PRINCIPLES OF ECONOMICS

WITH AGRARIAN REFORM

AND TAXATION
Economics: An Introduction

Economics deals with the

problem of scarcity
Economics Defined
 Economics is the study of how societies use
scarce resources to produce valuable
commodities and distribute them among
different people.

 Economics may be defined as a science that

deals with the activities of man in obtaining
wealth for the satisfaction of his wants.

 Economics is the art of making a living.

Economics Defined

 Economics is the proper allocation and

efficient use of available resources for
the maximum satisfaction of human
wants.

 Economics is the branch of social

science that deals with the production
and distribution and consumption of
goods and services and their
management.
Economics Defined
 Economics is the science that deals with the
production, distribution, and consumption of
wealth, and with the various related problems
of labor, finance, taxation, etc. (Webster's New
World)

 Economics is the study of choice and decision-

making in a world with limited resources.

 Right and prudent administration of assets,

Public wealth, set of services and economic
interests.
Economics Defined

 The study of the choices people make to

cope with scarcity.

 Economics is the study of how to use

our limited resources to satisfy our
unlimited wants as fully as possible.
Division of Economics:
 Microeconomics is that branch of economics
that deals with the economic behavior of
individual units such as consumers, firms and
the owners of the factors of production.
for example, the price of rice, the
number of workers of SMC, the income of
Mr. Aquino, etc.
 Micro means small, thus microeconomics
deals with the study of the small units of the
economy.
Division of Economics:

 Macroeconomics is that branch of

economics that deals with the economic
behavior of the whole economy such as
government, business and household.
Examples of macroeconomic studies
are national income, employment and
inflation.
Division of Economics:
 Microeconomics and macroeconomics are
closely related.
for example, compared with the human
body, the microeconomic units are the
heart, kidney, lungs and other parts. The
macroeconomic unit is the human body. A
defect in part of the human body affects the
whole body. The same is true in the
operation of economics.
History of Economics:

 It has started to be known when Adam

Smith’s book Wealth of Nations was
published in 1776.
 Prior to that, economics has been
integrated into other fields such as
religion, philosophy and political
science.
 That book became the bible of
economics for more than a century.
History of Economics:
 Economics have been as old as mankind.
 It started when God drove Adam and Eve
away from the Garden of Eden.
 Economic thoughts appeared in biblical
teachings, philosophy and politics.
 The primitive people invented ways and
means of food gathering and hunting.
Such art of making a living among the
ancient tribes represented a form of
economics.
History of Economics:

 The word “economics” has been derived

from the Greek word oikonomia. It
means household management.
 The housekeeper has to see to it that
there is enough food, clothing and
shelter; that the house is kept in order;
that the necessary duties and
responsibilities are performed by the
members of the household; and that
their products are distributed according
to necessity.
History of Economics:
 To the ancient Greeks, the term oikonomos
applied more on the proper management of
the city-states.
 As a science, economics emerged only in
1776
Basic Economics Problem

1. What goods and services to produce

and how much?
 A society must determine how much of
each of the many possible goods and
services it will make, and when they
will be produced.
for example, Will we produce frozen pizzas or shirts
today? A few high-quality shirts or many cheap shirts?
Will we use scarce resources to produce many
consumption goods (like frozen pizzas)? Or will we
produce fewer consumption goods and more
investment goods (like pizza-making machines, which
will boost production and consumption tomorrow.
Basic Economics Problem
2. How to produce the goods and services?
 It has to do with production and technology.
 As a general rule, goods and services must
be produced in the most efficient manner.
 This means maximum output with minimum
input without sacrificing quality.
 The application of modern technology has
increased output and decreased cost of
production.
 The use of advanced technology will create
more unemployment.
 Basic Economics Problem

3. For whom are the goods and services?

 One key task for any society is to decide who
gets to eat the fruit of the economy’s
efforts.
 How is the national product divided among
different households?
 Are many people poor and a few rich?
 Do high incomes go to managers or workers
or landlords?
 Do the sick or elderly eat well, or are they
left to fend for themselves?
Economic System Model
 Economic system is a set of economic
institutions that dominates a given economy.
 An institution is a set of rules of conduct,
established ways of thinking, or ways of
doing things.
 The purpose of an economic system is to
solve the basic economic problems. The
main goal of economic system is high
standard of living for all its citizens.
 Capitalism

 The factors production and

of
distribution are owned and
managed by private individuals or
corporations. We can use different
terms like market economy, free-
enterprise economy, or laissez faire
economy for capitalism. The essential
characteristics of capitalism are: private
property, economic freedom, free competition,
profit motive
Communism
 It is the opposite of capitalism. The
factors of production and distribution are
owned and managed by the state. It is
also known as the command economy or
classless economy. The essential
characteristics of communism are: no private
property, no economic freedom, presence of central
planning, no free competition, no profit motive.
 Socialism

 It is a combination of capitalism and

communism. The major industries are
owned and managed by the state while
the minor industries belong to the private
sector.
How to Judge a Economic System:

The vital criteria to judge an economic system

is as follows:

1. Abundance
2. Growth
3. Stability
4. Security
5. Efficiency
6. Justice and equity
7. Economic freedom
 The Goals of Economics:

1. Economic growth
2. Full employment
3. Price stability
4. Economic freedom
5. Equitable distribution of wealth and
income
6. Economic security
THEORY OF WANTS
Demand and Consumer Behavior

Demand is the schedule of various

quantities of commodities which buyers are
willing and able to purchase at a given
price, time and place. It is determined by
factors such as:
1. Income
2. Population
3. Taste and preferences
4. Price expectation
5. Prices of related goods
Table: Individual demand schedule
showing the inverse relationship
between price and quantity.
Quantity
Price
Demanded
5 1
4 2
3 3
2 4
1 5
 Demand and Consumer Behavior

 Individual demand curve showing a down

slopping curve. The position of the demand
curve indicates the inverse relationship
between price and quantity demanded.

 Law of Demand states that consumers are

most likely to buy more goods and services
as price decreases, and buy less goods and
services as price increases.
 Validity of the Law of Demand
The law of demand states: as price
increases, quantity demanded decreases, and
as price decreases, quantity demanded
increases.

Such theory is only true if the assumption of

ceteris paribus is applied.

It means “all other things equal or

constant.” The law of demand is correct if the
determinants of demand are held constant.

That is there is no change in income, taste

or population.
 Elasticity of Demand

 Demand elasticity refers to the reaction or

response of the buyers to changes in price
of goods and services.

 There are five types of demand elasticity to

price changes of goods and services:
1. Elastic demand. A change in price results to a greater
change in quantity demanded. For example, a 10%
change in price (increase or decrease) creates a 20%
change in quantity demanded (increase or decrease).
This means that the buyers are very sensitive to price.
Elasticity of Demand
2. Inelastic demand. A change in price
results to a lesser change in quantity
demanded. For example, a 20% change in
price creates a 5% change in quantity
demanded. This means that buyers are
not sensitive to price change.

3. Unitary demand. A change in price

results to an equal change in quantity
demanded. For example, a 10% change in
price results to a 10% change in quantity
demanded.
Elasticity of Demand

4. Perfectly elastic demand. Without

change in price, there is an infinite change
in quantity demanded. Such situation
occurs in a purely competitive market.

5. Perfectly inelastic demand. A change in

price creates no change in quantity
demanded.
Determinants of Demand Elasticity
1. Number of good substitutes. Demand is
elastic for a product with many
substitutes. An increase in the price of
such product induces the buyers to look
for good substitutes.
2. Price increase in proportion to income.
If the price increase has very little effect
on the income or budget of the buyers,
demand is inelastic. But if the price
increase involves a substantial amount
in proportion to the income of
consumers, demand is elastic.
 Determinants of Demand Elasticity

3. Importance of the product to the

consumers. Luxury goods are not very
important to majority of the people. On the
other hand, the essential goods are very
important to people. Rice is important to
Filipinos, Electricity is important to factory
owners and gasoline is important to
transportation industry. All of these are
inelastic.
Theory of Consumer Behavior
1. Law of diminishing marginal utility. The law
states that as the amount of the good consumed
increases, the marginal utility of that good tends
to diminish.
 Marginal utility refers to the additional
satisfaction of a consumer whenever he
consumes one more unit of the same good.

For example, the first unit of a good like ice

cream gives you a certain level of satisfaction or
utility. Now imagine consuming a second unit. Your
total utility goes up because the second unit of the
good gives you some additional utility. What about
adding a third or fourth unit of the same good?
Eventually if you eat enough ice cream, instead of
adding utility, it makes you sick. This leads us to the
fundamental economic concept of marginal utility.
 Determinants of Demand Elasticity

2. Indifference curve. The word “indifference”

means showing no bias, or neutral.
 Suppose there are five combinations of two
products (like meat and fish). The first
combination can be 5 kilos of meat and 1 kilo
of fish while another combination is composed
of 5 kilos of fish and 1 kilo of meat, and so on.
 Since all the combinations give the same level
of satisfaction or utility, the consumer would
be indifferent as to which combination he
receives.
It means any combination would be desirable for
him.

