Topic 8: Microeconomics
THMN17H – Applied Economics  The correlation between price and how much of
Macro vs. Micro Economics
Microeconomics
▪ The term Microeconomics is derived from the Greek
word “MIKROS” which means Small.
▪ In microeconomics attention is concentrated on a
very small part of individuals
“ Microeconomics is the study of particular Firms,
Particular Household, individual prices, wages,
incomes, Individual industries, particular
commodities”
– K.E. Boulding
Notable Quotes:
“Anyone who believes exponential growth can go on
forever in a finite world is either a madman or an
economist.”
–Kenneth E. Boulding
Microeconomics
“ Microeconomics is that Branch of Economics which
is concerned with individual firms, their output and
costs, the production and pricing of single
commodities, wages of Individuals & etc.” – Hansen
“In Microeconomics we examine the Trees, and not
the Forest. Microeconomics is useful in achieving
worm’s eye view of some very specific component of
our economic system.”
– C. McConnell
According to the UNWTO World Tourism
Barometer, Demand for international tourism grew
by 3.9% in 2016
 Up by 46 million tourist arrivals to reach a total of
1,235 million in 2016, even in the face of global
economic and security challenges.
DEMAND
▪ Demand refers to how much (quantity) of a
product or service is desired by buyers.
▪ The quantity demanded is the amount of a product
people are willing to buy at a certain price.
▪ The relationship between price and quantity
demanded is known as the demand relationship.
▪ Supply represents how much the market can offer.
▪ The quantity supplied refers to the amount of
certain goods producers are willing to supply when
receiving a certain price.
The Supply Relationship
goods or service is supplied to the market is
known as the supply relationship.
 Price, therefore, is a reflection of supply and
demand.
The demand for recreation, leisure and tourism
products
▪ Law of Demand
▪ As with any product, with everything else held
constant. As the Price of that product
increases (a), The Demand for a product
decreases (b)
The 4 four basic laws of supply & demand
▪ If demand increases and supply remains
unchanged, a shortage will result, leading to a
higher equilibrium price.
▪ If demand decreases and supply remains
unchanged, a surplus will result, thus leads to
a lower equilibrium price.
▪ If demand remains unchanged and supply
increases, a surplus will result, leading to a
lower equilibrium price.
▪ If demand remains unchanged and supply
decreases, a shortage will result, leading to a
higher equilibrium price.
Equilibrium Price
▪ The market price at which the supply of an
item equals the quantity demanded.
Law of Supply and Demand
▪ In free markets, surpluses and/or shortages
tend to be temporary and obey the law of
supply and demand, since actions of buyers
and sellers tend to match prices back toward
their equilibrium levels.
▪ In tourism and hospitality. This can be seen
during peak and lean season pricing of
products. Although tourism and hospitality
products are Inelastic, prices are still
dependent on Demand. (Elasticity will be
discussed in later slides)
Definition of Demand
 The amount of a product that will be sold at a
certain price for a specified period
 The higher the price the less bought….the lower
the price the more purchased
 ▪ A decrease in the value of the Philippine Peso
could lead to an increase in the demand for a
The demand for recreation, leisure and tourism
holidays or vacations to the Philippines, Ceritis
products
Paribus (meaning all other things being
Demand and other factors unchanged)

– other prices Motivation and Demand

▪ substitutes and joint demand ▪ Travel facilitators are economic and social factors
combined with influence from suppliers of tourism
– comparative quality/value added products. Facilitators relate to a person’s ability to
travel. Key facilitators are: time and money.
– fashion and tastes
▪ Motivators relate to the reasons why people wish
– advertising
to travel and engage in tourism.
– opportunities for consumption (e.g. leisure
Motivation would depend on:
time)
▪ Physical motivators
– Population
▪ Cultural motivators
– External factors - disposable income, time
availability, change in the demographic ▪ Interpersonal motivators
composition of a society.
▪ Status and prestige motivators
– Basic services intertwined with tourists
Professor H.P. Gray:
motivations
▪ Wanderlust – the desire to exchange the
– Market segments –the categorization of
known for the unknown, to leave familiar
tourists
things and to seek new experiences, places,
– Tourism policy by government organisations people and cultures

– Marketing through promotional campaigns ▪ Sunlust – a desire to travel and enjoy sunny
that lift or create demand places

– The media through either positively endorsing Characteristics of Tourism Demand:

or recommending a destination or tourism
▪ Supply of some tourism facilities (eg:
supplier, or adversely reporting on negative
accommodation) is ‘inelastic’….ie: limited or
aspects of tourism in an area.
restricted.
