Nina Kryscha Grace Y.

Amo BSA1-G1

CHAPTER 5

1. What are the major factors that contributed to productivity gains in agriculture in Asia in the
past twenty-five years? Is the rate of growth of the agricultural sector likely to slow down or
accelerate? Reflect on how these factors are likely to change in the future.
-The major factors that contributed to agriculture in Asia are the Green revolution,
increased yields from higher yielding varieties, application of fertilizers, pesticides, and
herbicides and extensive irrigation; It would likely accelerate if this will be maintained and
further notice to put into importance in the agricultural sector; These factors will likely
change for innovation or improvement in developing productivity gains.
2. There has been considerable discussion of the role of mechanization in creating employment
and raising labor productivity. Are there any general guidelines to follow in suggesting a
mechanization policy for the Asian developing countries?
- General guidelines of the mechanization policy are not elaborated. Mechanization could
increase productivity and boost agricultural and food production with the use of
equipment and machineries but this decision is left in the Asian developing countries
whether to mechanize or not.
3. Consider two countries, one that subsidizes agriculture, and another that subsidizes industry.
They are identical in all other respects. Which country has a better chance of achieving rapid
growth with poverty reduction?
- In my opinion, both countries can possibly achieve rapid growth. It depends on how
they would handle certain factors such as the adaptability of technological changes,
considering innovation, maximization of resources available, controlling the inflow and
outflow of resources and implementation of economic strategies and policies that
would benefit the country.
4. Why are the terms of trade between agriculture and industry so important in determining the
rate of growth of an economy in the transition from focusing on agriculture to manufactured
products?
- The trade between agriculture and industry are complementary to each other in
determining the growth of economy. Interdependence between agriculture and industry
becomes strengthened through various linkages generated in these two sectors.
Production linkages arise from the interdependence between agriculture and
industry through the use of productive inputs. Production linkages arise from the
interdependence between agriculture and industry through the use of productive inputs.
Demand linkages between the two sectors suggest that demand for one sector’s product
pulls demand for another sector in an upward direction. Finally, there is a savings-
investment linkage between these two sectors. A self-reliant agriculture capable of
exporting surplus food-grains helps in saving scarce foreign exchange resources of the
country. Now these resources can be better utilized for importing capital goods and crucial
raw materials needed for industrialization effort. -Agriculture and Industry in Economic
Growth
5. Genetically modified crops (corn, for example) have been developed in the United States and
are being exported around the world. There is, however, resistance to these exports in many
countries. Why do you suppose this is so?
- The labeling of GM crops is mandatory in many countries (such as China, EU, Russia,
Australia, New Zealand, Brazil, Israel, Saudi Arabia, Korea, Chile, Philippines, Indonesia,
Thailand), whereas in Canada, Hong Kong, USA, South Africa, and Argentina voluntary
labeling schemes operate. The rapid adoption of GM crops has increased controversies, and
mitigating these issues pertaining to the implementation of effective regulatory measures
for the detection of GM crops is essential. DNA-based detection methods have been
successfully employed, while the whole genome sequencing using next-generation
sequencing (NGS) technologies provides an advanced means for detecting genetically
modified organisms and foods/feeds in GM crops. 
Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5495694/
6. Africa seems to be located in a cycle of producing agricultural products for export. The terms
of trade for these goods continue to deteriorate. Creating a downward cycle of slow or
negative growth. How has Asia avoided such a cycle? What are the major factors involved?
- Recent export growth in Africa has been offset by even larger growth in imports,
caused by a booming population. This has led to a deterioration of Africa’s trade
balance. Asia have adopted structural reforms and increased its resilience against
economic shocks coming from outside the region. Meaningful reforms have led to
enhanced competition, creating a deeper and more liquid market place.
7. You are having a discussion with another student who says that agricultural growth is not
important when it comes to understanding the experience of economic development in Asia.
How would you respond to this statement? What kind of evidence is there to either support
or refute the student’s statement? Use specific country or regional examples where possible.
- “It is seen that increased agricultural output and productivity tend to contribute
substantially to an overall economic development of the country, it will be rational and
appropriate to place greater emphasis on further development of the agricultural
sector.” (Pragyandeepa, n.d.). England has a clear evidence on their agricultural
revolution which preceded the industrial. With support according to Prof. Mark
Overton, this revolution occurred in three major changes: the selective breeding of
livestock; the removal of common property rights to land; and new systems of
cropping, involving turnips and clover. Also leading in increased labor and land
production. By having agricultural practices, it will support the primary needs of the
people.
8. What changes have been occurring in the structure of agriculture in Asia in the past two
decades? How are these changes likely to affect the behavior of farmers?
- There are changes in farming practices for the past two decades, higher productivity on
farms, commercially orients farming, and strengthening the integration between
farming and other sectors of the economy. The farm input industry has changed to
meet the increased reliance on fertilizers and machineries. The food processing sector
evolved with new technologies such as food preservation, developed more extensive
irrigation, and helped farmers generate more income.
9. Explain why research and development are much more important now than they were a few
decades ago.
- Research and development contributes to sustainability of businesses and provides a
platform for creativity and innovation to flourish in an organization. Innovative
breakthroughs have happened only because of painstaking efforts of the R&D function.
R&D becomes extremely relevant to make an organization future ready, to equip the
business with the wherewithal required for commercialization of lab efforts through
large scale production. And there are many reasons why research and development has
an essential role to the economy (Ganapathy, 2014, para. 1, para. 2, para.14).
Nina Kryscha Grace Y. Amo BSA1-G1