By definition, an indifference curve is a curve that

shows different combination of two goods which
yield the same level of satisfaction.

 Indifference curves are useful in the sense that

they indicate the degree of substitution of one good
for another.

The ability to substitute one good for another is

an important scope in consumer behavior.

 It indicates the rate at which a consumer would

exchange units of one product for additional units
of another product.
 Table: An indifference schedule showing the
various combinations of meat and fish

 
A consumer’s indifference curve: Every point on an
indifference curve indicates a combination of two
products that provides same level of satisfaction.
Budget Line

A budget line indicates the various

combinations of two products that can be
purchased by the consumer with his income,
given the prices of the products.

A consumer has a fixed budget, so he has

to spend his money wisely to able to
maximize his satisfaction.

He has several combinations of two

products to choose, but at the same time his
choice is limited due to the budget.
 For example, the unit price of both products is P25

 The total budget of the consumer is P150.

 It is possible for him to buy 5 units of A and 1 unit

of B, or 5 units of B and 1 unit of A.

 Just have a look at the table to find the various

options of the consumer.
Table: Budget line schedule showing the various
combinations of two products with a fixed budget
of P150 and the unit price of both the products is
P25.

A graphical illustration of budget line.

 Supply and Pricing in Competitive Markets

Supply is the schedule of various quantities

of commodities which producers are willing
and able to produce and offer at a given
price, place and time. Its determinants are:
1. Technology
2. Cost of production
3. Number of sellers
4. Prices of other goods
5. Price expectations
6. Taxes
Law of Supply
As price increases, quantity supplied also
increases, and as price decreases, quantity
supplied also decreases.

 This direct relationship between price and

quantity supplied is the law of supply.

However, the law of supply is only correct if

we apply the assumption of ceteris paribus.

This means the law of supply is valid if the

determinants of supply are held constant.
 Elasticity of Supply
 Supply elasticity refers to the response of the
sellers/ producers to price change of goods.
 There are five types of elasticity of supply or
types of responses of producers to price changes:
1. Elastic supply. A change in price results to a greater
change in quantity supplied. This means that
producers are very responsive to price change. For
example, with a 10% increase in price, they
increase their quantity supplied by 20%.
2. Inelastic supply. A change in price results to a
lesser change in quantity supplied. This shows that
producers have very weak response to price
change.
3. Unitary supply. A change in price results to
equal change in quantity supplied.
4. Perfectly elastic supply. Without change in
price, there is an infinite change in quantity
supplied.
5. Perfectly inelastic supply. A change in price
has no effect on quantity supplied.
 Determinant of Supply Elasticity

  The determinant of supply elasticity is the time

involved in the ability of producers to response to
price changes.
 If it takes a short time to produce the products to
take an advantage of an increase in price, then
supply is elastic.
 On the other hand, if it takes a long time to
produce the products, then supply is inelastic.
 Agriculture or farm products are highly inelastic.
The Law of Supply and Demand

The law of supply and demand states that

when supply is greater than demand, price
decreases.
Demand is greater than supply, price
increases.
When supply is equal to demand, price
remains constant.
This is the market price or the equilibrium
price.
It means that both sellers and buyers have
mutual agreement.
 
 CHAPTER 3: ANALYSIS PRICE SYSTEM

Analysis of the Price System

 One favorable argument for the price
system is its efficiency in distributing goods
and services.
 On the part of the producers, they tend to
produce those products that give them
maximum profits.
On the other hand, the consumers are
inclined to purchase those products that
provide them maximum satisfaction.  

In the process of free competition, the

best methods of production and marketing
are developed and used in order to increase
output and reduce unit cost of production.

Thus the goal of profit maximization

becomes attainable.
 At the same time, the welfare of the
consumers is enhanced because they are
the beneficiaries of quality products at low
prices.
Another argument in favor of price system is
the presence of personal freedom.

Producers are free to produce any product to

satisfy their own economic interests as long as
those do not conflict with legal and moral
traditions.

Other freedoms include the free choice of

workers or employees.

Employees are also free to choose their

employers.

Buyers are also free to purchase any product

that gives them maximum satisfaction.
 Criticisms against the Price System

 Free competition does not exist long

enough.

 Self-interests of businessmen force them to

drive away their rivals through competition.

 Another strategy is to merge their

companies for market advantage.
The small ones find it difficult to compete
with the big ones.

In the process of competition, the big

companies become the price leaders.
 Another case against the price system is
the unfair distribution of goods and
services.
 Only the very few rich can have a decent
life under the price system.
 Social goods like anti-pollution, rural
electrification, irrigation, or highways
cannot be allocated efficiently through the
price system.
The small ones find it difficult to compete
with the big ones.

In the process of competition, the big

companies become the price leaders.

Usually these require a huge financing,

and yet the returns of investment take a
long time and profits may not be attractive.

Only the government is willing to

undertake such projects.
 The Role of the Government

 Keeping in mind the limitations of the price

system, the government has to regulate
and supervise production, distribution and
consumption of goods and services.
 The government provides incentives in the
production of goods and services that
greatly contribute to the socio-economic
development of the country.
The government interferes in the
allocation of the goods and services in order
to protect the welfare of the poor.

At the same time, the government has to

control the consumption of goods and
services that are wasteful and detrimental to
the growth of the economy.

In developing countries, the role of the

government is more active.
 The Role of the Government

 Infrastructures like roads, bridges,

communication facilities, electrification,
schools and hospitals have to be set up.

 These speed up the process of economic

growth.

 Economic growth means more employment,

production and income. And this situation
leads to the high standards of living.
CHAPTER 4: PRODUCTION

Production is the creation of goods and

services to satisfy human wants.

The factors of production are called the

inputs of production, and the goods and
services that have been created by the
inputs are called the outputs of production.

The factors of production are classified as

fixed factor (fixed input) and variable factor
(variable input).
 A fixed factor remains constant regardless
of the volume of production.

 In case of variable factor, it changes in

accordance with the volume of production.

 The process of transforming both fixed and

variable inputs into finished goods and
services is called the theory of
production.
Kinds of Utilities in Production

Form Utility - Utility could be increased in

a certain commodity by changing its form.

Raw materials are indeed useful, but they

could be made more useful by reshaping
them.

Trees in the forest serve man in one way

or another, but they are of little use to him
unless the lumberman cuts them down and
saws them into boards.
 Fresh fish can satisfy our want for food better
if it is properly cooked to suit our taste.

 Coal and iron extracted from the bowels of

the earth keep us warm and provide us with
the raw materials for our tools and
machinery.

 Lumbering, fishing, mining, all of these so-

called extractive industries create form
utility.
Agriculture is another industry that
creates form utility.

The farmer, by careful preparation and

fertilization of the soil, produces all sorts of
crops.
 Place Utility - Goods can be made more
desirable by moving them about.

 Matter in the wrong place is dirt, but in the

right place it is wealth.

 After harvesting the crop, it is of little use to

the farmer unless it is brought to town and
sold to the people who consume it.
Possession Utility - The rice in the
granary of the farmer, after satisfying his
needs for that commodity will not be as
useful as when it is brought to market and
sold to the final consumers.

An automobile in the shop of the dealer is

not as useful as in the hands of the person
who needs a car.

The selling of the rice or of the car is an

activity that creates what is known as
possession utility.
 Time Utility - Time is an important factor
that influences the utility of goods.

 There are some utilities that cannot be kept

for a long time and wait to satisfy the
maximum need for them.

 During the mango or lanzones season, great

quantities of these fruits go to waste or
command a very low price.
Fish does not keep long after being taken
off the water; it is a very perishable
commodity.

The same may be said of meat, vegetables

and other commodities.

 The development of cold storage and

refrigeration has partly solved the problem
of preserving these perishable commodities
until such time as they are more useful.
 
 Service Utility - Production is not only
confined to material goods but also to
immaterial goods or services.

 There are many persons who never handle

material goods but are considered
productive because they create certain
utilities by rendering valuable and
necessary services to the community; they
are engaged in service production.
The people engaged in the so-called
learned professions and those who render
personal services create service utility.

The services of professors, lawyers,

doctors, priests and ministers, singers,
dancers, government officials and also those
of servants, cooks, waiters, and housemaids
are included in service production.
 Economic Costs

1. Total cost – is the sum total cost of

production. It is composed of wages,
rents, interests and normal profits.

2. Fixed cost – is a kind of cost that remains

constant regardless of the volume of
production. Even if there is no production,
there is still cost. Examples are the
expenditures on machines and buildings.
3. Variable cost – is a kind of cost that
changes in proportion to volume of
production. If there is no production, there
is no cost. More production means more
costs. Examples are wages and raw
materials.

4. Average cost – is also called unit cost. It is

equivalent to total cost divided by quantity.