Substitutes
▪ Accommodation Space/Room cannot be
▪ A substitute, or substitute good, in readily increased when demand also increase.
economics and consumer theory is a product or
▪ When supply is limited competing forces may
service a consumer sees as the same or similar
bid the price up.
to another product. Put simply, a substitute is a
good that can be used in place of another. ▪ In response to higher offers suppliers may be
willing to increase production (extend the
Joint Demand
hotel, release additional rooms, if available).
▪ Joint demand refers to the relationship between
Price Elasticity
two or more commodities or services when they
are demanded together. There is joint demand for ▪ If the %age change in demand is greater than the
cars and petrol, pens and ink, tea and sugar, etc. %age change in price which caused it, then
Jointly demanded goods are complementary. demand is elastic.
▪ A rise in the price of one leads to a fall in the ▪ If the change in demand is less than the %age
demand for the other and vice versa. For example, change in price which caused it, then demand is
a rise in the price of cars will bring a fall in their inelastic.
demand together with the demand for petrol and
lower its price, if the supply of petrol remains
unchanged.
▪ If responsiveness of demand is exactly
proportional to the change in price, then elasticity
is unitary.
Price of tourism product is made up of 3
components
1. Price of transport to the destination
2. Rate of exchange between the currency of the
host country and the currency of the
generating country (international tourism)
3. The price of ground costs (as influenced by
inflation)
Income Elasticity
▪ An individuals income increases their demand for
specific products but reduce their demand for
products previously consumed.
▪ This is because the change in income may allow a
person to buy a higher-quality product instead of
an inferior product. [Law of Substitution]
Definition of ‘demand for tourism’
▪ The total number of persons who travel or wish to
travel and use tourist facilities and services at
places away from their places of work or residence
- (Cooper et all. 1993)
The demand for recreation, leisure and tourism
products
Demand and other factors
– Income
▪ Normal (superior) and inferior goods
Air fares elasticity
▪ Short haul air fares tend to be inelastic as price
elasticity of demand has been calculated to be
inelastic. (doesn’t change demand much)
▪ Long haul travel tends to be price elastic (ie a
special air fare reducing $300 of the price of a
flight to NZ can create an immediate increase in
demand) whereas low priced are usually price
inelastic (ie reducing the cost of a Diet Coke
from $1.20 to $1.15 is unlikely to cause much
shift in demand)
Exchange rate elasticity
▪ A drop in the value of the Peso is positive for
Philippine TOURISM as it lowers the cost of
visiting the country. Visitor numbers and
spending will increase. But the funding that
RP Tourism receives for marketing The
Country overseas is in Peso, and as the value
of the Peso decreases their purchasing power
overseas will also decrease.
▪ A strong Peso increases the cost of a
Philippine holiday and reduces the spending
power of visitors, It does however increase the
purchasing power of the Philippines outside of
the country by increasing its marketing budget
in overseas markets.
Determinants of demand elasticity
▪ For business travelers the decision of
when/where or even whether to go is often
beyond their control. (attending conferences,
meetings, product launches etc) So business
travel is both price and income inelastic.
▪ For leisure travelers they have freedom of
choice regarding where/when/how long and
even whether to go on holiday at all. Leisure
travelers can shop competitively, checking
prices, value for money, special offers etc. So
income and price elasticity's are higher than
for business travelers.
▪ Tourism demand will continue to grow and
become increasingly differentiated.
▪ There will be greater market specialization and
segmentation with a stronger emphasis on
more active pastimes rather than passive
holidays.
▪ Packaged holidays will be customized to
accommodate greater individual freedom
through a modular product design.
Total revenue and elasticity of demand
▪ Drop in price only increases revenue if demand is
high enough and the quantity sold compensates for
lowering of selling price.
▪ Promotional Pricing or Lowering of Prices during
Lean Season could lead to increased demand thus
increasing revenue.
▪ Increase in price usually leads to drop in demand
but can lead to increase in overall revenue.