CHAPTER 6- MIDTERM EXAM

1. Assess the strengths and weaknesses of the Lewis-Fei-Ranis model of economic growth and
structural transformation. Can you think of ways to improve the model?
- The Lewis-Fei-Ranis model is developed by two economists John Fei and Gustav Ranis, a
dualism economy model also known as the Surplus Labor Model. There was a flaw in
Lewis model that it did not pay enough attention to the importance of agricultural
sector in promoting industrial growth. But Fei-Ranis (FR) model of dual
economy explains how the increased productivity in the agricultural sector would
become helpful in promoting industrial sector. In this respect, it presents three stages
whereby a UDC moves from stagnation to self-sustained economic growth. Thus, this
model is treated as an improvement over Lewis model of unlimited supply of labor.
Source: https://economicsconcepts.com/fei_ranis_model_of_dual_economy.htm
This model ignored the role of capital and economy model as its weaknesses, this can
be further improved if these factors will be included.
2. There are two strands of thought regarding industrialization. That first says that it is
important to have a large market in order to take advantage of scale economies and to
produce efficiently at low cost. The second says that small-scale industries have been very
successful because they have been able to take advantage of shifts in demand, innovation,
and fashion because of their size. How do you reconcile these two ideas?
- Economies of scale are an important concept for any business in any industry and
represent the cost-savings and competitive advantages larger businesses have over
smaller ones. Larger companies are able to produce more by spreading the cost of
production over a larger amount of goods (Kenton, 2019). Small scale units can adopt
lean production method, which offer better quality and more variety at a lower cost.
They can be more cost efficient when compared to large scale units because their
expenses are lower. In short, both will be reconciled when costs are lower than
production they would reach cost-efficiency.
3. Does the answer to Question 2 have anything to do with changes in technology over the past
several decades?
- Yes, ‘What is the Role of Technology in Business?’ article stated:
Technology in business allows organizations to improve both the performance and
overall effectiveness of products, systems and services, which, in turn,
enables businesses to expand quickly and efficiently and provide security for
businesses.  
4. The debate is over whether the rapid growth in Asia was a result of “inspiration” or
“perspiration.” What exactly does this phrase mean? Explain the arguments for both sides.
Has there been a shift in the evidence over time? If there has, what do you think are the
reasons for this shift?
 - The Asian Miracle occurred in eight economies, Japan, Hong Kong, the Republic of
Korea, Singapore, Taiwan, and the newly industrializing Indonesia, Malaysia, and
Thailand referred as High Performing Asian Economies (HPAEs). It is said to be mostly
attributed to ‘perspiration’ because of the development of government policies along
with the promotion of institutional and policy reform, strengthening of competition,
promotion of the accumulation of physical and human capital and adoption of trade
liberalization. As for the shift of evidence, it is evident that these Asian countries will be
facing economic challenges overtime but will ensure to continue their economic
growth.
Source: http://economicstudents.com/2013/05/inspiration-vs-perspiration-what-was-the-
key-to-east-asias-economic-success/

