ECO 007: Economic Development

Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

Lesson title: Open and Closed Economy Materials:

Lesson Objectives: Student Activity Sheets
1. I can explain the difference between open and closed economy. References:
2. I can discuss the components of balance of payments. Economics by Bello, Camacho,
Catelo, Cuevas and Rodriguez.
2009 edition
Investopedia

Choose an effective time schedule

in studying your lessons. Your
productive moment in learning is
the key to understand the lesson.

A. LESSON PREVIEW/REVIEW

1) Introduction (2 min)
Hello! It’s another day of learning. The topic for today is all about open and closed economy. But before
that, let’s have a quick review of what you have learned about the previous discussion.

Pre-Test (3min)
Direction: Explain briefly the difference between expansionary and contractionary fiscal policy.

Expansionary fiscal policy Contractionary fiscal

_____________________________ policy______________________________
_____________________________ __________________________________
_____________________________

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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

2) Activity 1: What I Know Chart (3 min)

Direction: I posted some questions on the second column about our topic for today. Kindly write your
ideas on the first column. There’s no right or wrong answers so feel free to express your ideas.

What I Know Questions: What I Learned (Activity 4)

1. What is a closed economy?

2. What is the difference between

closed and open economy?

3. What are the components of

balance of payments?

B.MAIN LESSON
1) Activity 2: Content Notes (60 min)
You can write down important notes or highlight words which you think are the main points of our topic.

A closed economy An open

CLOSED ECONOMY

OPEN ECONOMY

is one that has no economy is a type

trading activity with of economy where
outside economies. not only domestic
The closed actors but also
economy is entities in other
therefore entirely countries engage in
self-sufficient, trade of products
which means no (goods and
imports come into services).
the country and no
exports leave the
country.

Recent globalization implies that economies are tending to become more open to take advantage
of international trade. A good example of a raw material that is traded globally is petroleum. For instance, in
2017, according to World'sTopExport.com, an independent research and educational firm, the five biggest
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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

crude oil exporters accounted for over USD$841.1 billion worth of exports.

 Saudi Arabia at $133.6 billion

 Russia at $93.3 billion
 Iraq at $61.5 billion
 Canada at $54 billion
 The United Arab Emirates at $49.3 billion.

According to the U.S. Energy Information Administration, even the United States, the largest producer of oil in
the world, imported roughly 10.4 million barrels per day in 2017, most of which comes from Canada, Saudi
Arabia, Mexico, Venezuela, and Iraq.

Balance of Payments (BOP)

The balance of payments (BOP), also known as balance of international payments, summarizes all between
residents of an economy and the rest of the world. These transactions consist of imports and exports of goods,
services, and capital, as well as transfer payments, such as foreign aid and remittances.

Resident refers to people, firms, government, and other institutions that are based in the country. Foreigners
like tourists, foreign students and diplomats who are temporarily staying or visiting the country are not
considered residents.

BOP accounting practices double-entry bookkeeping. Each transaction is recorded as a debit and credit in the
balance of payments.

Debit Items Credit Items

1. Import of goods and services
2. Resident transfers to non-residents
3. Increase in foreign assets
4. Decrease in foreign liabilities
1. Export of goods and services
2. Transfer from abroad
3. Decline in the foreign claims of residents (decrease
in foreign assets)
4. Increase in the claims of foreigners on domestic
residents (increase in foreign liabilities)

Item (in million US $) 2004 2005 2006 2007

Current Account (CA) 1,628 1,984 5,347 6,301
Capital and Financial -1,630 2,229 20 2,889
Account (KA)
Net Unclassified Items -278 -1,803 -1,598 -633
(NUI)
Overall BOP position -280 2,410 3,769 8,557
Net Change in Reserve 280 -2,410 -3,769 -8,557
Assets (NCRA)
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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

.Balance of payments in the Philippines 2004 to 2007

Note: Positive values (Surplus) means that credits exceed debit whereas negative values (Deficit)
represent the reserve.
Overall BOP Position
BOP formula:
*BOP Surplus – positive value
CA + KA + NUI + NCRA = 0
*BOP Deficit – negative value

Components of BOP

1. Current Account – captures trade in goods and services, income inflows, and current transfer
payments. Trade in goods and services represent exports and imports of tangible commodities
like agricultural products, electronics, etc and intangible products such as travel, tourism,
communication, insurance,etc.

2. Capital and Financial Account – represents capital trasnfers, changes in resident claims on
non-residents (change in assets) and changes in non-resident claims on residents (changes in
liabilities). This account captures the following transactions such as a. changes in ownership of
fixed assets, b. foreign lending and borrowing, c. payment of foreign debt, and d. purchases of
equity.