AC =TC
Q
 5. Marginal cost – is the additional or extra
cost brought about by producing one
additional unit. It is obtained by dividing
change in total cost by change in quantity.
MC= ΔTC
ΔQ
6. Explicit cost – is also called expenditure
cost. These are payments to the owners of
the factors of production like wages,
interests, electric bills, and so forth.

7. Implicit cost – also called non-

expenditure cost. The factors of production
belong to the users.

8. Opportunity cost – is a foregone

opportunity or alternative benefit.
 Short Run and Long Run Period

 Short run refers to a period of time that is

too short to allow an enterprise to change
its plant capacity, yet long enough to allow
a change in its variable resources.
 Long run refers to a period of time that is
long enough to permit a firm to alter all its
resources or inputs.
Economies of Scale

Economies of scale may be classified as

internal and external economies of scale.

Internal economies of scale are the

factors inside the firm that contribute to the
efficiency of the firm.
Examples of such factors are division of labor,
human resource development, managerial
specialization, proper use of machines and
equipment, favorable management policies,
effective utilization of by-products, and modern
techniques of production.
 External economies of scale refers to those
factors that are outside the firm, but they
contribute to the efficiency of the firm in
terms of increased output and decreased
unit cost of production.
Examples are government policies,
electrification, and transportation and
communication facilities.
Appropriate Techniques of Production

Labor-intensive technology means more

labor inputs and less capital inputs.

Capital-intensive technology means more

machines and less labor.

Poor countries should use labor-intensive

technology and advanced countries should
use capital-intensive technology.
 Conclusion

 In the production of goods and services one

must always consider the type of products
that one is to produce, for whom the
products are to be produced , how are these
products to be produced and how long will it
take to produce the products.
 Thus one must take into consideration the
cost of producing the product , the
techniques in production, the length of time
and the utility of the products that are to be
produced.
 CHAPTER 5:
BUSINESS ORGANIZATION
 Business Organizations
  The main economic activity is production. Almost
all production activity is done by specialized
organizations.
 There are different forms of business
organizations, from very simple to complex.
 The choice of a form of business organization
depends on one’s resources, objectives, and
perceptions.
 There are three most common forms of business
organizations in a capitalist economy.
 These are single/sole proprietorship, partnership
and corporation.
Single/Sole proprietorship

This is the oldest and simplest form

of business organization. It is also the
easiest to put up. This is owned and
usually managed by one person.
 Advantages:
1. It is easy to form and dissolve. It requires a small
capital and there are no legal papers needed
except the usual business license from the
Department of Trade and Industry and a business
permit from the city/municipal government.
2. All profits belong to the business owner. This is
the greatest advantage to the entrepreneur as
there is no one else to share the profit with.
3. The owner is the boss. He makes his own
decisions and executes them the way he likes. For
example, he can change his business hours,
products, prices, or style of management.
4. Tax advantage and less government regulation.
Usually the owner pays only the income tax. The
government regulation is almost nil. The only time
the sole proprietor deals with the government is
when he pays the license, permit, and tax.
 
 Partnership
:
 Article 1967 of the Civil Code defines
partnership as an organization where “two or
more persons bind themselves to contribute
money, property, or industry to a common
fund with the intention of dividing the profits
among themselves.
 There are two types of partners: general and
limited.
 The liability of a general partner extends up to
his personal properties while a limited partner
is only liable to the extent of his contribution
in the business.
Advantages:

1.It is easy to organize. The partnership is

much easier to form than a corporation.

The legal requirements include articles

and by-laws of partnership to be submitted
to the SEC, verification of business name
with SEC, registration of business name with
the Bureau of Commerce, Bureau of Internal
Revenue for a TIN (tax identification
number), business permit from the
city/municipal hall and a registration of
employees with SSS.
 2.Availability of more capital and credit.
Partners can pool their resources –
properties, equipment, and others – and
use these for security in obtaining bank
loans.
 Suppliers are more willing to extend more
credit to a partnership than to a single
proprietorship.
3. The partners get all the profits. This
stimulates them to improve their
business.

4.More and better knowledge and

skills. Each partner contributes his
knowledge and skills to the
organization.

It is said that two heads are better

than one.
 This kind of combination provides better
management in terms of planning,
decision-making, and implementation
compared with sole proprietorship.
Disadvantages:

1. Unlimited liability. Each general

partner is personally responsible for all
the debts of the business.
2. Lack of stability. In most of the
cases the partnership is terminated by
the death, withdrawal, or legally
declared insanity of any of the
partners.
3. Management disagreement. If the
management do not work in unity, conflicts
arise.
 Suspicion or distrust may crop up among
the partners.
 Such negative attitude and unfair often
takes place.
4. Idle investment. It is easy to invest
money in partnership, but sometimes it
is difficult to get it out.
 For example, when a partner decides to
leave the organization, the remaining
partners may not buy his share.
 And if the leaving partner decides to sell
his share to an outsider, the problem
might arise that the existing partners
may not agree
 Kinds of Partnerships:
:
1. Universal-refer to all present property or to
all profits
2. Particular- has for its objects determinate
things their use or fruits, or specific
undertakings, or the exercise of a
profession or vocation
3. General- liabilities of partners extend to
their individual properties after the assets
have been exhausted
4. Limited-at least one general partner and
the others are limited partners
Kinds of Partners:

1. General-liable for partnership

obligations to the extent of their
private properties
2. Limited-those who cannot be held
for partnership obligations
3. Capitalist- contributes money or
property
4. Industrial- contributes expertise,
,skills and services
5. Managing-administers the operation and
manages the business directly
6. Liquidating-handles affairs of dissolution
of the business
7. Ostensible-publicly makes known his
connection with the partnership
8. Secret-identity is not publicly made
known
9. Dormant- both a secret and silent partner
10. Nominal- partner in name only
Corporation
It is an artificial being created by operation
of law, having the right of succession, and the
powers, attributes, and properties
expressedly authorized by law or incident to
its existence.

The shares or certificates of ownership of a

corporation are called stocks.

The owners of stocks are called stockholders

or shareholders.

There are two types of corporations: private

or close corporation and open corporation.
 Advantages:

1. Limited liability. The stockholders

have a limited liability.
 In case the corporation becomes a
failure, the creditors can lay their
claim on the assets of the corporation
and not on the assets of the
stockholders.
2. Easy to raise capital. A corporation
can sell shares of stock to the public
for addition funds.

3. Perpetual life. The life of a

corporation does not end with the
withdrawal or death of key owners.

It can exist for 50 years and is subject

to renewal.
4.Specialized management. A
corporation can hire professionals. It
has funds to develop its human
resources.
Disadvantages:

1. Difficult to organize. Sometimes it requires

the services of a lawyer and an accountant
to prepare the legal documents.
 The legal requirements include submission
of articles of incorporation and by-laws to
SEC, registration with BIR and DOLE,
acquisition of a business permit from city/
municipal hall and a license from the DTI.
 It also has to get approval from other
agencies like Central Bank, Food and Drug
Administration and many others depending
on the nature of the products and services.
2. Strictly regulated and supervised by the
government.
 Corporations have to submit their financial
reports every year to concerned
government agencies.
 They have to comply with government
laws, policies and regulations.
 Government regulation and supervision
on corporations are close compared with
the other forms of business organizations.
3. Some corporations are socially
irresponsible.
 They sell substandard goods and
pollute the environment.

4. Formal and impersonal employer-

employee relationship.
 A corporation has several layers of
management.
 The top management seldom or do
not associate with the workers or
clerks of the corporation.
 Cooperatives

  The cooperative code defines a cooperative

as a duly registered association of persons,
with a common bond of interest, who have
voluntarily joined together to achieve a
lawful common social or economic end,
making equitable contributions to the capital
required and accepting a fair share of the
risks and benefits of the undertaking in
accordance with the universally accepted
principles of cooperation, which include the
following:
1.Open and voluntary membership
2.Democratic control
3.Limited interest on capital
4.Division of net surplus
5.Cooperative education
6.Cooperation with other cooperatives
Objectives of Cooperatives

1. To encourage savings among

members;
2. To generate funds and extend credit
to the members for productive
purposes;
3. To encourage among members
systematic production and marketing;
4. To provide goods and services and
other requirements to the members;
5.To develop expertise and skills among
its members;
6.To acquire lands and provide housing
benefits for the members;
7.To promote and advance the
economic, social, and educational
status of the members; and
8. To establish, own, lease, or operate
cooperative banks, cooperative
wholesale and retail complexes,
insurance and agricultural/industrial
processing enterprises, and public
markets.
 Types of Cooperatives

1.Credit cooperative. Create funds in

order to grant loans for productive
purposes.
2. Consumer’s cooperative. Procures
and distributes commodities to its
members and non-members.
3. Producer’s cooperative. Undertake
joint production in agriculture and
industry.
4. Marketing cooperative. Engages in
the supply of production inputs to
members and markets their
products.