5. Alice Amsden and Michela Hobday, among others, argue that the total factor productivity
debated misses the point, what exactly they are talking about?

- Alice Amsden pointed out to calculate whether a country would have a dynamic
comparative advantages for a product in a sector, the share output in the sector should
compared in the Unites states and Japan. She recommended that the mix of industries
in Asian be taken as a benchmark for comparative advantages.
6. Some writers argue that the development of the electronics industry has been a “double-
edged sword.” Explain how this reasoning goes. What are the trends for the next few years
and how will this affect the relative costs and benefits of further intensification of production
in electronics?
- In my view, as what a double-edged sword mean, the electronics industry has both
favorable and unfavorable consequences. Dependability of technology, privacy issues,
global competition, less labor opportunities and more are the unfavorable
consequences. Yet, the electronics effect in cost has a favorable side for a business to be
more efficient and cost-effective when it comes to production.

7. Discuss the interrelationship between education and the shifts that have taken place in
industrial production in Asia over the past two or three decades. How does comparative
advantage fir into this paradigm?

- The key issues of SMEs: access to markets, technology, human resources, financing and
information. (Mohammad, R., & Almas, H., & Arman, A. 2016, p. 37.). Which means
education is essential in driving industrial development to address these issues to
further open labor opportunities, create innovation and apply the skills learned.
8. How can state-owned enterprises (SOEs) stifle innovation? In a country with a large SOE
sector like the China or Vietnam, has it still been possible grow rapidly and to stimulate
innovation? How has this happened?
- “SOEs have grown so dominant that economists accuse them of stifling innovation and
restricting opportunities for private companies, which now account for almost all
employment growth, according to government figures.” (Zhu, C., & Hornby, L., 2012).
SOEs has been absolutely lacking in terms of innovation, experience, investments,
 leadership and decision making process yet, it was possible to grow since it gives good
marketing principles and contributed to their total factor productivity (TFP).
9. Is the motivation to migrate from rural areas to the city generally the same as the motivation
to work overseas? discuss some of the possible differences in the variables that explain
migration in these two cases.
- In my observation, there are a number of factors involved upon why people are
encouraged to transfer from another area hence, the motivation to migrate from rural
areas to urban is similar as the motivation to work overseas mainly in terms of looking
for employment opportunities to provide sufficient income. Differences when going
overseas is there is an evident higher rate of salary as the value of other countries’
currency is higher compared domestically, benefits are also included to that.

10. Hobday, Amsden and others with similar views have written about the industrialization
experience of countries in East Asia. What is the basic thrust of their argument? How does
their analysis impact on the current debate about the role of China in the future growth and
development trajectory of the Asian region?

- The index of export Growth for the Asian economies that is, by design heavily
influenced by the changing structure of exports. If a country changes its export
structure in the favor of products for which import growth of the world is growing
rapidly then this index will be larger than when a country export are not responding to
his shift in the world import demand. Almost countries in Asia have swiftly to take
advantage of markets that are growing rapidly, such as in the electronics, computers
and pharmaceuticals.

11. Discuss the total factor productivity question with respect to the Asian developing
economies. In the discussion, review the Krugman-Young evidence with the impact of total
factor productivity on growth and examine other evidence that has been presented since
their articles were written. If there are differences between Krugman-Young and more recent
evidence, explain why and how these differences may have arisen.