▪ Increasing price during peak season due to high
demands could help recover losses from low sale
during lean season
Sensitivity of demand
▪ Fashion – destinations go in and out of fashion
▪ Socio-political changes – civil unrest can seriously
affect demand for a destination, or alternatively
 increase demand if the country was previously
engaged in war or internal strife and is now
peaceful.
▪ Foreign Exchange.
Simultaneous consumption of Complementary
products and services
▪ Tourism products are often consumed together,
such as an air flight and a hotel room along with a
sightseeing tour.
▪ So increase in demand for one product may cause
increase in demand of complementary product.
Competition
▪ From other tourism products, such as suppliers of
similar products, or suppliers of products to other
destinations.
Seasonality
▪ Tourism demand is highly season almost
worldwide with weather being critical factor in
choosing a destination
▪ School holidays affect seasonality, as do
traditional ‘factory shut-downs’ that require
workforce to take holidays at that time.
▪ Key holidays affect seasonality, such as Christmas,
Thanksgiving in USA.
▪ Special events are impacted by seasonality of
demand. The tourism demand is only present for
the periods of the event. Like Oktoberfest in
Germany
▪ Marketing strategies are designed to shift demand
from peak (requires less marketing effort) to off-
peak in order to extend the tourism season
Law of Supply
▪ As the price of a product rises, all other things
being equal , suppliers will offer more for sale.
[As they will have more to sell since price
increases can dampen demand]
Law of Supply Definition of tourism supply
▪ The supply of all assets, services and goods to be
enjoyed or bought by visitors and occasioned by
the journeys of visitors.
▪ Tourism supply consists of an amalgamation or
mix of attractions.
▪ Tourism supply shapes the demand for tourism in
a country.
Tourism Supply
▪ Tourism resources for tourism supply range from
natural to man-made.
Tourism Supply
▪ Infrastructure required includes
telecommunications, accommodation and
transport. Below are Infrastructure development in
the Towns of San Vicente, Aborlan, Narra and
Brooke’s Point in the Province of Palawan to add
to the Provinces Tourism Development
Tourism Supply
▪ Tourism services include tour companies, visitor
information offices, transport rental agencies
Understanding tourism supply
▪ 'Tourism supply is a complex phenomenon
because of both the nature of the product and the
process of delivery.
▪ Principally, it cannot be stored (i.e. it is a
perishable product), it is intangible in that it cannot
be examined prior to purchase, it is necessary to
travel to consume it, heavy reliance is placed on
both natural and human-made resources and a
number of components are required, which may be
separately of jointly purchased and which are
consumed in sequence.
▪ It is a composite product involving transport,
accommodation, catering, natural resources,
entertainment, and other facilities and services,
such as shops and banks, travel agents and tour
operators.'
Sinclair and Stabler
(1997:58)
Tourism destination planning
▪ Not all places can be a tourism destination, one
must meet criteria's that would ensure the
viability and longevity of a particular destination.
▪ The availability of natural resources and
attractions
▪ The availability of investment funds
▪ A skilled human resource base
▪ Government policy that supports tourism
▪ Destination accessibility
▪ The presence of complementary services and
facilities and infrastructure
Tourism exists in a fixed geographical
location:
▪ This characteristic of tourism supply impacts on a
destinations’ ability to grow to meet demand.
 (investors can be slow to see the opportunity but
quick to see the risk)
▪ One purchases the product in one place but
consumes it in another.
▪ Businesses have to invest in tourism operations at
the destination with an expectation that the
destination will appeal sufficiently to visitors.
How does supply change to meet demand?
▪ Changes airlines have made to meet demand with
changing routes (cancelling some, introducing
others, adding or deleting capacity to meet the
market). Increasing or decreasing the aircraft size
and capacity in conjunction with demand and sales
▪ Cruise ships – flood of new Mega Cruise Ships
being built (additional supply) to meet the growing
demand for cruising.
▪ Advent of high-end luxury cruising with
balconies/windows and incredible array of
amenities to suit demand by more discerning
consumers
▪ Expansion of conference facilities to meet growth
in conferences and events market.
Changes in quantity of a product or
service occur due to:
▪ Capacity and technology
▪ Cost structure
▪ Prices of substitutes and complements
▪ Perceptions of future prices
▪ Income
▪ Preferences
Pricing Factors to Consider
The average price you sell your product for can
vary, some of the factors that influence pricing are:
1. Seasonality - You may vary your price depending
on high or low season.