3. Net Change in Reserve Assets – represent changes in the assets of the monetary authorities
that can be used for international transactions.

4. Net Unclassified Items – an “offsetting” account to the overstatement or understatement in

either receipts or payments of the recorded BOP components.

2) Activity 3: Skill-Building Activities (30 min)

Part 1
Direction: Suppose the following data represent Philippines’s international transactions measured in
million US$.

Merchandise exports 15 Merchandise imports 10

Non-resident investment in 12 Investments abroad 8
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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

the Philippines
Export of services 7 Import of services 5
Receipts of Income 5 Payments of Expenses 10
Unilateral transfer 6

Answer the following questions:

1. What is the Philippine’s balance of trade of commodities? Is it net export or net import? By how much
is the net increase or decrease?

2. What is the treatment on unilateral transfer? Is it current account, capital account or simply ignore?

3. What is the balance of current account?

4. What is the balance of capital account?

Part 2 Guided Questions

1. Why would it be useful to examine a country’s balance of payments data?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

2. Explain how a country can run an overall balance of payments deficit or surplus.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

3) Activity 4: What I Know Chart (2min)

Go back to Activity 1 and complete the table by writing your answer on the third column.

4) Activity 5: Check for Understanding (18min)

Direction: Indicate how each of the following transactions will be classified in the U.S. balance of
payments. Indicate whether it is a debit or credit item and in which component of BOP ( current or
capital account).

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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

Transactions:
(1) A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account
kept in New York City.
(2) A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American Express card.
(3) A Indian immigrant living in Los Angeles sends a check drawn on his L.A. bank account as a gift to
his parents living in Bombay.
(4) A U.S. computer programmer is hired by a British company for consulting and gets paid from the
U.S. bank account maintained by the British company.

Transactions Debit or Credit Current or Capital

Account
1 a. Japanese purchase of U.S. T bonds
b. Japanese payment using NYC account

2 a. U.S. citizen having a meal in Paris

b. Paying the meal with American Express

3 a. Gift to parents in Bombay

b. Receipts of the check by parents
(goodwill)

4. a. Export of programming service

b. British payment out its account in U.S.

5. a. Philippine investment in US marketable

securities
b. Payment of investment through US bank
account

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5 min)

A. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.

B. Think about your Learning

1. Hello buddy! How do you find our topic for today? I hope you learned a lot from this activity. What is
the difficult part on this activity where you had a hard time absorbing the details and the strategies you
use to eventually understand the lesson?
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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________

2. What is your question about our topic for today?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

KEY TO CORRECTIONS
Pre-Test
1.Expansionary fiscal policy refers to the intent of the government to raise the level of economic activity or
income while contractionary fiscal policy refers to the decrease in government spending and/or an increase in
income taxes.

Skill Building Activity

Part 1

1. Net export of 5 (10-5) Balance of trade in commodities only deals with merchandise.
2. Unilateral transfer is a Current Account
3. Philippine’s balance on current account is equal to merchandise exports + exports of services + income
from investments _ (merchandise imports + imports of services + income payments on investments + unilateral
transfers) = 15 + 7 + 5 _ (10 + 5 + 10 + 6) = 27 _ 31 = _4. Mexico has a negative or unfavorable balance on
current account.
4. Capital account is 4 (12-8)

Part 2
1. It would be useful to examine a country’s BOP for at least two reasons. First, BOP provides detailed
information about the supply and demand of the country’s currency. Second, BOP data can be used to
evaluate the performance of the country in international economic competition. For example, if a country is
experiencing perennial BOP deficits, it may signal that the country’s industries lack competitiveness.
2. A country can run an overall BOP deficit or surplus by engaging in the official reserve transactions. For
example, an overall BOP deficit can be supported by drawing down the central bank’s reserve holdings.
Likewise, an overall BOP surplus can be absorbed by adding to the central bank’s reserve holdings.

Check for Understanding

Transactions Debit or Credit Current or Capital

Account
1 a. Japanese purchase of U.S. T bonds Credit Capital

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 ECO 007: Economic Development
Student Activity Sheets Module #12

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

b. Japanese payment using NYC account Debit Capital

2 a. U.S. citizen having a meal in Paris Debit Current

b. Paying the meal with American Express Credit Current

3 a. Gift to parents in Bombay Debit Current

b. Receipts of the check by parents Credit Current
(goodwill)

4. a. Export of programming service Credit Current

b. British payment out its account in U.S. Debit Current

5. a. Philippine investment in US marketable Credit Capital

securities
b. Payment of investment through US bank Debit Capital
account

Submit your activity sheets before the end of the session!