- Young and Krugman hold that high capital accumulation rather than gains in efficiency
or technological progress has spurred growth. Nelson and Pack, however, have
recently criticized the methods of measuring technological progress. Applying the
nonparametric approach to frontier production function determination and the
Malmquist index of total factor productivity change, the authors take up this
criticism. They calculate productivity indicators for a sample of 18 American, Asian,
and European countries. For the Tiger states, their results confirm that capital
accumulation was the main source of growth in 1960-1973, whereas they find evidence
for an increasing importance of efficiency improvements for the growth in 1973-1990.
CHAPTER 7

1. Explain why the assumptions of the Ricardian model of international trade are not
particularly realistic. Why do we study this model if the assumptions are not realistic?
- The Ricardian model, focuses on comparative advantage with its basic assumption that
countries produce goods with only one factor of production, which is labor. It is not
realistic since, in the model, each market is assumed to be perfectly competitive when
in reality there are many industries in which firms have market power. Labor
productivity is assumed to be fixed when in actuality it changes over time, full
employment is assumed when clearly workers cannot immediately and less costly move
to other industries. Finally, the model assumes that technology differences are the only
differences that exist between the countries. It applies in the short-run because the
technology can change internationally over time.
We study the model because, “there is empirical evidence that the Ricardian theory is
very useful for explaining the reasons for and effects of trade between countries”
(Bauer, 2007).
Source: https://saylordotorg.github.io/text_international-trade-theory-and-policy/s05-the-
ricardian-theory-of-compar.html
2. How does the HOS model modify the Ricardian model? Does this add sufficient realism to the
model?
- Unlike in the Ricardian model, the HOS model pertains to two factors of production,
namely, labor and capital. It differs from the comparative advantage theory that
focuses on the efficiency of the production process. Because the country produces
goods based on the resources that they have in abundance, it will be cheapest to
produce these goods. assumes that labor and capital can flow freely between
sectors and that the amount of these two factors differs among countries. This
model assumes that in the long-run countries have same technology; Yes, it can add
sufficient realism.
Source: https://financetrain.com/ricardian-and-heckscher-ohlin-models-of-
international-trade/
3. Is there any relationship between the Gravity model and the Ricardian and HOS models?
Which model is more realistic in your view?
- The gravity model suggests that relative economic size attracts countries to trade with
each other while greater distances weaken the attractiveness while, the previous models
implies that the size of an economy was not considered significant. The widespread
adoption of the gravity model to explain patterns of trade has been seen by economists as
the empirical one and has significant development on previous theoretical models.
Source:https://www.economicsonline.co.uk/Global_economics/Gravity_theory_of_trade.htm
l
4. How do you explain the fact that the theories of the international trade that we have
discussed stress that more trade takes place when factor endowments are different with the
empirical results that most trade takes place between rich countries with similar factor
endowments?
-As a result of the differences and variation in a country's endowments, factor endowment
theory states in economic reasoning that these different breakdowns of capital to labor will
