Francisco, Nicca Mischelle

Sison, Joshua Verr

Arcangel,Alecxiemar
Ocana, Cherry
Lomugda,Ricorde
• The rules of trade between nations at a global or near
global level are governed by the World Trade
Organization. Its principles regarding multilateral trading
system should be without discrimination. Freer,
predictable, more competitive and more beneficial for
less developed countries.
• International economics is concerned with the effects
upon economic activity of international differences in
productive resources and consumer preferences and the
international institutions that affect them. It seeks to
explain the patterns and consequences of transactions
and interactions between the inhabitants of different
countries, including trade, investment and migration.
• Regional Trade Agreements of the Philippines:
To ensure free flow of trade by reducing trade barriers.(Tariff and
non-tariff)

- Association of Southeast Asian Nation Free Trade Area

- ASEAN-China Free Trade Area
- Japan-Philippines Economic Partnership Agreement
- ASEAN-Australia-New Zealand Free Trade Area
• Mercantilism
• Give more of your commodity to other follow trading countries, but, take little
or none from others in return

• Law of Absolute Advantage

• trade you have the most to the country that has the least of your commodity,
that also has the most of the commodity of which your country lacks.
• In short it’s a “helping hand” or “fill in the gap” kind of trade.

• Law of Comparative advantage

• even if country A is or has a less advantage in commodities compared to
country B, mutual advantage trade is still possible. Country A should export
the commodity which it has more and import from country B the commodity
that country A lacks the most. While country B, despite having an advantage
over A, will do the exact same thing as what country A is doing.
• In short, give what you at least have the most and take what you lack the
most
• Heckscher-Oblin theory
• each nation should give out what it has the most and the
cheapest. While each should take what it lacks & with an
expensive price

• Heckscher-Oblin-Samuelson Theorem
• international trade will cause the wages & interest rate to be the
same in all trading nations (factor price equalization theorem)
• Tariff
• A tax imposed on imported goods and services. Tariffs are used to restrict
trade, as they increase the price of imported goods and services, making
them more expensive to consumers
• Governments may impose tariffs to raise revenue or to protect domestic
industries from foreign competition, since consumers will generally purchase
cheaper foreign produced goods

• Quota
• A government-imposed trade restriction that limits the number, or in certain
cases the value, of goods and services that can be imported or exported
during a particular time period.
• They are sometimes imposed on specific goods and services to reduce
imports, thereby increasing domestic production.
• In theory, this helps protect domestic production by restricting foreign
competition
• Quotas are different than tariffs, which places a tax on imports or exports in
and out of a country. Both quotas and tariffs are protective measures imposed
by governments to try to control trade between countries.
• Government Regulations
• These are forms of protections arising from health and safety
standards and preservation of the environment

• Exchange controls
• Common exchange controls include banning the use of foreign
currency and restricting the amount of domestic currency that can
be exchanged within the country.
• Typically, countries that employ exchange controls are those with
weaker economies. These controls allow countries a greater
degree of economic stability by limiting the amount of exchange
rate volatility due to currency inflows/outflows.
• Poorer countries dependent on the export of few primary
agricultural products are wary about the exploitative
power of rich nations which have highly industrial
bases.Trade policies being implemented in different
trading blocks are influenced by developed countries
such as U.S., European countries, and Japan.
• Without a certain level of protection from rich nations,
these developing countries will find themselves trapped
in being poor for a long period of time.
• 1.) Tariff – Is a tax on imported products. It raises the
costs to foreign suppliers and reduces their revenues
thereby reducing the import spending of the country.

• 2.) Quota – I s a fixed limit placed on the quantity of

imports allowed into a country. Although the volume of
imports is limited, their price may be forced upward
because of the scarcity, thus, the spending on imports
may not fall too much.
• 3.) Government Regulations – These are forms of
protections arising from health and safety standards and
preservation of the environment.

• 4.) Exchange Controls – The BSP ( Bangko Sentral ng

Pilipinas ) restricts the sale of dollars ( and other forms of
currency ) to importers. Only those importers who have
permits are allowed to obtain dollars due to the necessity
of the product they are importing.
• 1.) Infant Industry Argument -This argument asserts that
a temporary imposition of tariff will cut down imports
while local industries will learn how to produce at low
costs to compete without the help of a tariff. This is the
most valid argument for an industrializing country.
They continue to be infants in spite of the
opportunity afforded them to compete with foreign products.
• 2.) Higher Standard of Living Argument -A tariff will
promote high wages because local industries cannot
provide competition with foreign competitors and pay
high wages at the same time. High wages and a large
number of workers secure a high standard of living for
most of the population.
But this argument lost its stream when it was
observed that higher wages of a result of higher
productivity.
• 3.) Increased Employment Argument -This arguments
contents that tariff creates employment opportunities for
labor. Goods that should have been imported can now be
produced at home ( import substitution ) and therefore
would increase the demand for labor.
The weakness of this argument lies in fact that
imports decrease, exports will decrease also, and
employment will decrease an outcome.
• 4.) Self-sufficiency Argument -This argument advocated
to secure economic independence of national self-
sufficiency. If war erupts, a country cannot depend upon
other countries for a continuous supply of essential
commodities.
Important industries should be strengthened to
ensure self-sufficiency in case of conflicts.
A foreign exchange market is the organizational
framework wherein individuals, businesses, and banks
buy and sell foreign exchange.