5. Service cooperative. Undertakes

medical and dental care,
hospitalization, transportation,
insurance, housing, labor, electric
light and power, communication,
and other services.
6.Multipurpose cooperative. Combines
two or more of the business activities
of different types of cooperatives.
Conclusion

The study of the four types of business

organization provided a significant guide
on the individual as regards the
advantages and disadvantages of each
type.
Such knowledge gives the individual
the benefit of determining which
business organization may be most useful
in producing the goods and providing the
services to people in society.
MACROECONOMICS CONCEPTS
Macroeconomic Concepts

Macroeconomics is the study of the

behavior of the economy as a whole.

It examines the overall level of a

nation’s output, employment, and
prices.
 Fundamental concerns of
macroeconomics policy:
1. Why do output and employment
sometimes fall, and how can
unemployment be reduced?
2.What are the sources of price
inflation, and how can it be kept
under control?
3.How can a nation increase its rate
of economic growth?
All market economies show patterns of
expansion and contraction known as
business cycles.

During business-cycle downturns, such as

the recession, production of goods and
services fall, and millions of people lose
their jobs.

For much of the postwar period, one key

goal of macroeconomic policy has been to
use monetary and fiscal policy to reduce the
severity of business-cycle downturns and
unemployment.
 Sometimes countries experience
periods of high unemployment, which
persist even when their economies are
expanding.
 Macroeconomics examines the sources
of such unemployment and after
diagnoses, can even suggest possible
remedies such as reforming labor
market institutions through reducing
the incentives not to work or increase
wage flexibility.
The lives of millions of people depend
upon whether macroeconomics can find the
right answers to these questions.
 When it comes to second question,
economists have learned that high rates
of price inflation have a corrosive effect
on market economies.

 A market economy uses prices as a

yardstick to measure economic values
and as a way to conduct business.
During periods of rapidly rising prices, the
yardstick loses its value: people become
confused, make mistakes, and spend much
of their time worrying about inflation eating
away their incomes.

That’s why macroeconomics has

increasingly emphasized price stability as a
key goal.
 When taking under consideration
question three, the macroeconomics is
also concerned with the long-run
prosperity of a country.
 Over a period of decades and more, the
growth of a nation’s productive potential
is the central factor in determining the
growth in its real wages and living
standards.
Over the past years, rapid growth in Asian
countries such as Japan, South Korea, and
Taiwan sent average incomes for their
citizens soaring.
Countries want to know the ingredients in
a successful growth recipe.

Does running a big budget deficit or a big

trade deficit have harmful long-run effects
on growth?
What is the role of investment in physical
capital, in research and development, and in
human capital?
 Should the government nourish key
industries through subsidies and
industrial policy, or does a hands-off
policy work better?
 A complication in considering the three
central issues is that there are inevitable
tradeoffs among these goals
 Reducing the budget deficit may mean
accepting slower growth in the short-run
Increasing the rate of growth of output
over the long run may require greater
investment in knowledge and capital; this
investment lowers current consumption of
food, clothing and recreation.

Of all the macroeconomic dilemmas, the

most agonizing is the choice between low
inflation and low unemployment.

There are no simple formulas for resolving

these dilemmas, and macroeconomics differ
on the proper approach to take when
confronted with high inflation, rising
unemployment, or stagnant growth.
 But with sound macroeconomic
understanding, at least the inevitable
pain that comes from choosing the best
route can be minimized.
The Theory of Economic Growth

Economic growth is the product of economic

development.
Economic development is a progressive process of
improving human conditions, such as the reduction
or elimination of poverty, unemployment, illiteracy,
inequality, disease and exploitation.
As a process, it involves the interaction of
economic and non-economic factors.
Economic growth is the increase in the volume of
goods and services produced by an economy.
It is generally a factor in an increase in the
income, of a nation.
It is conventionally measured as the percent rate
of increase in real gross domestic product, or GDP.
Stages of economic growth

 One theory in determining the stages of

economic growth is based on exchange
systems.
 That is from barter economy to money
economy, and finally to a credit
economy.
 Another approach is based on the
dominant productive sectors of the
economy.
According to this theory as stated by British
economist Colin Clark, there are three
stages of economic growth:

 
1. Agriculture is the main source of
employment and income.
2. Manufacturing industry becomes the
major economic activity as a country
develops.
3. Service industries grow to be the
dominant feature of the economy as a
country further develops.
 Another theory of classifying the stages of
growth is the doctrine of Rostow, an American
economic historian.
In his book Stages of Economic Growth, the
transition of a country’s economy from
underdevelopment to development passes
through several stages such as:
 1. Traditional society
2. Pre-conditions for take-off
3. Take-off
4. Drive to maturity
5. Age of high mass consumption
Some economic growth models:

1. Ricardian model - Here the key factor is

land. This means agriculture is the first
priority in the attainment of economic
growth.

2. Harrod-Domar - The key factor in this

model is physical capital like machines,
buildings, equipment, and so forth.
According to this model, the input is capital,
and its efficiency is determined by the
number of output it can produce.
3. Kaldor model - Here the key factor is
technology, which is embodied in
physical capital. Japan is an example
which has achieved economic growth
through technology.
Inflation
There is inflation when there is a rising
general level of prices.
Increase in prices is inflation or we can say
that it is decrease in the value of money.
Demand for goods and services decrease
when prices increase.
Inflation creates more inflation.
When prices keep on increasing, people are
inclined to spend their money before it loses
its value.
Inflation encourages more consumption and
less saving.
Types of inflation
1. Demand-pull inflation - This type of
inflation occurs when demand for
goods and services exceed supply.
 This is based on the law of supply and
demand.
 Another cause of demand – pull
inflation is the excess money supply.
 When money supply increases without
corresponding increase in production
of goods and services, prices rise.
2. Cost-push inflation - An increase in the
cost of production results to an increase in
prices.
Cost increases whenever there is an
increase in wages, oil prices, or prices of raw
materials.
3. Structural inflation - This view explains
that the inability of some sectors of our
economy to response immediately to
demand for goods and services.
 When supply cannot meet demand,
prices increase. If there are no
obstacles or constraints (financial,
physical or institutional), whenever
prices rise, producers are encouraged
to enter the market.
This increases supply, and therefore prices
fall
However, there are instances where
supply cannot be increased, at least in a
short period
Since supply falls, prices of such scarce
products rise
And this is inflation for such particular
products
CHAPTER 7: BUSINESS CYCLES
Business Cycles

Understanding the business cycles will be

useful in understanding the phases which an
economic system undergoes to bring about
the use of the resources.
Phases of the business cycles

1. Prosperity: This is the peak of the

business cycle.
 There is full employment, and the
national output is at full capacity.
 Output can no longer be increased
because productive resources are at
full capacity or fully employed.
2. Recession: Both production and
employment are falling down

3. Depression: Both production and

employment are at their lowest levels

Under such condition, no businessman

is willing to invest because the demand
for goods and services is also at its lowest
point

4. Recovery: Both production and

employment rise towards full
employment
 Business Cycle Theories

1. Exogenous theory: Forces outside the

economic system create the business cycles.
 Examples of these forces are wars, political
developments, natural disasters, or major
innovations.
 Typhoons and floods can easily wipe out in a
week's time the output of an agricultural
country.
 Civil wars have destroyed the economies of all
countries which have been afflicted with said
human misunderstandings or greediness for
political powers among the leaders
2. Endogenous theory: Forces within the
economic system cause the fluctuations in
the economy

 Examples are accelerators, multipliers,

innovations or monetary policies.
 Full employment

 When there is an available job for every

person who is willing and able to work,
it is full employment.
 
Theories of employment

1. Classical theory of employment - states

that employment increases at lower
wages
 Employers are willing to hire more
workers at lower wages because it is
more profitable
 Keynes did not agree with such theory.
He said that during depression, workers
are willing to accept any wage but could
not find jobs
 He argued that high wage could not be
the main cause of unemployment
2. The Keynesian theory of employment
- which is the modern theory of
employment - states that employment is
determined by aggregate or total
demand for goods and services.
 
Unemployment and its types

Disguised unemployment is a situation

where individuals are actually working but
they do not contribute to production.

Types of Unemployment
1. Frictional unemployment is caused by
interruptions in production for technical
reasons, or when workers are temporarily
laid off due to renovation works
2. Structural unemployment: A change in
technology renders the skills and talents
of some workers obsolete
3. Cyclical unemployment: This is caused
by the fall of business activities in the
economy
 When aggregate demand decreases,
production declines
 Some workers have to be laid off
4. Seasonal unemployment: During slack
periods, many workers in farming and
construction are laid off.
 Conclusion
 The concepts of recovery, recession,
expansion, depression are terms we
have encountered since time
immemorial
 These concepts dealt with how we have
attained levels of growth in relation to
the employment and unemployment of
our resources
 As we understand the concepts, we are
also made aware of the different effects
of the same in our society
 CHAPTER 8: MEASURING
NATIONAL OUTPUT AND INPUT
Measuring National Outputs & Income

Gross National Product - It is the total

market value of all final goods and
services produced by citizens in one
year.
The real economic achievements of any
country are measured by the number of
goods and services its citizens have
produced in a given year

If we depend on the market value of final

goods and services, it is not most of the time
accurate because of price fluctuations

 In case of inflation (high prices), the

market value of GNP naturally increases.

