Money & Banking
Money Multiplier - the amount of
money the banking system generates
with each peso of reserves
Exchange rates
• Exchange rate regime - government policy
stance regarding the exchange rate
1. Floating exchange rate regime – exchange
rate is allowed to seek its market equilibrium
value without government intervention
2. Fixed exchange rate regime - exchange rate
is kept constant or within narrow bounds; FX
reserves needed to back up currency
Exchange rates
Floating exchange rate
Advantages -
1. Automatic adjustment to reflect countries’
external positions
2. Official intervention not called for
Disadvantage –
Susceptible to volatile movements
Exchange rates
Fixed exchange rate –
Advantages
1. Nominal anchor function
2. Lessens uncertainty of what will be exchange
rate in near future
Disadvantage
Can cause prolonged
overvaluation/undervaluation
Exchange rates
Marshall-Lerner Condition –
Price elasticity of demand for imports and price
elasticity of demand for exports must be high
enough to obtain desired responses of currency
depreciation
Currency mismatch problem - foreign currency
denominated debt vs local currency earnings
International Trade
• Open economy - country that trades with
other countries
• Closed economy – country that does not trade
with other countries
• Terms of trade – ratio of export prices to
import prices; as the price of exports rises
relative to the price of imports, each unit of a
country’s exports is able to buy more units of
imports
International Trade
• Absolute Advantage - producer that requires
a smaller quantity of inputs to produce a good
is said to have an absolute advantage in
producing that good
• Comparative Advantage - a producer who has
the smaller opportunity cost of producing a
good is said to have a comparative advantage
in producing that good
International Trade
• Why trade?
• Apart from comparative advantage –
1. Lower costs through economies of scale
2. Increases variety of goods / product
differentiation
3. Increases competition
4. Enhances the flow of information and ideas
International Trade
Trade Policies -
• Free trade - government does not intervene
in the international flow of goods
• Protectionism - imposition of tariffs, import
quotas and other trade barriers to protect its
local industries from foreign competition
International Trade
• Infant industry argument
- most famous argument for protectionism
- nascent industries need protection until the
time they are stable enough to face foreign
competition
Development Economics
• Components of Economic Growth
1. Capital - accumulation results when some
proportion of income is saved and invested
to expand future output and income
2. Labor – for production and the domestic
consumer market
3. Technology - for productivity enhancement
Development Economics
Strategies for Economic Development
1. Capital investments and growth strategy of
development
Harrod-Domar growth model - to have positive
change of income, economies must save and invest
a certain proportion of their GDP
Development Economics
2. Structural change strategy of development
Lewis Two Sector Model - High-productivity
modern urban industrial sector gradually
absorbs labor from the rural subsistence sector
Development Economics
3. Development strategy of free markets
To allow market prices to guide resource
allocation and stimulate economic development
4. Import substitution, export promotion and
economic integration
Development Economics
5. Contemporary strategy of development
Government policy interventions, including
overseeing coordination among economic
players
6. Sustainable management of natural
resources and the environment
Development Economics
• Consequences of Phil. underdevelopment
1. Lack of economic growth and employment
opportunities
2. High levels of income inequality
3. Poor implementation of social services
4. Poor geographical attributes
5. Concentration of political power
Agrarian reform & rural development
- 70 percent of the poor reside in rural areas
and majority of farmers are below the poverty
line
- Agricultural sector is declining in terms of
share to GDP (11% in 2011)
- For 2000 – 2010, agricultural sector grew by
average 3% p.a., compared to service sector’s
5.8% and industry sector’s 4.1 %
Agrarian reform & rural development
70 % of 10.2 million farmers remain landless
Farmer-landlord relationship is still feudal
Landed families are usually the same political
dynasties in their localities
Agrarian reform & rural development
Comprehensive Agrarian Reform Program
(CARP) had limited success since its launch in
1988 in terms of increasing incomes of landless
farmers, reducing poverty incidence in rural
areas and increasing investments in the
agricultural sector