Ex. If an American wants to buy Philippine product, he

has to sell his dollars in exchange for pesos in a
foreign exchange market.

The main function of foreign exchange is to transfer

funds of purchasing power from the Philippines to
other countries or vice versa.
The foreign exchange rate is the price if a unit of a
foreign currency in terms of domestic currency . the
exchange rate is made the same in all markets by
arbitrage . Foreign exchange arbitrage is the buying
of a currency when its price is low and selling high.

On the other hand when the value of a currency

declines/increases due to legislation. It is reffered to
as currency devaluation/currency appraisal.

• Ex. US$1 = P43.36 means that P43.36 will be

exchanged for each US$1 or that US$1 will be
exchanged for each P43.36
The exchange rate is important for several reason:

1.It serves as the basic link between the local and

overseas market for various goods, services and
financial assets
2. Exchange rate movements can affect actual inflation
as well as expectations about future price movements.
For Ex. A decrease in the value of the peso from US$1:
P25 to US$1: 35 will increase the price of a $1 per litter
gasoline from P25 (P25 x $1) to 35 (P35 x $1).
3.Exchange rate movements can affect the country’s
external sector through their impact on foreign trade.
the level of competitiveness of the Philippine exports
will be greatly affected by the change in the peso
exchange rates with other currencies.
4.The exchange rate affects the cost of servicing
(principal and interest of payments)

on the country’s foreign debt. a peso depreciation

increase the amount of pesos needed to buy foreign
exchange to pay interest and maturing obligations on
foreign debts
FLOATING EXCHANGE RATE
• TYPE OF EXCHANGE RATE REGIME WHEREIN A
CURENCY’S VALUE IS ALLOWED TO FLUCTUATE
ACCORDING TO THE FOREIGN EXCHANGE
MARKET(SUPPLY)

2 TYPES OF FLOATING EXCHANGE RATE

• MANAGE FLOAT
• DIRTY FLOAT
• A CURRENCY SYSTEM IN WHICH GOVERNMENTS
TRY TO MAINTAIN THEIR CURRENCY VALUE
CONSTANT AGAINST ONE ANOTHER

2 TYPES OF FIXED EXCHANGE RATE

 ADJUSTABLE PEG SYSTEM
 CRAWLING PEG SYSTEM
ADJUSTABLE PEG SYSTEM
• THE CENTRAL BANK WILL SET UP A MAXIMUM AND
MINIMUM VALUE OF THE CURRENCY

CRAWLING PEG SYSTEM

• THE PEGGED EXCHANGE RATE IS OFTEN ACCORDIMG
TO THE DISCRETION OF THE CENTRAL BANK OR SOME
ECONOMIC INDICATION
MANAGE FLOAT
• CURRENT INTERNATIONAL FINANCIAL
ENVIRONMENT IN WHICH EXCHANGE RATE
FLUCTUATE FROM DAY TO DAY BUT CENTRAL
BANKS ATTEMPT TO INFLUENCE THEIR COUNTRIES’
EXCHANGE RATE BY BUYING AND SELLING
CURRENCIES

DIRTY FLOAT
• THE COUNTRY WILL ARTIFICIALLY KEEP THEIR
CURRENCY LOW TO INDUCE ITS EXPORTS
 DEMAND AND
SUPPLY IN FOREIGN
EXCHANGE MARKET
What shifts the demand for dollars? Several factors, all relating to decisions of
foreign countries to purchase U.S. goods and services or U.S. investments. Note
that this is similar to the list of supply factors, only now we take of point-of-view of
the foreign interests that demand dollars. Here are some factors that would
INCREASE demand, causing the U.S. dollar to appreciate:

• An increase in the preference of foreign countries for U.S. goods. These

foreign countries demand dollars to purchase these goods and services, and
demand increases or shifts right .
• An increase in foreign GDP and income. With more income, foreign
consumers will buy more of all types of goods and services, both foreign and
domestic.
• An increase in the real interest rate on U.S. bonds relative to foreign
bonds. The higher real interest rate makes the U.S. bonds more attractive and
investors demand more dollars to purchase the U.S. bonds.
• A decrease in the riskiness of U.S. investments relative to foreign
investments. Again, the U.S. investments become more attractive.
• An expected appreciation of the dollar. People will demand dollars now to
benefit when they gain value against the foreign currency.
• If the supply for the U.S. dollar is constant while the demand
for the U.S. dollar increased due to the brisk importance of
U.S. goods and services, a huge effect on the movement of
the exchange rate will occur.