In case of deflation (low prices), the

market value of GNP is low.
 GNP at current prices is money GNP

 It is obtained by multiplying the

number of final products and services
by prevailing market prices

It is expressed as: P X Q = GNP

Measuring GNP

GNP can be measured in at least two

different ways, both of which yield the same
result
One way of measuring the GNP is from the
buyer's point of view, or in terms of
aggregate demand

Also known as the expenditure approach

to measuring GNP, this method calculates
the value of the GNP as the sum of the four
components of GNP expenditures:
consumption, investment, government
purchases, and net exports
 The expenditure method accounts for the
source of the monetary demand for
products and services
 The largest component, consumption,
includes the value of all the goods and
services purchased by consumers during the
year
 The investment category includes the
production of buildings and equipment as
well as the net accumulation of inventories
Financial investments, which involve only
transfer payments rather than the
production of capital goods, are not counted

 Government purchases include only

expenditures for goods and services, not
transfer payments such as Social Security

 Net exports include the value of all goods

produced in the country but sold abroad,
minus the value of goods produced abroad
and imported into the country
 
 Since every transaction involves a buyer and
a seller, the GNP can also be calculated from
the seller's point of view, which focuses on
where money payments go

 The method, also known as the income

approach, measures GNP as the sum of all
the incomes received by all owners of
resources used in production
Such income payments are known as
factor payments, because they are paid to
various factors involved in the production of
goods and services

These include employee compensation,

rental income, proprietary income,
corporate profits, interest income,
depreciation, and indirect business taxes
 Employee compensation includes all
payments relating to labor, including fringe
benefits and taxes paid on labor

 Rental income is paid for the use of capital

goods. Proprietary income represents
payments to owners of business firms

 Corporate profits are earned by the

shareholders of a business
Interest income is received for lending
financial resources

Depreciation is a charge against assets

used in production

The indirect business tax refers to sales

tax, which represents part of the payments
for goods and services that are not paid to
any of the income recipients
 
 The measurement of GNP is fairly complex
and follows a set of rules that, while
generally agreed upon, may nevertheless
appear somewhat arbitrary.

For example, housing is treated in a

manner that protects GNP calculations from
changes in the rate of home ownership
All occupant-owned housing, as opposed
to rental housing, is treated in the GNP
accounts as if rented

Thus, the rental value of occupant-owned

housing is included as a service in the GNP
along with the rental value of houses that
are actually rented
 GNP measures the value of final products
and services, so it is necessary to avoid
double-counting the many intermediary
products that are bought and sold in the
economy
 Products and services are counted as part of
the GNP when they reach their final form
Some important final products are actually
excluded from the GNP

 Many household activities are excluded, as

are all illegal goods and services

In the case of housework, the services of a

hired maid are considered part of the GNP,
but not if the same services are performed by
a member of the household

The exclusion of domestic chores has a

greater effect on the calculation of the GNP of
lesser-developed countries, where
households may produce their own food and
clothing to a greater extent
The treatment of government expenditures
also affects GNP calculations
All government expenditures are considered
final; there is no attempt to categorize them
as intermediate and final
The effect of this rule is an upward bias in the
GNP
In addition, all government expenditures are
considered as current consumption rather
than as investments; they are measured only
once, in the year in which they occur
Finally, government goods and
services, which are usually not sold in
the marketplace, are valued at cost in
the GNP.
Limitations of GNP
1. It does not show the allocation of goods and
services among the members of society. It
only shows the number of goods and services
produced by citizens in a given period. An
increase in GNP does not necessarily mean
that the economic and social welfare of the
masses has improved. In a society where
there is a widespread mal-distribution of
wealth, an increase in GNP only benefits the
very rich who own the productive resources
2. GNP accounting in less developed
countries in understated. There are
many economic transactions especially
in the rural areas that are not
registered in the market. For example,
backyard poultry, fishing and other
small-scale income-producing
activities whose products are only
intended for family consumption. Only
market transactions are reflected in
the GNP.
3. The evils of economic growth like
pollution, congestion and dirty environment
are not reflected in the GNP. The cost of
such destruction to the health of human
beings, and to the balance of nature is very
high. And this is not subtracted from the
GNP.
4. GNP only measures the number of
goods and services but not the
quality of goods and services.
Needless to say, quality is an
important feature as it affects the
well-being of people.

5. Income or products from illegal

sources are not included in the GNP.
Examples are gambling, unlicensed
money lending, and narcotics
business.
Price Index
When newspapers tell us “inflation is rising,”
they are really reporting the movement of a
price index
A price index is a measure of the general
price level; more precisely, it is a weighted
average of the prices of a number of goods
and services
The most important price indexes are the
consumer price index, the GDP deflator, and
the producer price index
The Consumer Price Index (CPI)

In economics, a Consumer Price Index

(CPI, also retail price index) is a statistical
measure of a weighted average of prices of a
specified set of goods and services
purchased by wage earners in urban areas.
It is a price index which tracks the prices of a
specified set of consumer goods and
services, providing a measure of inflation

The CPI is a fixed quantity price index and

a sort of cost-of-living index
 The CPI can be used to track changes in
prices of all goods and services purchased
for consumption by urban households

 User fees (such as water and sewer service)

and sales and excise taxes paid by the
consumer are also included. Income taxes
and investment items (like stocks, bonds,
life insurance, and homes) are not included
For example assume that consumers buy
three commodities: food, shelter, and
medical care

Using 1995 as the base year, we reset the

price of each commodity at 100 so that
differences in the units of commodities will
not affect the price index. This implies that
the CPI is also 100 in the base year. [= (0.20
X 100) + (0.50 X 100) + (0.30 X 100)]
 Next, we calculate the consumer price
index. Suppose that in 1996 food prices rise
by 2 percent to 102, shelter prices rise 6
percent to 106, and the medical care prices
are up 10 percent to 110. We recalculate
the CPI for 1996 as follows:
 
CPI (1996)
= (0.20 X 102) + (0.50 X 106) + (0.30 X 110)
  = 106.4
In other words, if 1995 is the base year in
which the CPI is 100, then in 1996 the CPI is
106.4.
 Gross Domestic Product
  It is the total market value of all final goods
and services produced within the territories
of a country in one year. Incomes derived
from investments or wealth in foreign
countries is excluded. In a country whose
economy is dominated by multinational
corporations or foreigners, the GDP is bigger
than GNP.
  GDP is used for many purposes, but the
most important one to measure the overall
performance of an economy.
 CHAPTER 9:
INTERNATIONAL TRADE
 International Trade and Theory of
Comparative Advantage
 International trade refers to exchange of goods
and services between one country and other
countries
 Because of geographical conditions and
technological monopoly, countries produce
various products, and no one country can
create all kinds of products
 With free international trade, countries can
exchange their goods with one another
Hence, each country has the opportunity
to purchase all the goods and services from
other countries which it cannot produce

Free international trade appears more in

theory

For economic and political reasons, there

have been trade barriers on the movement
of goods and services among countries
 Bases of International Trade
1. Distribution of economic resources.
 The distribution of natural resources, labor and capital
goods among countries is not even
 When a top Japanese government official saw the
United States, he said God has not been fair in the
distribution of natural resources
 The arable land of Japan is only about 15 percent of its
total land area. And during winter, half of this is covered
with snow
 Countries which have abundant skilled labor are most
efficient in the production of labor-intensive goods.
 Bases of International Trade
2. Technological efficiency
All other things being equal, a country which has the
most efficient technology can produce goods at the
lowest price, with the best quality, and the highest
quantity
Difference in technological efficiency results to
difference in quality and price of products.
 Importance of International Trade
International economics is concerned with allocation
of economic resources among countries.
Such allocation is done in the world markets by
means of free trade; the best products are produced
and sold in a free competitive market
One fundamental principle in international trade is
that one should buy goods and services from a country
which has the lowest price, and sell his goods and
services to a country which has the highest price - this
is good for the buyers and the sellers.
 Importance of International Trade
Another thing is that no country in the world can be
economically independent without a decline in its
economic growth
Even the richest countries buy raw materials for their
industries form the poor countries.
 Barriers to International Trade
In theory, free trade benefits everybody and every
country
It has been said that tariffs and other trade barriers
only encourage inefficiency, restrict commerce, and
reduce the general standard of living.
But the theory of free trade came from a world which
is no longer relevant with existing realities.
During the time of Adam Smith, Great Britain was the
leading industrial power, and was greatly benefited
from free trade.
 Barriers to International Trade
Free trade prospered because there were abundant
world markets and only a few key countries.
Former Harvard professor Henry Kissinger pointed
out that today’s world economy, by contrast, contains
many trading nations of widely different cultural
backgrounds with great variations in labor costs and
standards of living, each claiming sovereign control
over its economic decisions
In such conditions, competition becomes more
ruthless and its impact more drastic.
 Other Arguments for Trade Barriers
1. Military self-sufficiency. There is a need to protect
industries which manufacture goods and materials for
national defense and security. Strategic military goods
are not sold to enemies.
2. Local standard of living. To a country with a high
standard of living, it is argued that tariffs are needed to
protect such living standard. The inflow of cheap
foreign products will reduce the prices of the local
goods, and ultimately wages and the level of living will
also fall.
 Other Arguments for Trade Barriers
3. Local employment. It is contended that be restricting
imports, the level of employment rises. This will
stimulate production in the local economy in view of
the absence of foreign competition. Of course, more
production requires more workers.
 Exchange rates
A foreign exchange is the price of foreign money
relative to the local money.
For example, the price of $1 is ₱53. In other words it
requires 53 units of our peso to buy 1 unit of U.S. dollar.
Under a floating exchange rate, the price of a dollar
relative to our peso is determined by the market forces
of demand and supply.
This means exchange rate between the dollar and the
peso fluctuates. In case the price of a dollar increases,
let us say to ₱55 to $1, then the dollar has appreciated
and the peso has depreciated.
 Exchange rates
Depreciation can also be called currency devaluation.
Strictly speaking, devaluation refers to the increase of
price of gold relative to a currency.
For example, one ounce of gold is worth $60.
Supposing it has become $600, this means the value of
the U.S. dollar has decreased 10 times.
 
