Applied Economics

Module No. 5: Week 5: First Quarter

TOPIC: Contemporary Economic Issues Affecting the Filipino
Entrepreneurs

Learning Competency
Analyze the effects of contemporary economic issues affecting the Filipino
entrepreneur.
Code: Code: ABM_AE12-Ie-h-8

Objectives
After reading this module, the learners will be able to analyze the effects of contemporary issues
affecting the Filipino entrepreneurs
a. Investment and Interest
b. Minimum Wage
c. Rentals
d. Taxes

Let’s Recall
Multiple Choice. Choose the letter of the correct answer.

1. Economics is the study of

a. production technology c. how society decides what, how, and for whom to produce
b. consumption decisions d. the best way to run society
2. A resource is scarce if supply exceeds demand at zero price.
a. True b. False
3. The opportunity cost of a good is
a. the time lost in finding it
b. the quantity of other goods sacrificed to get another unit of that good
c. the expenditure on the good
d. the loss of interest in using savings
4. A market can accurately be described as
a. a place to buy things
b. a place to sell things
c. the process by which prices adjust to reconcile the allocation of resources
d. a place where buyers and sellers meet
5. A command economy decides resource allocation by government planning
a. True b. False
6. The study of the relationship between positive and normative economics.
a. Applied Economics c. International Economics
b. Macroeconomics d. Command Economy
7. It refers to large – scale interactions, examines the economy as a whole.
a. Applied Economics c. International Economics
b. Macroeconomics d. Command Economy

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8. Analyzes the flow of goods and services between nations. Concerned with international banking,
monetary exchange rate, tariffs and the effects of different economic and governmental systems.
a. Applied Economics c. International Economics
b. Macroeconomics d. Command Economy
9. Named as planned economy, the decisions of the government drive the production.
a. Applied Economics c. International Economics
b. Macroeconomics d. Command Economy
10. Basic economic problem which each and every economy must determine what products and
services, and what volume of each, to produce.
a. What to produce? c. For whom to produce?
b. How to produce? d. b and c
11. Basic Economic question which focused on who receives what share of the products and services
which the economy produces.
a. What to produce? c. For whom to produce?
b. How to produce? d. a and b
12. It is a science related to economics that many theories have also been applied to economics, these
is natural selection, which it is thought that evolution favors individuals who are best adapted to a
situation.
a. Physics and Economics c. Ecology and Economics
b. Chemistry and Economics d. Biology and Economics
13. It is aimed at understanding the interaction between ecology and human economics.
a. Physics and Economics c. Ecology and Economics
b. Chemistry and Economics d. Biology and Economics
14. Uses statistical modeling developed by physicists to analyze various aspects of finance, including
market behavior and
wealth distribution.
a. Physics and Economics c. Ecology and Economics
b. Chemistry and Economics d. Biology and Economics
15. Green chemistry, the development of renewable or nontoxic materials and energy sources, drives
changes in economics and commerce.
a. Physics and Economics c. Ecology and Economics
b. Chemistry and Economics d. Biology and Economics

Let’s Understand
Contemporary Economic Issues Facing the Filipino Entrepreneurs

Contemporary issue refers to an issue that is currently affecting people or places and
That is unresolved. The economic problem, sometimes called the basic, central or fundamental
economic problem, is one of the fundamental economic theories in the operation of any economy and
here are the contemporary economic issues affecting the Filipino entrepreneurs.
A. Investment and Interest Rates
Investment is the amount of goods purchased or accumulated per unit time which are not consumed
at the present time while interest rates is the charge for the privilege of borrowing money
and its important on the financial markets because interest rate offer consumer spending.
The Determinants of Investment
Determinants of investment are important because investment is a process through which capital
is increased in one period for use in future periods. The accelerator effect happens when increase in
national income in industry shows the net investment spending by business often falls results in
an appropriately larger rise in capital investment spending.
Investment Climate in The Philippines