determine a country's comparative advantage and what to manufacture or specialize an
economy on.
Source: https://www.investopedia.com/ask/answers/041615/how-do-factor-endowments-
impact-countrys-comparative-advantage.asp
5. Import-substitution policies are very attractive and have been adopted by many developing
countries. Explain the advantages of such policies.
- Import-substitution policies seek to promote rapid industrialization and, therefore,
development by erecting high barriers to foreign goods in order to encourage domestic
production. It consists of a broad range of control, restriction and prohibitions such as
import quotas and high tariffs on imports. The trade restrictions are intended
to “protect” domestic industries so that they can gain comparative advantage and
substitute domestic goods for formerly imported goods.
Source: http://www.economicsdiscussion.net/economic-development/import-
substitution-and-export-promotion-economics/26803
6. Eventually import-substitution policies were replaced by other policies. What were these
policies and why were they adopted?
-Economies adopting import-substitution policies did not succeed in growth and
development, since there are unfavorable consequences by the government’s interference.
Government subsidy was provided free, the manufacturing plant could experience loss,
which would persist or even expand. It was changed by an export-led strategy which is
known to be more successful in countries adopting this like South Korea, Taiwan, Singapore
and Hongkong. It produces a “virtuous cycle” that begins with the attraction of foreign
investment, promotion of domestic industries, rise in employment, outcome, and exports.
Trade surplus improves the exchange rate and international reserves. -Redefining Capitalism
in Global Economic Development, 2017
7. Explain the rationale for dual pricing. What is the difference between dumping and dual
pricing?
- Dual pricing may be employed to drive out other competitors and then raise its prices
once the other parties are no longer selling in the market, there may be financial and
tax reasons, different distribution costs and prices may ne demand- based . Dumping is
when a country or company exports a product at a price that is lower in the foreign
importing market than the price in the exporter's domestic market while, dual pricing is the
practice of setting different prices in different markets for the same product or service.
Source:https://www.accountingtools.com/articles/dual-pricing.html &
https://investopedia.com
8. The “Flying Geese” model is based on shifting comparative advantage. Does this model have
its roots in international trade theory or in growth theory? How can growth theories be
adjusted to take the “Flying Geese” paradigm into account?
 - The logic of the FG paradigm (as understood in its typical modern versions) emphasizes
the importance of the orderly (market-rational) sequence – nationally and regionally – in
industrial development. It is thought to be not rational for any country with an abundant
unskilled labor – as the potential basis of its comparative advantage – to try to take up the
task of building the capital-intensive high-tech or knowledge-intensive R&D-driven sectors.
Source: https://unctad.org/en/PublicationsLibrary/osgdp20133_en.pdf
9. Discuss the relative costs of an import tariff versus an import ban. What is the crucial
distinction between the two economic effects? Demonstrate graphically.
500
450 Imports take on effect that would
400
initially make a domestic producer
350
300 produce less since there is higher
250 World Price + P50 tax demand in imports.
200 As when an import tariff is imposed,
World Price
150 the cost of the product will increase
0 therefore, it increases the price and
0 10 20 30 40 50 decreases consumer surplus.