 Exchange rates
An exchange rate can be overvalued or undervalued
The value of a U.S. dollar relative to peso is
determined by the demand and supply of dollars.
Supposing the real market value of a dollar is ₱53.
If the official rate of the government (Central Bank) is
₱50, then our peso is overvalued.
Overvalued because it requires only ₱50 and not ₱53
to buy a dollar. It is cheaper to buy goods and services
from a country with undervalued currency than from
the one with an overvalued currency.
 Determinants of Exchange rates
Without government restrictions or regulations on the buy
and sell of dollars, the price of the dollar is determined by
market forces such as:

 1. Relative income changes.

An increase in the purchasing power of the Filipinos tends
to raise the imports of the U.S. goods.
This means demand for U.S. dollars also increases. As a
result, the price of the dollar rises, and the value of our
peso depreciates.
 Determinants of Exchange rates
 1. Relative income changes.
Conversely, a rise in the purchasing power or real income
of the Americans tends to increase imports of Philippine
goods.
Such situation increases the value of the peso relative to
the dollar, because the supply of dollars in the Philippines
increases.
 Determinants of Exchange rates
2. Relative price changes.
In case prices of goods and services are much higher in
the Philippines than in the United States, Filipinos are
inclined to buy from the United States because of cheaper
prices.
This results to a greater demand for dollars, and so its
price increases.
This means the value of the peso declines. On the other
hand, a fall in the prices of goods in the Philippines
increases demand for Philippine products from the U.S.
residents - this reduces the exchange rate of the dollar.
 Determinants of Exchange rates
3. Relative interest rates.
Supposing interest rates are higher in the Philippines than
in the United States.
These attract U.S. investments and reduces Filipino
investments in the U.S.
These results to an increase in the supply of dollars in the
Philippines while the demand for dollars declines.
So, the exchange rate of dollar falls.
Trade Protection for the Less Developed Countries
 The theory of free trade is basically based on the concept
of comparative advantage.
Industrial countries should sell finished products while
agricultural countries should sell raw materials.
In this case, the agricultural countries will have no chance
to industrialize their economies which is the best way to
achieve high economic growth.
Agricultural economies have remained poor because the
prices of their products in the world markets are low while
those of the industrial countries are high.
 
Trade Protection for the Less Developed Countries
 The most widely used trade barriers are tariffs and
import quotas.
A tariff is an excise tax on imported goods while an import
quota limits the number of goods to be imported.
Nations built trade barriers to give their infant industries a
chance to develop and grow.
During the formative industrial development of United
States, Germany, Canada, and other countries in Western
Europe, they protected their infant industries against the
industrial goods of Great Britain.
 Conclusion
 The word had indeed become smaller
due to the development in technology.
This is most true in the field of
telecommunication and transportation
Thus the relations among countries have
become more intense
In this regard, the most important
concern remains to be economic
FISCAL POLICY
 FISCAL POLICY
Fiscal policy refers to the revenue and expenditure
measures of the public budget
 By fiscal policy we mean the process of shaping
taxation and public expenditure to help dampen the
swings of the business cycle and contribute to the
maintenance of a growing, high-employment
economy, free from high or volatile inflation
In formulating fiscal policies, the voters, the
President and his cabinet (executive branch) and the
legislative body (congress or general assembly) are
involved
In a true democratic society, the welfare of the
people is promoted through the budget
The most important needs of the economy and
the people are given top priority

However, in not a few cases, political interests of

government officials are the first considerations

For instance, many government projects appear

immediately before the election time
The objectives of fiscal policy are:

1. Provision for social goods

2. Equitable distribution of wealth and income
3. Maintain high employment
4. Ensure price stability; and
5. Sustain a satisfactory rate of economic growth
The national budget contains specific provisions
for the funding of projects and programs geared
toward the attainment of the aforementioned
policy objectives
The budget is focused towards the promotion of
the welfare of the poor masses
It is the President of the Republic, together with
the cabinet members, who prepare the national
budget
The proposed budget is submitted to the
legislature for discussion and approval
Discretionary Fiscal Policy

A discretionary fiscal policy is one in which the

government changes tax rates or spending
programs, usually by passing new legislation

The principal weapons of discretionary fiscal

policy are public works, other capital programs,
public-employment projects, and changes in tax
rates
Public works include creating jobs, building
hospitals, schools, and roads as well as other
infrastructures needed for a growing economy

Other public works investments, such as

electrification, proved enormously beneficial to
underdeveloped areas, and transportation
projects
At the other extreme from highly capital-
intensive, long-duration public works projects are
public-employment projects
The idea behind these programs is simple: If the
problem is high unemployment, why not just
create jobs directly? Public-employment projects
are designed to hire unemployed workers for a
short time in public jobs, after which people can
move to regular jobs in the private sector
A third approach to discretionary fiscal policy is
making temporary changes in income taxes

Tax cuts can keep disposable incomes from

falling and prevent an economic decline from
snowballing into a deep recession

Varying tax rates can be used to either stimulate

or restrain an economy
 Shortcomings of Fiscal Policies
Many government programs and projects are
very good
They are always intended for the good of the
people, especially the poor masses
However, when it comes to results, it is already
different
Such projects are not properly managed or
implemented
Either the implementers or managers are
inefficient or some very powerful groups have
hampered the success of such programs for
economic or business reasons
For example, the land reform program in most
of the less developed countries is a failure.
Fiscal policy is very effective during economic
depression
The government has to spend more money on
public works in order to create employment
This results to more income and consumption
that stimulate the private sector to produce goods
and services
And this is the beginning of economic recovery
 Fiscal Functions
However, during a period of economic boom,
the government finds it politically difficult to
increase taxes and reduce government
expenditures
 Many people do not understand why the
government should increase taxes and reduce
government expenditures at the time when the
economy is prosperous
They do not know that such fiscal measures are
designed to prevent inflation
There are three major fiscal functions:

1. ALLOCATION FUNCTION
 Private goods like rice, soap, or cake are allocated
in the market
 Those who have the money and they are willing to
acquire such goods can purchase them
 They just exchange their money with such goods.
 However, in the case of most social goods it is not
efficient to allocate them through the market
system
 For example, Ayala avenue is a public or social
good. If all those who use the street, including
pedestrians, have to pay, then there would be
a great delay in the movement of persons and
transportation facilities
 Another example is the anti-malaria or anti-
pollution project in a community
 It is not economically feasible to exclude those
houses that do not like to buy the project
 Whether they pay or not they get the benefits
of the project
 So, there is no need to sell the project to the
community
 If it is the felt need of the community, then the
government should clean the community
through health and sanitation programs
 Such programs are funded by taxes paid by the
people
 The government also sells private goods at a
lower price, and in many countries in Europe
and America, such goods are even free for
those who cannot afford to buy them in the
market
 They are given free food, clothing and shelter,
medicare and education