• For example:
1)When we export products or services, we create a demand for
dollars because our customers need to pay for our goods and
services in dollars and, therefore they will have to convert their
local currency into dollars. Hence they sell their currency to buy
dollars so that they can make the payment.
2) Speculators
• If an investor feels that the price of Mexican pesos will rise in
the future, she will demand more pesos today. This increased
demand leads to an increased price for pesos.
What shifts the supply curve for dollars? Several factors, all relating to decisions in
the U.S. to purchase foreign goods and services or foreign investments. Here are
some factors that would INCREASE supply, causing the U.S. dollar to depreciate:

• An increase in the preference of Americans for foreign goods. When

Americans desire more imports--French wine or German cars--then they supply
more dollars to exchange for foreign currency, and supply increases or shifts
right.
• An increase in U.S. GDP and income. With more income, U.S. consumers will
buy more of all types of goods and services, both foreign and domestic. .
• An increase in the real interest rate on foreign bonds relative to U.S.
bonds. The higher real interest rate makes the foreign bonds more attractive and
investors supply more dollars to exchange for foreign currency and purchase the
foreign bonds.
• A decrease in the riskiness of foreign investments relative to U.S.
investments. Again, the foreign investments become more attractive.
• An expected depreciation of the dollar. People will supply dollars now to avoid
holding dollars while they lose value against the foreign currency.
Central Bankers
• A central bank might decide that its holdings of a particular currency
are too low, so they decide to buy that currency on the open market.
They might also want to have the exchange rate for their currency
decline relative to another currency. So they put their currency on the
open market and use it to buy another currency. So Central Banks
can play a role in the demand for currency.Supply and demand are
often thought of as being two sides of the same coin. Here we see
that this is the case, as in every transaction there is a buyer and a
seller, or in other words, a demander and a supplier.

• Now we know what agents can cause price changes and for what
reasons. We can use our knowledge to analyze what happens in the
"real world". An interesting case is the Canadian-to-American
exchange rate. Due to the geographical proximity and economic
intergration of the two countries the Canadian-to-American exchange
rate is often examined. The sharp decline in the value of the
Canadian dollar relative to the American one is widely discussed in
the news, so we'll discuss it now.
Factor Change in Factor Change in US $

US real interest
increase appreciate
rate

Foreign real
increase depreciate
interest rate

expected US price
increase depreciate
level/inflation

US investment risk increase depreciate

US relative tariffs
increase appreciate
and quotas

demand for US
increase appreciate
goods

demand for foreign

increase depreciate
goods

US relative
increase appreciate
productivity
• Balance of Payments – (BOP) is a summary of the economic
transactions of a country with rest of the world, for a specific
time period. The summary measure the performance of the
Philippine’s external transactions is called the overall BOP
position.
• A record of all transactions made between one particular
country and all other countries during a specified period of
time. BOP compares the dollar difference of the amount of
exports and imports, including all financial exports and
imports. A negative balance of payments means that more
money is flowing out of the country than coming in, and vice
versa.
• BOP is one of the most important tools for national and
international policy formulation as countries have increasingly
become independent.
• Economic transaction 2 major categories
1.Current account-
a)Goods and Services - Exports, Imports, Services
b)Income - Overseas Filipino earnings, Investment
income, Interest payments to foreign creditors
c)Current - Remittance of OFWs, Gifts grants and
donations
2.Capital and Financial account-
a)Capital account - capital transfers
b)Financial account - direct account, Portfolio
holdings, other investments.
 NET UNCLASSIFIED ITEMS
• Overall BOP Position
a) Change in Reserve Assets (Gross International Income) –
Foreign issued Securities, Monetary Gold, Foreign Exchange
b) Change in Reserve Liabilities – Use of fund credits, Short-term

The overall BOP position is a summary measure of the performance

of the country’s external transaction.
 January- December Growth Rate (%)
2010 2009
Current Account 8,465 9,358 -9.5
Capital and Financial 7,948 -1,627 588.5
Account

Net Unclassified Items -2,010 -1,320 -53.4

Overall BOP 14,403 6,421 124.3

• Current account Balance + Capital and Financial

Account; or
• Change in Net International Reserves due to transactions
(change in reserve assets and change in reserve
liabilities).
Solution:
Current Account:
8465 – 9358 = -893 / 9358 = -9.5
Year 2010 Capital and Financial Account:
Current Acc. 8,465 7948+1627= 9575 / 1627 = 588.5
(Add) + Net Unclassified Items:
Capital and Financial Acc. 7,948 -2010+1320= -690 / 1320 = -52.27
------------------------ Overall BOP
16,413 14403-6421=7982 / 6421 = 124.3
(Less) -
Net Unclassified Items 2,010
------------------------- Year 2009
OVER ALL BOP 14,403 Current Acc.
9,358
(Less) -
Capital and Financial Acc. 1,627
Growth Rate: ------------------------
Present acc. – Past acc./Past acc. 7,731
(Less) -
X 100 Net Unclassified Items 1,320
-------------------------
OVER ALL BOP 6,411