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Investment climate in the Philippines has improved in the past decade but challenges like caps of foreign
ownership and poor infrastructures is continue to fray investors nerves. South east Asia country said
that continues to experience high level of net foreign direct investments as inflows dipped in 2018. Three
Challenges for The Filipino Entrepreneur
● Government Licensing Permits - It is important to have to ensure that the financial health of the
young company in a good standing.
●Prohibitive Rental Rates and Other Clauses in Malls - For me it’s challenging because it increases the
rental rates and other clauses in malls that the consumers can’t afford the price
●There Are Many Who Have No Job - it’s because there are many people who can’t find job and many
of them are unemployment or they not finished their study so that there are company can’t accept them.
Current Problems of Filipino Entrepreneur:
Inadequate access to technology - w e a r e i n t h e modern period technology is already enabling
our businesses and their machinery is modern use of technology since here in the Philippines our
technology is low it is enough for Filipino entrepreneur to partner with other entrepreneurs because
we lack of technology.
Investment and the Rate of Interest
An explanation of how the rate of interest influences the level of investment in the economy. Typically,
higher interest rates reduce investment, because higher rates increase the cost of borrowing and require
investment to have a higher rate of return to be profitable.
• Private investment is an increase in the capital stock such as buying a factory or machine.
(investment in this context does not relate to saving money in a bank.)
• The marginal efficiency of capital (MEC) states the rate of return on an investment project.
Specifically, it refers to the annual percentage yield (output) earned by the last additional unit
of capital.
• If the marginal efficiency of capital was 5% and interest rates were 4%, then it is worth
borrowing at 4% to get an expected increase in output of 5%. (an effective profit margin of
1%).
Interest rates and investment

If interest rates rise from 5% to 7%, then we get a fall in the quantity of investment from 100 to 80.

If interest rates are increased, then it will tend to discourage investment because investment has a
higher opportunity cost.
1. With higher rates, it is more expensive to borrow money from a bank.
2. Saving money in a bank gives a higher rate of return. Therefore, using savings to finance
investment has an opportunity cost of lower interest payments.
If interest rates rose, firms will need to gain a better rate of return to justify the cost of
borrowing/using savings.
Assuming inflation is zero, and interest rates are 5%. Then any investment project would need an
expected rate of return of at least greater than 5%. If interest rates were 7%, then any investment project
would need an expected rate of return of at least greater than 7%, and therefore less investment would
occur.
Real interest rates and investment
For firms, they will consider the real interest rate - which equals nominal interest rate - inflation.

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 • If inflation is 10% and nominal interest rates 9% – we have negative real interest rates.
Borrowing money is more desirable as inflation will make it easier to pay it back.
• If inflation is 4% and nominal interest rates are 6%, we have real interest rate of 2%
Elasticity of demand for investment
Interest rates are one important determinant of investment. However, it is not the only factor, other
factors include investor confidence, economic growth, the willingness of banks to lend, accelerator
theory, and state of technology.
In a liquidity trap, lower interest rates may have little effect on boosting levels of investment. Therefore,
demand for investment becomes very interest inelastic.