 In the Philippines, there are also goods and

services sold by the government at a lower
price or even free

 But these are limited due to our inadequate

financial resources
2. Distribution function

 The issue of the fair distribution of wealth and

income has been a problem from ancient
times to modern times
 Some economists believe that just distribution
of wealth and income is only for politicians,
philosophers and poets
 In economics, income distribution is
determined by the prices of factor ownership,
like land, labor, capital, and entrepreneurship
ability
 This economic theory appears good but in
countries where there is no just distribution of
the factors of production, only very few have
high incomes while the great masses have very
low incomes
 In less developed countries, most of the
people own only labor
 Because of very limited economic activities,
there is a surplus of labor supply
 Thus, wages are very low. This means most
people in countries live below poverty line
 Social reforms fight for distributive justice. They
claim that the productive resources of society
should be fairly distributed among its members
 If this is done, the gap between the rich and poor
is narrowed
 Economic opportunities are available to all
regardless of religion, race or belief
 Such situations exist only in the richest countries
of the world
 Even a poor country, through its fiscal policies can
contribute to distributive justice. Progressive
taxation is a good example. This is based on the
ability to pay.
3. Stabilization function
 One goal of fiscal policy is the attainment of
economic stability
 When there are no problems of
unemployment and inflation, then the
economy is said to be stable
 The government through the fiscal tools of
taxation, borrowings, and expenditures can
minimize or eliminate the problems of
unemployment and inflation
 The government should give top priority to
projects which are very efficient in generating
jobs and incomes for the people
 Such productive projects do not only reduce
unemployment but also inflation rate
 More supply of goods means lower prices
 This is the law of supply and demand
 In the same manner, taxation can help in
reducing inflation rate
 If the kind of inflation is caused by oversupply
of money in relation to the number of goods
available in the economy, the solution of the
government is increase taxes in order to
reduce the disposable income of the buyers
 Most individuals are not happy about such
fiscal policy
 They believe that taxes should be lowered
during inflation because their purchasing
power falls
 What they do not understand is that when
there is an oversupply of money, demand for
goods and services increases
 Since supply is limited, prices go up
 The tax increase should only be temporary just
enough to control the demand for goods and
services while efforts are being done by the
government in increasing supply of goods and
services
TAXATION
General Principles of Taxation
Taxation is a means of raising funds for the
operations of the government, especially its
public services
 Taxes are very important as they constitute
the life of our economy and society
 It is not possible for a government to exist
permanently if it has no funds
Most of our programs and projects are
financed by tax revenues
The rest are funded by local and foreign
loans
Essential Characteristics of Tax
1. It is an enforced contribution. A tax is not
a voluntary payment or donation and its
imposition is in no way dependent upon
the will or assent of the person taxed.
2. It is generally payable in money.
3. It is proportionate in character. A tax is
laid by some rule of apportionment
according to which persons share the
public burden. It is ordinarily based on
the ability to pay.
4. It is levied of persons or property. A tax
may also be imposed on acts, transactions,
rights or privileges. In each case, however, it
is only a person who pays the tax.

5. It is levied by the state which has

jurisdiction over the person or property. The
object to be taxed must be subject to the
jurisdiction of the taxing state. This is
necessary in order that the tax can be
enforced.
6. It is levied by the law-making body of the
state. The power to tax is a legislative power
which under the constitution only Congress
can exercise through the enactment of tax
statutes.
7. It is levied for public purpose or purposes.
Taxation involves, and a tax constitutes, a
charge or burden imposed to provide income
for public purposes – the support of the
government, the administration of the law,
or the payment of public expenses.
Classification of Taxes
They are classified:
1. As to subject matter or object:
a. Personal, poll, or capitation - Tax of a
fixed amount imposed on persons residing
within a specified territory, whether citizens
or not, without regard to their property or
the occupation or business in which they
may be engaged. Example: Community
(formerly residence) tax.
b. Property - Tax imposed on property, whether
real or personal, in proportion either to its
value, or in accordance with some other
reasonable method of apportionment. Example:
Real estate tax.

c. Excise - Any tax which does not fall within the

classification of a poll tax or property tax. It is
said that an excise tax is a charge imposed upon
the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation,
profession or business. Examples: Income tax,
value-added tax, estate tax
Note: This tax is not to be confused with
excise tax imposed on certain specified
articles manufactured or produced in, or
imported into, the Philippines, “for domestic
sale or consumption or for any other
disposition.”
2. As to who bears the burden:
a. Direct - Tax which is demanded from the
person who also shoulders the burden of the
tax; or tax for which the taxpayer is directly
liable or which he cannot shift to another.
Example: Corporate and individual income taxes.

b. Indirect - Tax that is demanded from one

person in the expectation and intention that he
shall indemnify himself at the expense of
another. Examples: Value-added tax; excise taxes
on certain specific goods; customs duties.
 3. As to determination of amount:
a. Specific - Tax of a fixed amount imposed by the
head or number, or by some standard of weight or
measurement; it requires no assessment (valuation)
other than a listing or classification of the objects to
be taxed. Examples: Taxes on distilled spirits, wines,
fireworks, and others.
b. Ad valorem - Tax of a fixed proportion of the
value of the property with respect to which the tax
is assessed; it requires the intervention of assessors
or appraisers to estimate the value of such property
before the amount due from each taxpayer can be
determined. Examples: Real estate tax; excise taxes
on cigarettes, gasoline and others; customs duties
4. As to purpose:
a. General, fiscal, or revenue - Tax imposed
for the general purposes of the government
i.e., to raise revenue for governmental
needs. Examples: Income tax; value-added
tax, and almost all taxes.
b. Special or regulatory - Tax imposed for a
special purpose, i.e., to achieve some social
or economic ends irrespective of whether
revenue is actually raised or not. Example:
Protective tariffs or customs duties on
imported goods.
5. As to scope:
a. National - Tax imposed by the national
government. Examples: National internal
revenue taxes; customs duties and national
taxes imposed by special laws.

b. Municipal or local - Tax imposed by

municipal corporations or local government
units. Examples: Real estate tax; professional
tax.
6. As to graduation or rate:
a. Proportional - Tax based on a fixed
percentage of the amount of the property,
receipts, or other bases to be taxed.
Examples: Real estate taxes; value-added tax;
and other percentage taxes.

b. Progressive or graduated - Tax the rate of

which increases as the tax base or bracket
increases. Examples: Income tax; estate tax;
donor’s tax.
c. Regressive - Tax the rate of which
decreases as the tax base or bracket
increases, i.e., the tax rate and the tax base
move in opposite directions. We have no
regressive taxes.
Tax Distinguished from other Terms

1. Toll – It has been defined as a sum of

money or the use of something, generally
applied to the consideration which is paid for
the use of a road, bridge or the like, of a
public nature.
a. A toll is a demand of proprietorship,
while a tax is a demand of sovereignty;
 b. A toll is paid for the use of another’s
property, while tax is paid for the support of
the government.
c. The amount of toll depends upon the
cost of construction or maintenance of the
public improvement used, while there is
generally no limit on the amount of tax that
may be imposed; and
d. A toll may be imposed by the
government or private individuals or entities,
while a tax may be imposed only by the
government.
2. Penalty – It is any sanction imposed as a
punishment for violation of law or acts
deemed injurious. Thus, the violation of tax
laws may give rise to imposition of penalty.
a. A penalty is designed to regulate
conduct, while a tax is generally intended to
raise revenue; and
b. A penalty may be imposed by the
government or private individuals or entities,
while a tax may be imposed only by the
government.
3. Special assessment – It is an enforced
proportional contribution from owners of
lands especially benefited by public
improvements.
a. A special assessment is levied only on
land;
b. It is not a personal liability of the person
assessed, i.e., his liability is limited only to the
land involved;
c. It is based wholly on benefits; and
d. It is exceptional both as the time and
place. A tax, on the other hand, has general
application.
4. License or permit fee – It is a charge
imposed under the police power for the
purposes of regulation. License is rather in
the nature of a special privilege, of a
permission or authority to do what is within
its terms.
a. License fee is the legal compensation or
reward of an officer for specific services,
while tax is an enforced contribution
assessed by sovereign authority to defray
public expenses;
 b. It is imposed for regulation, while a tax
is levied fro revenue;
c. It involves an exercise of police power,
while a tax involves the exercise of the taxing
power;
d. Its amount should be limited to the
necessary expenses of inspection and
regulation, while there is generally no limit
on the amount of tax that may be imposed;
 e. It is imposed on the right to exercise a
privilege, while a tax is imposed also on
persons and property; and
f. Failure to pay a license fee makes the
act or business illegal while failure to pay a
tax does not necessarily make the act or
business illegal.
5. Debt – A tax is not a debt in the ordinary
sense.
a. A debt is generally based on contract,
express or implied, while tax is based on law;
b. A debt is assignable, while a tax cannot
generally be assigned;
c. A debt may be paid in kind, while a tax
is generally payable in money;
d. A debt may be the subject of set-off or
compensation, while a tax is generally not;
 e. A person cannot be imprisoned for the
non-payment of debt, while imprisonment is
a sanction for non-payment of tax;
f. A debt draws interest when it is so
stipulated or when there is default, while a
tax does not draw interest except only when
delinquent.
Requirements of a good tax system:

1. The distribution of the tax burden should

be equitable. This means that a person has
to pay tax based on his ability to pay.
2. Taxes should not ruin the efficient market
system.
3. Taxes should serve as tools in facilitating
economic stability and economic growth.
Taxes can greatly help solve or minimize the
economic problems of inflation and
unemployment.
4. Tax administration should be efficient.
This refers to the productivity of tax
collection.
5. The cost of tax administration and its
compliance should be economical.
Approaches to Equitable Taxation