10. What is the fallacy of competition suggested

by William Cline? What are the empirical results regarding this fallacy? Are they different from
the theory? Why?
- fallacy of composition (FC) problem: what seemed logical for one country in isolation was
logically inconsistent when generalized. Cline (1982) presented calculations suggesting that
FC problems could indeed pose limits on the pace and breadth of generalizing the East
Asian growth model. Further calculations in Cline (1984) suggested, nonetheless, that
relatively robust rates of growth of manufactured exports from developing countries could
be pursued without triggering protection, so 196 Exports of Manufactures and Economic
Growth: The Fallacy of Composition Revisited long as they observed “speed limits” that
were substantially slower than the pace that had so far characterized the East Asian model
of growth.
Source:https://pdfs.semanticscholar.org/e6a7/bc2075452ee6e9862c0a0df0293d189c6aaa.pd
f?_ga=2.85554649.1155355406.1585369594-1284445069.1585369594
11. Foreign direct investment has helped many countries to develop in Asia. Still, there is some
reluctance to accept or attract foreign direct investment in certain countries. Explain their
motivation? Have any countries been successful in governing rapidly without much FDI? If so,
how they do it? Can their experience be replicated?
- Like Indonesia, after an absence from the FDI destination list for a few years after the
1997–1998 Asian Financial Crisis, Indonesia was back in the top 10 destinations following the
2007–2008 Global Financial Crisis (Table 1), thanks to reforms during the government of
former President Yudhoyono as well as improved domestic economic growth prospects,
thus total FDI is still rising.
Source: https://www.adb.org/news/op-ed/foreign-direct-investment-not-coming-indonesia-
really-edimon-ginting
12. Discuss how the factor price equalization theorem worked in Asia and how did it relate to the
“Flying Geese” model?
- The factor price equalization theory is a theory that explains the effects of trade and
globalization on the price of goods. The theory is often applied to workers’ wages. It
predicts that trade will make less scarce the less-skilled workers in advanced countries and
skilled workers in developed countries, therefore reducing their wages. Conversely, it will
make more scarce unskilled workers in developing countries and skilled workers in
developing countries, therefore raising their wages. The eventual outcome predicted by the
theory is that equally skilled workers across countries will have equal wages.
Source: https://mediawiki.middlebury.edu/IPE/Factor_price_equalization_theory
13. Explain the statement, “The Asian financial crisis was intimately related to foreign trade.”
-There are thus a number of potentially significant trade implications from the Asian crisis.
We will shortly be moving into the period where countries both inside and outside the
region may be tempted to turn to trade restrictions, or at least to avoid new trade
liberalization, to help them through the difficult adjustment period.
14. Discuss why there has been such a large increase in intraregional trade in the past decade,
even while there is so much concern about competition from China.
- Asia's growing share of world trade has resulted largely from increased regional trade
integration.  Intra-industry trade is also booming. This trend in emerging Asia tracks
developments in the more advanced economies, but the motivation in Asia is quite
different. China is playing a key role as the region’s export platform, importing more from
Asia and exporting more to the rest of the world.
Source: https://www.piie.com/commentary/testimonies/trade-implications-asian-financial-
crisis
15. Discuss the relative advantage of bilateral prefrential trade agreements and multilateral
agreements?
- The advantage of bilateral trade agreements increases trade between the two
countries. They open markets to successful industries. As companies benefit, they add
jobs. The country's consumers also benefit from lower costs. They can get exotic fruits
and vegetables that can get too expensive without the agreement. They are easier to
negotiate than multilateral trade agreements, since they only involve two countries.
Multilateral agreements advantages make all signatories treat each other equally,
increases trade for every participant, standardizes commerce regulations for all the
trade partners, countries can negotiate trade deals with more than one country at a
time, and applies to emerging markets (Amadeo, 2020).
16. How does the discussion regarding trade in services relate to innovation developments in
globalization, and in information and computer technology?
- Digital technologies are driving a rising share of services trade in the global economy.
Many services that previously required face-to-face contact between the firm and consumer
can now be provided remotely, with the additional transaction costs for some of these
Internet based services close to zero. The ICT revolution has reduced the transaction costs
and information asymmetries associated with international trade through platforms and
support services that make it easier for firms to access international markets. Digital
 innovations such as mobile money, online marketplaces, and the sharing economy,
overcome many of the traditional constraints to international trade in services.
Source: http://www2.itif.org/2016-tisa-services.pdf
17. Explain the meaning of triangular trade. How does this term relate to the trade relationship
between China and other Asian economies?
- Triangular trade or triangle trade is a historical term indicating trade among three ports
or regions. Thus, since the mid-1990s a new triangular trade pattern has emerged. On
the one hand, both Japan and the other emerging Asian economies invest in and export
capital goods, including final capital goods and components, to China; on the other
hand, China exports more and more to the traditional markets of other Asian
economies. As a result, China has to some extent become a substitute for Japan and
emerging Asian economies as the most important source of US imports, and in this
process, rapid export growth since the 1990s had significantly upgraded the
technological structure of China's manufactured exports (Yu and Hu 2015).
18. Discuss how the rapid growth in China has impacted on the other countries to Asia in terms
of the pattern of international trade.
- China’s export growth has both competitive and complementary effects. Lower labor
costs afford China’s labor-intensive exports competitive advantages in the world’s
major export markets and add competitive pressure to countries that export similar
products. Moreover, the enormous domestic import demand due to China’s rapid
economic development and its demand for energy and raw materials also provide a
tremendous stimulus for exports from other countries. China’s trade production has
strong network effects as a result of the development of an increasingly important
integrated regional production system in Asia. –” The impact of China’s economic
development on the global economy”
Nina Kryscha Grace Y. Amo