In this case, a fall in interest rates from 5% to 0.5% has had only a very small impact on increasing
investment.
This happened during the great recession of 2009 when interest rates were cut to 0.5%, but the
economy remained stagnant with little increase in investment. In 2009, the credit crunch meant that
banks were unable or unwilling to lend.
Factors that determine investment apart from interest rates
• Investor confidence ‘animal spirits’ – mentioned by J M Keynes
• Economic growth. The accelerator theory states that investment is influenced by rates of change
in economic growth. signs of economic recovery will lead to strong growth in investment.
• Availability of finance. If banks are willing to lend then investment will be stronger. In a credit
crunch, banks may cut back on lending and firms will be unable to invest – even if they wanted
to borrow for investment.
Philippines Interest Rate
In Philippines, interest rate decisions are taken by The Monetary Board of The Bangko Sentral ng
Pilipinas (BSP). The official interest rate is the reverse repo rate (RR/P) which is the overnight
borrowing rate. The central bank of the Republic of the Philippines is committed to promote and
maintain price stability and provide proactive leadership in bringing about a strong financial system
conducive to a balanced and sustainable growth of the economy.
B. Rentals
An item that is leased out for a specific amount of time and is governed by either a verbal or written
agreement. The most common forms of rentals are homes, cars, and equipment. Most rentals require
some form of payment to be made either at the commencement of the leasing period or during the
scheduled leasing period.
Housing rentals are covered by the Philippines’ Rent Control Act of 2009, a law which may not
be familiar to most renters in the Philippines, but actually has been approved and in effect since 2009.
This “Rent Control Law” is essentially intended to protect millions of Filipino renters across the
country.
The reasons why the rental office space in commercial districts in Makati, Taguig, and Ortigas in Metro
Manila are very expensive. Since companies spent hundreds of millions of pesos to buy or lease real
state in these locations and disbursed probably billions of pesos to construct high rises of
condominiums, they expect favorable returns on their investments. This can only be done by charging
very high rental rates in office spaces.
C. Minimum Wage
Minimum wages have been defined as “the minimum amount of remuneration that an employer
is required to pay wage earners for the work performed during a given period, which cannot be
reduced by collective agreement or an individual contract.

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 This definition refers to the binding nature of minimum wages, regardless of the method of fixing
them. Minimum wages can be set by statute, decision of a competent authority, a wage board, a wage
council, or by industrial or labor courts or tribunals. Minimum wages can also be set by giving the force
of law to provisions of collective agreements.
The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a
just and equitable share of the fruits of progress to all, and a minimum living wage to all who are
employed and in need of such protection. Minimum wages can also be one element of a policy to
overcome poverty and reduce inequality, including those between men and women, by promoting the
right to equal remuneration for work of equal value.
The contemporary issue facing the Filipino entrepreneurs about minimum wage only involves the
need to have a compromise between the employers and workers. PRESIDENT RODRIGO
DUTERTE mentioned in a statement in one of his speech the need to have a universal minimum wage
for all employees in the country. At the moment, wages are different depending on where you are
situated. If you are employed in Manila, you are generally paid more than those working in the province.
Another issue is the government’s desire to get rid of contractual workers. This is view by the
president as being unfair to the workers because of the lack of security. But this is debatable since it is
seen as placing all the burden on the shoulders of the employer. And with all the permits, regulations,
taxes and other headaches that come with dealing with government agencies and their greedy hands,
entrepreneurs would have to take steps to cover additional costs.
Effects of minimum wage on the Philippine economy
This policy note presents the results of a study that explores the effects of labor policies on the industry.
In particular, it examines the minimum wage policy by disentangling and controlling various factors
that may confound the effects of minimum wages on employment. Using various econometric methods,
the study finds that the minimum wage policy reduces employment in small firms. It causes small firms
to reduce their production workers. The negative impact of minimum wages emanates from scale
effects. Because of greater marginal costs, it is difficult for small firms to mature into larger-scale firms.
In the process, the production and the demand for production workers decline. With the decline of
small-scale firms, larger firms are able to acquire more production workers, presumably at starting
wages lower than what experienced workers would have received in smaller firms. These firms are not
able to rehire all the laid-off workers, and the poorer workers who may need cash in the short term may
find these arrangements inferior to their previous jobs. Furthermore, because of the minimum wages,
firms are reluctant to hire younger, less educated, and female production workers. To minimize costs,
increasing training for these younger and less educated production workers may no longer be an option
as minimum wages rise. These findings may have serious consequences in the way the Labor Code
affects production efficiency, as well as social protection. There is thus a need to coordinate these policy
areas in a way that reinforces one another.
D. Taxes
Taxes are involuntary fees levied on individuals or corporations and enforced by a government entity—
whether local, regional or national—in order to finance government activities. In economics, taxes fall
on whomever pays the burden of the tax, whether this is the entity being taxed, such as a business, or
the end consumers of the business's goods.
To help fund public works and services - and to build and maintain the infrastructures used in a
country - the government usually taxes its individual and corporate residents. The tax collected is used
for the betterment of the economy and all living in it.
A percentage of the taxpayer’s earnings or money is taken and remitted to the government. Payment of
taxes at rates levied by the state is compulsory, and tax evasion - the deliberate failure to pay one's full
tax liabilities - is punishable by law.
Pros and cons of tax reform package law in Philippines
President Rodrigo Duterte has greenlighted the implementation of the Tax Reform for Acceleration and
Inclusion, also known as the Train Bill.
Referred to as the “Christmas gift to all Filipinos,” the law will now allow employees who earn less
than P250,000 annually to a bigger take-home pay. The first package of the bill will be effective on the
first day of 2018.
Aside from the recently ratified law, Duterte said that he expects more tax reform measures by next
year.