2. Operating Cost - The higher your operating costs,
the more expensive your prices will need to be so that
you cover all expenses.
3. Competition - There is no point pricing your
product out of the marketplace, you need to stay
competitive or be able to justify the high price.
4. Demand - People will pay more if there is a high
demand in a region; similarly they will pay less if there
is an abundance of choice.
Information Needed in Pricing
1. Tour or Accommodation Details - You will need
to provide information about your business, such
as the different tour types you offer and the
number of passengers or how many different room
types you have.
2. Daily Cost (Fixed) - You need to determine the
fixed costs associated with operating your
business, such as fuel, labor etc...
3. Daily Cost (Variable) - You need to determine
the costs associated with taking passengers on tour
or letting out rooms, such as meals, third party
activities, linen and room cleaning
4. Annual Business Costs (Fixed) - You need to
calculate the total costs associated with operating
your business. These costs occur whether you have
tours operating or not, this is why they are called
fixed. For example costs that are fixed include
insurance, marketing, lease payments, bank fees,
accounting fees, salaries etc...
5. Annual Capacity - If you have been trading for a
number of years you should know your average
capacity. If you are new to the industry you will
have to estimate your future capacity based on
factors such as visitation to the region, competitor
analysis and customer feedback.
Topic 8: Macroeconomics
A. Investment in Public Sector
SOURCES OF PUBLIC INVESTMENTS
National Level
▪ government channels leisure and tourism
investment through government departments
and public corporations
Local Government Units
▪ Cities and municipalities
Supranational Level
▪ such as ASEAN, Asian Development Bank
(ADB)
TYPES OF PUBLIC SECTOR INVESTMENTS
Building and Land
▪ Parks, leisure centres and museums.
 ▪ Roads, railways and airports, water and
Social costs Social Benefits
sewerage, power and telecommunications.
Inconvenience to local Transport of Goods
Plant and Machinery residents due to right of Link CAR to other
way issues and closure destination nationwide
▪ Playground apparatus, computerized booking of runway to vehicular New jobs created by the
systems traffic project
Research and Development
INFRASTRUCTURE
Airport Terminals
▪ International, Domestic and Community airports
Airport Expressway
▪ NAIA Skyway  elevated expressway system which
links Metro Manila Skyway to the Ninoy Aquino
GOVERNMENT INVESTMENT INCENTIVES
International Airport (NAIA) and Entertainment
City. To encourage
Incentives can include
investment
AIMS and METHODS of PUBLIC SECTOR
▪ in areas of high
INVESTMENT unemployment
▪ matched funding
• projects are wholly public sector-financed ▪ where there are clear
social benefits ▪ tax relief
• projects are jointly financed by the public and offered by a scheme
private sectors • where structural
changes in the
• private sector investments which are eligible economy have led to • subsidized loans
for public sector investment incentive grants. geographic areas of • simplified planning
economic decline (for procedures
• provision of goods and services which have
example inner city
significant public benefits, but which might not decline, rural decline
be profitable enough to attract private sector etc.)
investment.
• economic development or regeneration of a
particular area. SOURCES OF FUNDS FOR PUBLIC
Public-funded restoration projects on Baluarte de INVESTMENT
San Diego in the Intramuros, Manila ▪ OPERATING PROFITS – BUDGET
AIMS ALLOCATION
▪ NATIONAL LOTTERIES – LOTTO
• Preservation of cultural capital ▪ TAXATION
▪ PUBLIC-PRIVATE PARTNERSHIP
• Economic regeneration
(PPP) –
• Provision of jobs Build-Operate-Transfer (BOT)

INVESTMENT APPEAL COSTS BENEFITS

Cost funded by private sector
Private Costs
Cost–benefit analysis Private Benefits
Construction Cost of
- all the costs and benefits of a project are identified Revenue from project
project
and weighed up, including social as well as private
ones. Enhance tourism and
Material
Cost-Benefit Analysis of Baguio Airport industry
Restoration
Link to other
Labor
destination

Encourage potential
Fees
carriers
 ▪ BORROWING FROM FOREIGN
FUNDERS –
(ADB, JICA)
FUNDING PROJECTS
▪ Rehabilitation of Boracay Island at Malay,
Aklan financed by the National Government
through the Department of Environment and
Natural Resources (DENR)
Conceptualized in 1981 as the Main theatre for the
First Manila International Film Festival
• The Film Center opened in 1982 costing an
estimate of $25 million.