1. How did the peso perform on a real and trade-weighted basis?

- On a real trade-weighted basis, the peso lost external price competitiveness in Q4 2019
against the basket of currencies of all trading partners (TPI) and trading partners in
advanced (TPI-A) and developing (TPI-D) countries relative to Q3 2019. This was indicated by
the increase in the real effective exchange rate (REER) index of the peso by 1.36 percent,1.78
percent, and 1.12 percent, against the TPI, TPI-A and TPI-D baskets, respectively.6,7
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
2. Has the peso been volatile?
- The volatility of the peso’s daily closing rates (as measured by the coefficient of
variation) stood at 0.80 percent during the review quarter. This was lower than the
1.01 percent registered in the previous quarter.8 The volatility of the peso in Q4 2019
was slightly higher than the volatility of most currencies in the region.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
3. What is the medium-term outlook on the peso?
- ‘The Development Budget Coordination Committee (DBCC) forecasts sustained economic
growth in the Philippines as macroeconomic fundamentals including imports remain stable, while
exports are expected to improve. Furthermore, the expansionary fiscal policy of the government is
expected to boost the performance of the Philippine economy. The DBCC maintains the growth
prospects for the medium term. Inflation assumptions remain stable at 2% to 4% for 2017 to 2022.’
There are forecasts for the infrastructure. Both medium-tem revenue and expenditure program
budget, goods import and export, oil prices and etc. that s further provided in the DBCC;s website.
Source: https://www.dbm.gov.ph/secretary-s-corner/press-releases/list-of-press-releases/206-
dbcc-forecasts-rosy-medium-term-outlook-for-the-ph-economy
4. What were the recent foreign exchange measures undertaken by the BSP?
- At present, the country's exchange rate policy supports a freely floating exchange rate system
whereby the Bangko Sentral ng Pilipinas (BSP) leaves the determination of the exchange rate to
market forces. Under a market-determined exchange rate framework, the BSP does not set the
foreign exchange rate but instead allows the value of the peso to be determined by the supply of
and demand for foreign exchange. Thus, the BSP’s participation in the foreign exchange market is
limited to tempering sharp fluctuations in the exchange rate. On such occasions of excessive
movements, the BSP enters the market mainly to maintain order and stability. When warranted,
the BSP also stands ready to provide some liquidity and ensure that legitimate demands for foreign
currency are satisfied.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
5. Why did the BSP adopt a floating rate system?
- The floating exchange rate system was adopted in 1970 because the government considered
that occasional, large fluctuations typical of the fixed exchange rate system are more costly,
destabilizing and disruptive to the economy than the more frequent but more gradual changes that
may occur in a free float.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
6. Why not fix the exchange rate? Or adopt a dual or multiple exchange rate system?
7. Is the current exchange rate policy in line with the inflation targeting approach to monetary
policy?
8. Why can't the BSP intervene more heavily during periods of high peso volatility?
- Heavy intervention cannot be sustained for a long period of time because it could create
problems for monetary policy. If the BSP continues to buy large amounts of dollars, it will have to
siphon off the equivalent amount of pesos it has released in the market to keep inflation stable.
This can not be done without incurring massive costs. On the other hand, not siphoning off the
pesos used to buy the dollars may lead to excessive money in circulation and fuel inflation.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
9. What is the view of the BSP regarding the imposition of capital controls?
- The BSP is not inclined to use capital controls—such as administrative measures imposed to
resist downward or upward pressure on the exchange rate or to discourage particular forms of
capital inflows—because, among other reasons, data show that exports and remittances and not
foreign investments make up the bulk of foreign exchange inflows. Hence, controls on capital
flows, particularly portfolio inflows, may not effectively curb the peso appreciation. Furthermore,
use of controls involves administrative costs and has been shown to be ineffective in the long run
as ways to avoid them are found.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf