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Here’s a breakdown of what this law will mean for ordinary Filipinos:
The Good:
• Income Tax
Simply put, income taxpayers who earn approximately P22,000 monthly and below are now exempted
from income tax payment. These employees will be able to receive their salary without any deductions
because of tax.
Aside from that, Presidential Spokesperson Harry Roque said the law also simplified taxes for small
taxpayers, including self-employed professionals, with the payment of a flat tax of 8 percent on gross
sales or receipts instead of income and percentage taxes which are filed once a year.
• Estate, Donors, and Value Added Tax
Train will also lower estate tax. Roque said that “taxpayers would now have to pay a fix rate of 6 percent
for the net estate with the standard deduction of P5 million.”
The presidential spokesperson also added that donors’ taxes is also now at a 6%-fixed rate over and
above P250,000 yearly.
He also said the Train Bill changed the value-added tax (VAT) and made it “fairer” after it revoked 54
special laws that provided nonessential VAT exemptions.
“Simplified and Fairer” Tax System
Sonny Angara, chair of the Senate ways and committee, said that “next year would mark the beginning
of a new, simplified and fairer income tax system.”
The Train Bill has a target revenue of P120 million. 70 percent of which would go to the Build, Build,
Build program, and other infrastructures, including military infrastructure. The remaining 30 percent
will go to education, health, housing, and other “social services and mitigating measures.”
The Bad
• Increased prices of products and other services
Due to reduced taxes, the government need to make up for loss of revenue. Because of this, certain good
will have higher taxes. Buyers and consumers should expect higher prices for fuel and gas, electricity,
vehicles, tobacco, and other products and services.
Though income taxes will greatly decrease for almost all employees, they would need to spend more
money on things that they might need.
• Increase in DST and dollar deposit
Aside from increased prices of goods, Roque also said documentary stamp tax (DST), which is a tax
levied on special documents, papers, agreements, etc., increased 50 percent to 100 percent, except for
property, savings and nonlife insurance.
“Foreign currency deposit units increased from 7.5 to 15-percent final tax on interest income. Capital
gains of non-traded stocks increased from 5 to 10-percent to 15-percent final tax on net gains only,”
Roque said.
Taxation in the Philippines
The policy of taxation in the Philippines is governed chiefly by the Constitution of the Philippines
and three Republic Acts.
• Constitution: Article VI, Section 28 of the Constitution states that "the rule of taxation shall be
uniform and equitable" and that "Congress shall evolve a progressive system of taxation".
• national law: National Internal Revenue Code—enacted as Republic Act No. 8424 or the Tax
Reform Act of 1997 and subsequent laws amending it; the law was most recently amended by
Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act; and,
• local laws: major sources of revenue for the local government units (LGUs) are the taxes collected
by virtue of Republic Act No. 7160 or the Local Government Code of 1991, and those sourced from
the proceeds collected by virtue of a local ordinance.
Taxes imposed at the national level are collected by the Bureau of Internal Revenue (BIR), while those
imposed at the local level (i.e., provincial, city, municipal, barangay) are collected by a local treasurer's
office.
National taxes
Income tax
Income tax for individuals