• Damaged by the 1990 earthquake.
• Rehabilitation cost of the building in 2001 was
approximately Php300 million
Public Sector Investments: Cons
▪ Not a good interpreter of people’s wants and
thus often invests in ‘white elephants’.
▪ Not good at ensuring efficient use of funds and
tends to allow waste.
▪ Causes an increase in taxation or public
borrowing.
▪ ‘Crowds out’ private sector investment.
Opportunity Cost of Public Sector Investment
▪ An increase in public sector investment means
either:
▪ A reduction of other expenditure (BC)
▪ Or an increase in taxes (YZ)
WHITE ELEPHANTS
▪ a possession which the owner cannot dispose of
and whose cost, particularly that of
maintenance, is out of proportion to its
usefulness
PUBLIC SECTOR INVESTMENT vs PRIVATE
INVESTMENTS
Public Sector
▪ Can help regenerate parts of the economy
which have suffered from restructuring.
▪ Can generate jobs when unemployment is high.
Private Sector
▪ insufficient incentive to invest in public goods.
▪ under invests in goods which have mainly
social benefits.
▪ Or may not be able to undertake the finance or
risk for very large projects.
Review of Key Terms
 Infrastructure =
construction needed to support economic
development.
 Cost–benefit analysis =
full analysis of public and private costs and
benefits of project.
 Opportunity costs of public sector investment
=
alternative uses the funds could have been used
for
 Public Private Partnerships (PPPs) =
where governments contract a private company
to finance, design, construct, operate and
maintain a project in return for future income.
TOPIC: MACRO ECONOMICS
Balance of Payment and Exchange Rates
“ Every man lives by exchanging.”
— Adam Smith
David Ricardo
 Classical Economist who promoted the idea of
comparative advantage as the basis for trade.
 Addressed specialization on a global,
macroeconomic level to explain Specialize and
Trade based on the concept of Opportunity Cost.
 Opportunity cost the cost of the next best
alternative, or what you are giving up to do what
you are currently doing.
Adam Smith
 The Father of Modern Economics he focused on
describing the benefits of one type of
specializing in labor, division of labor, which is
when cooperating individuals perform
specialized tasks.
Specialization
 Is when a nation or individual concentrates its
productive efforts on producing a limited variety
of goods.
 It oftentimes has to forgo producing
other goods and relies on obtaining
those other goods through trade.
COMPARATIVE ADVANTAGE
 An economic term referring to an economy's
ability to produce goods and services at a lower
opportunity cost than that of trade partners. It
 provides a company the ability to sell goods and
services at a lower price than its competitors and
realize stronger sales margins.
ABSOLUTE ADVANTAGE
 an economic term referring to an economy's ability
to produce goods and services:
– of a greater total for the same quantity of
inputs.
– with fewer resources are needed to produce the
same amount of goods and there will be lower
costs than other economies
BENEFITS from SPECIALIZATION and TRADE
▪ increase productivity and standard of living within
a nation.
▪ there will be a larger global output of goods and
services.
▪ Once countries specialize their production in
particular area, additional benefits of economies of
scale are likely to arise. Everyone can benefit from
trading with one another. They can enjoy a greater
quantity and greater variety of goods and services.
COST OF SPECIALIZATION AND TRADE
– Domestic jobs are lost.
- Domestic income is lost
– National security.
– Nations “dumping” goods trying to drive out
domestic competition
– Other nations don’t treat their workers fairly
INTERNATIONAL ORGANIZATIONS
WTO (World Trade Organization)
the international agency that promotes free trade.
Established in 1994 and replaced GATT.
Composed of three main treaty agreements that
summarize the rules of free trade. These are:
- General Agreement on Tariffs and Trade (GATT)
which covers trade in goods.
- General Agreement on Trade in
Services (GATS) which covers trade in services.
- WTO’s intellectual property agreement which
covers trade and investment in ideas and creativity.
General Agreement on Tariff and Trade World Trade
Organization (GATT ) a legal agreement between
many countries, whose overall purpose was to promote
international trade by reducing or eliminating trade
barriers such as tariffs or quotas.
Established on January 1948 until 1994 and was
replaced by WTO.
General Agreement on Trade in Services (GATS )
the treaty that seeks to operationalize this aim.