10. What are the advantages and disadvantages of a firm peso?

- On the one hand, a firm peso confers benefits to the economy—the consumers in general
(by tempering the general rise in the prices of goods and services or inflation arising from
increases in international prices of imported or import-based commodities), importers,
Filipinos who travel or invest abroad, and those who pay for foreign loans (including the
government). Overall, a firm peso:  Helps dampen inflationary pressures;  Translates to
lower debt servicing;  Enables the BSP to build up international reserves; and  Allows
prepayment of foreign exchange obligations. On the other hand, a firm peso could have
some negative impact on certain sectors, including some export-oriented companies,
domestic producers of import substitutes, tourism sector, foreign investors, and creditors
who had lent money in foreign currency, and overseas Filipinos and their families.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
11. What are the advantages and disadvantages of peso depreciation?
- A weak peso can improve the external price competitiveness of Philippine products, thereby
increasing the country’s export earnings. The peso equivalent of OF remittances in foreign
currencies will also increase as the peso depreciation will mean more pesos in exchange of one
foreign currency unit (e.g., US$1). Moreover, tourism and investment activities will increase as it
will be less costly and more desirable for foreigners to travel and invest in the Philippines.
However, peso depreciation can also increase inflationary pressures as it would cost more pesos to
buy imported products and raw materials such as oil and rice.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf

12. What is the impact of COVID-19 on global financial markets?

- The spread of the novel coronavirus disease COVID-19 has severely impacted the global
financial markets. In Asia, it created a downward of market trend, The values of the Shanghai Stock
Exchange Composite index and the Nikkei Stock Average index have plunged in the wake of the
pandemic. Japan’s economy was dealt a further blow with the news that the Tokyo 2020 Olympic
Games will be postponed by up to a year. COVID-19 has struck fear into the heart of the economy in
the United States. The Dow Jones Industrial Average index has reported some of the biggest single-
day gains and losses of its history, reflecting the highly volatile nature of the financial markets.
The S&P 500 index and the Nasdaq Composite index have also battled to stay afloat in such rough
waters. These are just a few of the impacts that the virus has led to the financial economy.
Source:https://www.statista.com/topics/6170/impact-of-covid-19-on-the-global-financial-markets/
12. Is there a possibility for the establishment of a single ASEAN currency?
- Integration within the Asian region has been progressing significantly in recent years. This
may be observed from the rise in intra-regional trade and flows of investments within the
region. There are also a number of initiatives which support the greater linkage between
economies. These initiatives include the establishment of free trade agreements, the
Chiang Mai Initiative Multilateralization and various efforts to develop the regional bond
market. Amidst these initiatives, there is also a discussion on the possibility of the region
adopting a single currency and eventually forming a monetary union with one central bank
for the region. This issue has been examined by economic authorities in the region and it
has been found that the ASEAN is not ready yet to adopt a common currency in the near
future. This is due to lack of macroeconomic convergence, inadequate regional institutional
framework, low intra-regional trade and concerns over the potential loss of sovereignty
over national policymaking. Furthermore, more than the economic prerequisites, the
formation of a common currency area requires political will and social consensus. At
present, these factors need to be strengthened. The policymakers in the region are
focusing instead on deepening integration through trade liberalization and financial market
developments. While the adoption of a single currency may be difficult in the near to
medium term, its eventual emergence cannot be discounted.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf
14. How has the exchange rate moved because of COVID-19?
- The COVID-19 pandemic has not pushed the dollar up against all currencies, however.
Rather, currencies of vulnerable countries appear to have fallen against those of other
countries. The two main sources of vulnerability are stocks of debt issued in foreign
currencies that exceed foreign exchange reserves and dependence on commodity, chiefly
energy, exports. Among countries without these vulnerabilities, exchange rates have
 moved relatively little, but there is modest evidence of a flight to currencies traditionally
viewed as safe havens, in particular those of Japan, Switzerland, and the United States.
Source: https://www.piie.com/blogs/realtime-economic-issues-watch/exchange-rate-policy-
covid-19-pandemic
15. How does one measure the volatility of the peso?
- One way of measuring the volatility of the peso is through the coefficient of variation (COV),
which is the ratio of the standard deviation and the average exchange rate of the peso for a given
period. A low coefficient of variation indicates a stable peso while a high coefficient of variation
reflects a volatile peso.
Source: http://www.bsp.gov.ph/downloads/Publications/FAQs/exchange.pdf