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Citizens of the Philippines and resident aliens must pay taxes for all income they have derived from
various sources, which include, but are not limited to:

Compensation and self-employment income

Individuals, including nonresident aliens, earning compensation income are taxed based only on the
income tax schedule for individuals. On the other hand, self-employed individuals and professionals
are taxed based on the income tax schedule for individuals, applicable percentage taxes, and value-
added tax (VAT). However, if their gross sales (or gross receipts plus other non-operating income) does
not exceed the VAT threshold, they have the option to be taxed either on the basis of the income tax
schedule for individuals and the applicable percentage taxes, or just with a flat tax rate of 8% on their
gross sales (or gross receipts plus other non-operating income).
Income tax schedule for individuals effective FY 2018 until FY 2022
Interests, royalties, prizes and other winnings
-Interest income from bank deposits, deposit substitutes, trust funds, and other similar products (except
for its long-term variants) is taxed at the rate of 20%.
-Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%.
-Prizes and winnings from Philippine Charity Sweepstakes Office (PCSO) Lotto in excess of P10,000
(upon which individual prizes and winnings P10,000 or below are taxed on the basis of the income tax
schedule for individuals) are taxed at the rate of 20%.
-Interest income from a depository bank under the expanded foreign currency deposit system is taxed
at the rate of 15%.
-Income from long-term deposits and investments, when pre-terminated in less than three years after
making such deposit or investment, is taxed at the rate of 20%; less than four years, 12%; and, less than
five years, 5%.
Dividends
Cash and property dividends are taxed at the rate of 10%.
Capital gains
Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the rate of 15%.
Capital gains from the sale of real property are taxed at the rate of 6%, except when such proceeds
would be used to construct a new principal residence within eighteen months after the sale of a previous
principal residence had occurred.
Income tax for corporations
In general, the income tax rate for corporations is 30%. However, for-profit educational institutions and
hospitals enjoy a much lower rate of 10%.
Estate tax
The transfer of the net estate is taxed at a flat rate of 6%. There is a standard deduction amounting to
P5,000,000.
Donor's tax
The total value of gifts made in a calendar year shall be taxed at a flat rate of 6%. There is a standard
deduction amounting to P250,000.
Value-added tax
The value-added tax (VAT) rate since 2006 is 12%.
The new VAT threshold was changed from Php 1,919,500 to Php 3,000,000 as a result of the passage
of the Tax Reform for Inclusion and Acceleration (TRAIN) Law.
Exempt transactions
The following goods, services and transactions are exempted from the VAT:
Percentage tax
Percentage tax is a business tax imposed on persons or entities/transactions:
• who sell or lease goods, properties or services in the course of trade or business and are exempt
from value-added tax (VAT) under Section 109 (w) of the National Internal Revenue Code, as

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 amended, whose gross annual sales and/or receipts do not exceed Php 3,000,000 and who are
not VAT-registered; and,
• engaged in businesses specified in Title V of the National Internal Revenue Code.
Excise taxes
Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition and to things imported.
Local taxes
Real property tax
One of main sources of revenues of the local government units is the real property tax, which is a tax
imposed on all types of real properties including lands, buildings, improvements, and machinery.