Free trade liberalization under WTO is based on
three specific pillars:
MARKET ACCESS
 Foreign owned companies have free access to
domestic markets
MOST FAVORED NATION STATUS:
 Concessions granted to any one country must be
made available on a non-discriminatory basis to all
other signatories of the agreement
NATIONAL TREATMENT
 Foreign investors must be treated on an equal basis
with domestic investors, domestic investors must
not receive any favourable treatment that could be
conceived as protectionist.
LIMITS TO Trade BENEFITS
- Extra costs involved in currency conversion and
risk.
- Transport costs can add to production cost.
- Extra costs are involved in adopting goods and
services for local markets.
- Many countries seek to protect their home markets
by protectionist policies
- Most countries wish to maintain some balance of
production in key strategic goods and services so
as not to expose to over-dependence on foreign
countries
- Although overall there are significant gains to be
made from trade, which particular countries
benefit most will depend on the terms of trade.
TERMS OF TRADE
Measures the relative prices of what a country exports
in relation to the prices of its imports. It is expressed
by the formula:
(the average price of exports ÷ the average price of
imports)
A persistent argument put forward by developing
countries is that they face unfavorable terms of trade in
comparison with developed countries.
 BALANCE OF PAYMENT (BOP) Non-
-a Sales of financial
an account Capital
current Purchase Non- assests such
which It records Transfers
- a capital produced as
shows a inflows(-)
has four a copyrights
country’s and
main financial
financial outflows
components account
transactions (+) of
- net
with the currency. 3. FINANCIAL ACCOUNT
errors &
rest of the
omissions records money flows under the following sections:
world
Direct Portfolio Other Reserve
Investment Investment Investment Assets are
BOP COMPONENT s the direct s s those
NET purchase of the covers trade foreign
FINANCI firms of purchase of credits, financial
ERRORS
CURREN AL land or securities or loans and assets that
CAPITAL &
T ACCOUN buildings shares deposits. are
OMISSIO
T abroad. abroad. an controlled
NS
item which example, a by the
mainly measures loan to an monetary
arises
measures financial overseas authorities
because,
the value measures transaction company such as the
due to
of goods flows of s involving central
inaccurate
and capital, for the claims bank.
data
services example, on, and
collection,
traded, investment liabilities
figures do
income and s to, non-
not always
transfers residents
add up as GOVERNMENT POLICY
they should
An acute long-term current account deficit will require
government intervention.
BOP COMPONENT AND DIFFERENCE
This may take the form of:
1. CURRENT ACCOUNT
– devaluation or currency depreciation
mainly measures the value of traded goods and
services. Divided into four parts – deflation

Visibles – protectionism
Income
represent Current
Invisibles Earned by DEVALUATION OR CURRENCY
s exports Transfers
represents domestic DEPRECIATION
& represent
trade in residents
imports sums to - a policy of allowing a country’s currency to fall in
services or from non-
in goods approximat value or depreciate under a system of floating
intangibles & residents
or e the value
typically and vice exchange rates, or moving to a lower rate under a
tangibles of
organized versa fixed exchange rate system.
and resources
into: which - Aimed to stimulate exports by making foreign
typically given or
transportatio include currency price cheaper and to curb imports by
divided received
n, travel, workers increasing the price in the domestic currency
into: overseas
personal, earning
food, where no
cultural, and DEFLATION
beverage money has
recreation investmen
s and changed - A policy involves the government to reduce the
t
basic hands . spending power in the economy.
income
materials - The rationale is that, imports form a significant
2. CAPITAL ACCOUNT Consist of proportion of consumer expenditure, a reduction in
spending power will in turn reduce imports.
- Deflation is achieved through increasing interest
rates or increasing taxes. If deflationary policy
 reduced consumer expenditure, then import
spending would fall
PROTECTIONISM
▪ This entails direct controls on imported goods,
including taxes on imports (tariffs) and limits on
import volumes and values (quotas).
▪ The threat of retaliation and the rules of
international treaties such as the EU and GATT
(which exists to reduce protectionism) make
protectionism a difficult option
BALANCE OF LEISURE and TOURISM
PAYMENT
▪ Tourism is an important foreign currency earner
for many countries
▪ What impact has the closure of Boracay Island had
on the Philippines Balance of Payments?
