability benefit.

1. To achieve supply-side improvements in the macro-economy, such as spending

on education and training to improve labor productivity.
2. To reduce the negative effects of externalities, such as pollution controls.
3. To subsidize industries which may need financial support, and which are not available
from the private sector. For example, transport infrastructure projects are unlikely to attract
private finance, unless the public sector provides some of the high-risk finance, as in the
case of the UKs Private Finance Initiative – PFI. During 2009, the UK government
provided huge subsidies to the UK banking sector to help deal with the financial crisis.
Agriculture is also an industry which receives large government subsidies. See: CAP.
4. To help redistribute income and achieve more equity.
5. To inject extra spending into the macro-economy, to help achieve increases in aggregate
demand and economic activity. Such a stimulus is part of discretionary fiscal policy.

Local government is extremely important in terms of the administration of spending. For

example, spending on the NHS and on education are administered locally, though local
authorities. Approximately 75% of all public spending is by central government, and 25% is
by local government.

Central and local government (public sector) spending

Using public spending to stimulate economic activity has been a key option for successive
governments since the 1930s when British economist, John Maynard Keynes, argued that
public spending should be increased when private spending and investment were
inadequate. There are two types of spending:

19
 1. Current spending, which is expenditure on wages and raw materials. Current spending is
short term and must be renewed each year.
2. Capital spending, which is spending on physical assets like roads, bridges, hospital
buildings and equipment. Capital spending is long term as it does not have to be renewed
each year – it is also called spending on ‘social capital’.

Nature and Purposes of Taxation

Display slide, to discuss to the students. Taxation is known as the only tool of fiscal policy,
defined as an “inherent right of the state to levy and collect a portion of each individual and entity’s
income from productive endeavors within the states’ political boundaries. And since it is an
inherent right of the state, this means absolute right, taxation laws were enacted to limit this right.
That is the reason why taxation is graduated, and in most countries, it is progressive. When we
say graduated, means taxes to be paid are divided into several brackets of income; and
progressive, means that the higher the income, the higher the income, the higher will be the tax
rate to be paid, and vice-versa. (Show example on the other slide).

Taxation is very important for the government to exist, for without it no government can ever
exist, as taxes are the lifeblood of the government. Citizens pay taxes, in the expectation that the
government will protect them and provide them with the necessary environment to enable them
to live in safety and perform their productive activities without fear or hesitation.

The Bureau of Internal Revenue is the tax-collecting arm of the government for individual and
corporate income taxes. The Bureau of Customs is the government-collecting arm to import
taxation.

Characteristics of a Sound Taxation System

1. It should have a Fiscal Adequacy

2. It should have Administrative Feasibility
3. It should have Equity.
4. It should be Consistent and Compatible with the Nation’s Economic Direction

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Procedure of Taxation

Basically, taxation is legislative in character and all tax measures emanate from Congress.
The House of Representatives enact taxation bills which go down to the Senate. Then to the joint
conference committee and finally, to Malacañang for the President’s approval or in a few
instances, veto.

Once the tax measure is approved and published in the gazette, it becomes a law. Then it is
forwarded to the tax collection agency concerned for implementation. The tax measure normally
provides for sanctions and penalties for violators.
 Tax Evasion – means the taxpayer or entity subjected to tax, paid taxes but did not pay
the correct amount.
 Tax Avoidance – means that the person or entity subjected to tax did not pay any tax at
all.

Below are persons or entities under the law which are exempt from paying taxes.
1. Those who earn very little.
2. Entities such as cooperatives
3. Business in selected favored industries e.g., exports and pioneering.
And non-profit organizations.

Important facts about Fiscal Policy:

1. Taxes may either be direct or indirect.

2. Funding sources normally come from two principal sources: tax collection and borrowing.
3. Both government expenditures have multiplier effects on the economy.
4. Fiscal Policy affects Aggregate Demand and Aggregate Supply.

Importance of Timing in Policy Implementation

Impact of Expansionary and Restrictive Fiscal Policy based on:
1. Keynesian Model
2. Crowding-Out Model
3. New Classical Model
4. Supply-Side Model

21
READINGS:

To read economic strategies: Fiscal Policy, Monetary Policy and Foreign Trade Policy in the
Philipine setting.

LEARNING OUTCOME/HOMEWORK:

Kindly enumerate at least 5 projects where the government had direct involvement based on the
roles enumerated above.

MEASUREMENT:

The students will take a ten (20) point quiz via google form.

REFERENCES:

Cuevas, R.C., Paraiso, O.C., and Larano, L.C. (2011). Macroeconomics. Mutya Publishing
House, Inc.

Payumo, C.S., Ronan, J.R., Maniego, N.L. & Camba, A.L. (2012). Understanding Economics.
Alteo Digital & Printers: Manila. Part 3. 145-236.

https://www.economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.htm
l#:~:text=Government%20spends%20money%20for%20a,including%20unemployment%20and
%20disability%20benefit.

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