Let’s Apply
Modified True or False. Write True if the statement is true and False if the
statement is false.
1. Investment climate in the Philippines has improved in the past decade.
2. If interest rates are increased then it will tend to encourage investment because investment has a
higher opportunity cost.
3. W e a r e i n t h e modern period technology is already enabling our businesses and their
machinery is modern use of technology since here in the Philippines our technology is low it is
enough for Filipino entrepreneur to partner with other entrepreneurs because we lack of
technology.
4. The purpose of minimum wages is to unprotect workers against unduly low pay.
5. The policy of taxation in the Philippines is governed chiefly by the Constitution of the Philippines
and three Republic Acts.
Multiple Choice. Choose the letter of the correct answer from the box.
1. It helps fund public works and services - and to build and maintain the infrastructures used in a
country it is used for the betterment of the economy and all living in it.
A. Investment and Interest B. Rentals C. Minimum wage D. Taxes An
item that is leased out for a specific amount of time and is governed by either a verbal or written
agreement.
A. Investment and Interest B. Rentals C. Minimum wage D. Taxes
2. The amount of goods purchased or accumulated per unit time which are not consumed at the
present time
A. Investment and Interest B. Rentals C. Minimum wage D. Taxes
3. The minimum amount of remuneration that an employer is required to pay wage earners for the
work performed during a given period, which cannot be reduced by collective agreement or an
individual contract.
A. Investment and Interest B. Rentals C. Minimum wage D. Taxes
4. Law which may not be familiar to most renters in the Philippines, but actually has been approved
and in effect since 2009.
A. Bangko Sentral ng Pilipinas (BSP) C. Train Bill
B. Philippines’ Rent Control Act of 2009 D. Bureau of Internal Revenue (BIR)
5. Committed to promote and maintain price stability and provide proactive leadership in bringing
about a strong financial system conducive to a balanced and sustainable growth of the economy.
A. Bangko Sentral ng Pilipinas (BSP) C. Train Bill
B. Philippines’ Rent Control Act of 2009 D. Bureau of Internal Revenue (BIR)

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 Let’s Analyze

Multiple Choice. Choose the letter of the correct answer.

Direction: Identify each statement if it is A. Advantage, or B. Disadvantage
of the implementation of the Tax Reform for Acceleration and Inclusion, also known as the Train Bill.
1. Increased prices of products and other services.
2. Income Tax
3. Increase in DST and dollar deposit
4. Estate, Donors, and Value Added Tax
For nos.5-9: Identify each tax if it is A. National Tax, or B. Local Tax.
5. excise tax
6. value-added tax
7. tax imposed on lands, and buildings
8. tax imposed on improvements, and machinery
9. income tax

Let’s Try
Multiple Choice. Choose the letter of the correct answer from the box.

A. Estate tax C. Value-added tax E. Real property tax

B. Donor's tax D. Excise taxes
1. Apply to goods manufactured or produced in the Philippines for domestic sales or consumption or
for any other disposition and to things imported.
2. The new _____ threshold was changed from Php 1,919,500 to Php 3,000,000 as a result of the
passage of the Tax Reform for Inclusion and Acceleration (TRAIN) Law.
3. The transfer of the net estate is taxed at a flat rate of 6%. There is a standard deduction amounting
to P5,000,000.
4. The total value of gifts made in a calendar year shall be taxed at a flat rate of 6%. There is a
standard deduction amounting to P250,000.
5. One of main sources of revenues of the local government units.
6. _____ from the sale of shares of stock not traded in stock exchange are taxed at the rate of 15%.
A. Interests, royalties, prizes and other winnings C. Capital gains
B. Dividends D. Income tax for corporations
7. Cash and property ______ are taxed at the rate of 10%.
A. Interests, royalties, prizes and other winnings C. Capital gains
B. Dividends D. Income tax for corporations
8. In general, the income tax rate for corporations is 30%. However, for-profit educational institutions
and hospitals enjoy a much lower rate of 10%.
A. Interests, royalties, prizes and other winnings C. Capital gains
B. Dividends D. Income tax for corporations
9. Royalties, except on books, literary works and musical compositions, are taxed at the rate of 10%.
A. Interests, royalties, prizes and other winnings C. Capital gains
B. Dividends D. Income tax for corporations
10. Prizes and winnings from Philippine Charity Sweepstakes Office (PCSO) Lotto in excess of
P10,000 (upon which individual prizes and winnings P10,000 or below are taxed on the basis of the
income tax schedule for individuals) are taxed at the rate of 20%.
A. Interests, royalties, prizes and other winnings C. Capital gains
B. Dividends D. Income tax for corporations