Tourism a key earner for the Philippines but
expenditure leaks out of the economy by allowing
foreign brands in the local to satisfy international
tourist
TOURISM LEAKAGE
– The purchase of imported equipment is an outflow
of currency to the Philippines current account in
goods (visibles) to satisfy the demands of
international standard and tourists.
CURRENCY
- a medium of exchange for trading for goods and
services. It is in the form of paper or coins,
usually issued by a government and generally
accepted at its face value as a method of payment.
- In the 21st century, a new form of currency was
introduced, the virtual currency. Virtual currencies
such as bitcoins have no physical existence or
government backing and are traded and stored in
electronic form.
EXCHANGE RATES
Significance of exchange rates:
– How does a rise in a country’s exchange rate affect
leisure and tourism?
– makes imports cheaper *e.g clothes, equipment)
– makes exports expensive (e.g. discourage inbound
tourists)
EXHANGE RATES SYSTEM
1. FLOATING RATING SYSTEM
exchange rate is left free to be determined in the
foreign exchange market by the forces of supply and
demand.
In this, Central Bank allows the exchange rate to adjust
to equate to the supply and demand for FOREX
2. FIXED RATING SYSTEM
exchange rate is fixed by the Central Bank of the
country
- by official action
- stands ready to buy and sell FOREX at fixed price
over other currency
- Devaluation and Revaluation rest on the country
DEMAND FOR USD$ (Supply OF Ph Peso)
What factors cause demand for USD$?
– demand for foreign visible exports
– –demand for foreign invisible exports
– –demand for funds for direct and portfolio
investment in dollars
– demand for funds for overseas deposits in dollar
accounts
– speculation
– government intervention
SUPPLY OF USD$ (Demand for Ph
Peso)
What factors cause for USD$ to be supplied to the
Ph?
– demand for Philippine visible exports
– demand for Philippine invisible exports
– demand for funds for direct and portfolio
investment in dollars
– demand for funds for dollar denominated loans
– speculation
– government intervention
SPOT AND FORWARD MARKETS
SPOT MARKET
• the immediate market in foreign currency and
represents the current market rate.
• Payment is made today and the transaction takes
place today at today’s rate.
FORWARD MARKET
• exists to satisfy demand for a guaranteed future
exchange rate.
• Payment is made today but the transaction is made
in the future (e.g. 3 months) at a rate agreed today
EXCHANGE RATE and GOVERNMENT Filipinos permanently Inbound tourism ranked
POLICY residing abroad) within third among the biggest
the Philippines, declined export items in 2018,
- Governments may attempt to influence the by 1.6% in 2018, after miscellaneous
exchange rate amounting to PhP 441.4 services at 31.5% and
- Policy instruments to affect the exchange rate billion from PhP 448.6 semiconductors at 22.8
consist of billion in 2017.
- –interest rates and –direct buying and selling of Shares to Gross Value Employment in tourism
currency by the Central Bank. Added of the following: characteristic industries
- Raising interest rates will generally increase Transportation - 21.9% was estimated at 5.4
demand for a currency as savings are moved from F&B Services - 21.3% million in 2018, higher
overseas banks to domestic banks to benefit from Entertainment and by 1.8 percent compared
higher interest rates. Recreation Services - to 5.3 million in the
19.9%. previous year.
HIGH or LOW RATES Share of employment in
tourism industries to
The exchange rate policy of the Government is usually total employment in the
challenged in cases such as: country was recorded
at 13.0 percent in 2018.
LOWER EXCHANGE RATES
makes export prices competitive and discourages GROSS DOMESTIC PRODUCT (GDP)
imports The market value for produced within a given period
HIGHER EXCHANGE RATES by factors of production located WITHIN THE
COUNTRY.
cutting import prices, helps to combat inflation.
a. Is concerned only with NEW & CURRENT
TOURISM CONTRIBUTION TO THE PRODUCTION.
ECONOMY
b. Also EXCLUDES OUTPUT PRODUCED
The TDGVA graph This includes the ABROAD by domestically owned factors of
representing the following information production
contribution of tourism on tourism expenditure,
to the GDP of the transportation & c. INTERMEDIATE GOODS PRODUCED
country. employment in 2018: ABROAD (goods that are produced by one firm for
The contribution of A decent increase use in further processing by another firm) are not
tourism to the Philippine despite the six-month counted in the GDP.
economy in 2018 stood closure of Boracay
at 12.7%, or 0.5 Island from April 26- GROSS NATIONAL PRODUCT (GNP)
percentage point higher October 26, 2018 and
The total market value of ALL FINAL GOODS &
from 12.2% in 2017, the slower global
[but] slower than the 1.5 economic growth in SERVICES produced within a given period by factors
percentage points 2018 due to the lingering of production owned by a country’s citizens regardless
growth in 2017. Th US-China trade war of where the output is produced.
since July 2018.
INFLATION
Domestic tourism This represents 24.9% of
expenditure grew Household Final  the long term rise in the prices of goods and
by 21.0% or PhP 2.6 Consumption services caused by the devaluation of currency.
trillion in 2017 to PhP Expenditure (HFCE) in  Problems arise when unexpected inflation is
3.2 trillion in 2018. 2018.
experienced which is not adequately matched by a
This includes domestic
tourism expenditure of rise in people’s incomes.
resident visitors within  The purchasing power has been effectively
the country either as reduced, which can in turn lead to a slowing or
domestic trip or part of stagnant economy. 
an international trip
HOW IS INFLATION MEASURED
Inbound Tourism Compared to the
Expenditure or the country’s total exports, – Statisticians measure inflation by looking at a
Expenditure of Non- the share of inbound "basket of goods" which "contain" what the typical
Resident Visitors tourism expenditure
Filipino consumes on a regular basis. 
(foreign visitors and was 8.0 percent.
– This long list of goods and their prices comprise
the consumer price index (CPI).
– The annual percentage change in the CPI is then
used to measure inflation.
 Food and non-alcoholic beverages
 Alcoholic beverages and tobacco
 Clothing and footwear
 Housing, water, electricity, gas and
other fuels
 Furnishing, household equipment, and
routine house maintenance
 Health
 Transport
 Communication
 Recreation and culture
 Education
 Restaurants and miscellaneous goods and
services
WHAT CAUSES INFLATION?
Inflation may be driven either by:
SUPPLY-DRIVEN or COST-PUSH inflation
happens when the cost of producing goods, the prices
of raw materials, and wages go up.
In this scenario, there are fewer goods being produced
due to the high costs of production, yet demand
remains consistent.
DEMAND-PULL inflation occurs when people's
demand outpace the ability of industries to supply
goods.
WHAT CAUSES INFLATION?
MONEY SUPPLY
- Inflation is primarily caused by an increase in the
money supply that is in circulation.
- The less currency that is in circulation, the more
valuable the currency will be.
- If government decides to print new currency, it is
essentially devaluing the money already in
circulation.  an indicator that people have more money to spend
NATIONAL DEBT
- The country’s debt drives inflation and the
government has two option to counter the effect
either by:
1. Raising taxes
2. Print more money to pay off the debt.
EXCHANGE RATES
- Inflation can be made worse by the increasing
exposure to foreign marketplaces.
- An increasingly global economy, exchange rates
are one of the most important factors in
determining the rate of inflation.
- Foreign commodities and goods become more
expensive to local consumers while
simultaneously making local goods, services, and
exports become cheaper to consumers overseas.
HOW DOES INFLATION AFFECTS YOU?
Inflation may be driven either by:
- Inflation means you need to pay more for the
same goods and services.
- One could also think of inflation as a reduction
of the value of money, as consumers are able
to purchase less than before.
- As inflation rises, the value of the
peso diminishes more quickly. 
- Elevated prices of goods hit hardest those
consumers who have not received salary
increases over time. In effect, people have to
constantly get a raise to keep up with the
prices of goods.
- High inflation is also not good for people who
have long-term investments in banks, as it may
erode the value of money.
IS INFLATION ALL BAD? NO
 In fact, the government wants inflation, but only
within an acceptable range.
 For instance, Philippines economic managers want
inflation for 2018 to 2020 to settle between 2%
and 4%. The problem, however, is that inflation in
2018 continues to shoot up beyond the target
range. 
 Revising monetary and trade policies, as well as
providing subsidies to the poor, are only some of
the ways by which the government can restrain
inflation within the acceptable range.
 Inflation, especially when it is demand-driven, is
and reflects a growing economy.
 The government is also avoiding deflation, or the
decline of prices of goods.
 While it may sound good, deflation is an indicator
of anemic or poor economic activity.
 Low consumption slows down the economy,
which would then lead to fewer jobs and
opportunities. 
CURRENCY MOVEMENT AND PRICES