Good citizens have the responsibility to

contribute a fair share to the cost of
government
Certainly, the payment of tax is a burden to
all those who have the duty to pay because
of their income and wealth
But such burden can be made less painful
by the government trough the concepts
benefit received and ability to pay.
1. Benefits received: People pay their taxes
in accordance with the benefits they
received from government projects. It is like
buying goods and services in the market.
Those who do not receive benefits do not
pay taxes. However, there are government
projects in which it is not possible to exclude
those who do not pay, like antipollution
project. Moreover, there are spillover
benefits whose payments are difficult to
determine.
2. Ability-to-pay: Such ability is
determined by their income and
wealth. Those who have more incomes
or wealth pay more taxes than those
with less incomes or wealth.
Tax Structures
 The following tax structures show the
relationship between rates and
incomes:
1. Progressive tax – is one whose rate
increases as income increases.
2. Regressive tax – is when its rate decreases
as income increases. Actually, there are no
regressive taxes. Our tax system is said to be
regressive because the main portion of our
tax revenues comes from indirect taxes.
3. Proportional tax – is one whose rate
remains constant regardless of the size
of the income.
Exemptions from Taxation

It has been the policy of the government to

give tax exemptions to certain economic
activities in order to encourage and promote
their growth such as cooperatives, cottage
industries, infant industries and rural banks
among others
In addition, organizations or institutions
which are engaged in non-profit
undertakings, together with some specific
financial benefits or incomes, are
exempted by the Tax Code and special
laws. Examples are:

1. Corporations or associations organized

and operated solely for religious, charitable,
scientific, athletic, or cultural purposes.
2. Benefits received by members from
GSIS
3. Social security benefits, retirement
gratuities, pensions, and other similar
benefits received by retired employees
4. Benefits received from the U.S.
government through the U.S. Veterans
Administration
5. Donations to special welfare, cultural
and charitable institutions
INCOME TAXATION
 Income Tax
Income tax has been defined as a tax on all
yearly profits arising from property,
profession, trade or business, or as a tax on a
person’s income, emoluments, profits and
the like
It is generally regarded as an excise tax
It is not levied upon persons, property,
funds or profits but upon the right of a
person to receive income or profits
Purposes of income taxation

1. To provide large amounts of revenues

2. To offset regressive sales and consumption
taxes
3. Together with estate tax, to mitigate the
evils arising from the inequalities in the
distribution of income and wealth, which are
considered deterrents to social progress, by
imposing a progressive scheme of taxation
Income
Income, in its broad sense, means all
wealth which flows into the taxpayer other
than as a mere return on capital [Section 36,
Revenue Regulations 2]
 Income means accession to wealth, gain
or flow of wealth
Conwi v. CTA [213 SCRA 83]: Income may
be defined as an amount of money coming
to a person or corporation within a specified
time, whether as payment for services,
interest, or profit from investment
Commissioner v. BOAC [149 SCRA 395]: Income
means “cash received or its equivalent.” It is the
amount of money coming to a person within a
specific time. It is distinct from capital for, while
the latter is a fund, income is a flow.

Fisher v. Trinidad [43 Phil 973]: Stock dividend is

not an income. It merely evidences the interest of
the stockholder in the increased capital of the
corporation. An income may be defined as the
amount of money coming to a person or
corporation within a specified time, whether as
payment for services, interest, or profit for
investment.
 Income vs. capital
 Capital is a fund or property existing at one
distinct point of time while income denotes a
flow of wealth during a definite period of time

 The essential difference between capital and

income is that capital is a fund or property
existing at one distinct point of time; income is
a flow of services rendered by that capital by
the payment of money from it or any other
benefit rendered by a fund of capital in relation
to such fund through a period of time. Capital is
wealth; income is the service of wealth. [Madrigal v.
Rafferty, 38 Phil 414]
Capital is the tree while income is
the fruit
 Sources of Income
What produces income?
 The term “source of income” is not a place
but the property, activity or service that
produced the income. In the case of income
derived from labor, it is the place where the
labor is performed; in the case of income
derived from the use of capital, it is the place
where the capital is employed; and in the
case of profits from the sale or exchange of
capital assets, it is the place where the sale or
transaction occurs.
 The source of an income is the
property, activity or service that
produces the income
 For the source of income to be
considered as coming from the
Philippines, it is sufficient that
income is derived from activity
within the Philippines
Sources of income
1.Sources within the Philippines
2.Sources without the Philippines
3.Sources partly within and partly
without the Philippines
Taxable income
 The term “taxable income” means
the pertinent items of gross income
specified in the NIRC, less the
deductions and/or personal and
additional exemptions, if any,
authorized by such types of income
by the NIRC or other special laws.
Requisites for income to be taxable

1. There must be a gain or profit

2. The gain must be realized or received
3. The gain must not be excluded by law
or treaty from taxation
Gain must be realized or received

 This implies that not all economic

gains constitute taxable income.
Thus, a mere increase in the value of
property is not income but merely an
unrealized increase in capital.
When is income considered received?

1.actual receipt
2.constructive receipt
Income constructively received
 Income which is credited to the
account of or set apart for a taxpayer
and which may be drawn upon by
him at any time is subject to tax for
the year during which so credited or
set apart, although not then actually
reduced to possession.
 To constitute receipt in such a case,
the income must be credited to the
taxpayer without any substantial
limitation or restriction as to the
time or manner of payment or
condition upon which payment is to
be made. [Section 52, Revenue
Regulations 2]
Examples of constructive receipt

1. Interest coupons which have matured and

are payable, but have not been cashed.
2. Defaulted coupons are income for the year
in which paid.
3. Partner’s distributive share in the profits
of a general professional partnership is
regarded as received by the partner,
although not yet distributed.
Are the following items income?

Found treasure - YES

Punitive damages - YES
Damages for breach of promise or
alienation of affection - YES
Worthless debts subsequently collected -
YES
Tax refund – NO (but yes if the tax was
previously allowed as a deduction and
subsequently refunded or credited, as
benefit accrued to the taxpayer; see
discussion on tax as a deductible item)
Non-cash benefits - YES
Income from illegal sources - YES
Psychological benefits of work - NO
Give away prizes – YES
Scholarships/fellowships – YES
Stock dividends - NO
Tests to determine realization of income

1. Severance test
2. Substantial alteration of interest test
3. Flow of wealth test
 Classes of Income

Kinds of taxable income or gain

1. Capital gains - Capital gains are gains or

income from the sale or exchange of capital
assets. These include:
a. Income from dealings in shares of stock
of domestic corporation whether or not
through the stock exchange;
b. Income from dealings in real property
located in the Philippines; and
c. Income from dealings in other capital
assets other than (a) and (b).
2. Ordinary gains - Ordinary gains are gains or
income from the sale or exchange of property
which are not capital assets.
a. Business income
Income from trading, merchandising,
manufacturing or mining
Income from practice of profession
Note: The term “trade or business” includes the
performance of the functions of a public office.
[Section 22(S), NIRC]
b. Passive income
Passive income from Philippine sources subject
to final tax
Passive income from Philippine sources not
subject to final tax
Passive income from sources outside the
Philippines
c. Passive income again
Interest income
Rentals/Leases
Royalties
Dividends
Annuities and proceeds of life
insurance/other types of insurance
Prizes and winnings, awards, and rewards
Gifts, bequests, and devises
d. Other types of passive income
Approaches in income recognition

1. Schedular system
The schedular system is one where the
income tax treatment varies and is made to
depend on the kind or category of taxable
income of the taxpayer
 
2. Global system
The global system is one where the tax
treatment views indifferently the tax base
and generally treats in common all
categories of taxable income of the taxpayer
 Classes of Income Taxpayers

Basis of classification of taxpayers

1. corporations v. individuals
2. nationality
3. Residence

Classes of income taxpayers

1. Individuals
a. Resident citizens
b. Non-resident citizens
c. Resident aliens
d. Non-resident aliens
i. engaged in trade or business in the
Philippines, or
ii. not engaged in trade or business in the
Philippines
iii. Note: A non-resident alien individual who
shall come to the Philippines and stay
therein for an aggregate period of more
than one hundred eighty (180) days during
any calendar year shall be deemed a non-
resident alien doing business in the
Philippines. [Section 25(A)(1), NIRC]
2. Corporations
a. Domestic corporations
b. Resident foreign corporations
c. Non-resident foreign corporations

3. Special
a. Proprietary educational institutions and
hospitals that are non-profit
b. Insurance companies
c. General professional partnerships
d. Estates and trusts
Who is a non-resident citizen?
The term “non-resident citizen” means:
1. A citizen of the Philippines who
established to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite
intention to reside therein.
2. A citizen of the Philippines who leaves
the Philippines during the taxable year to
reside abroad, either as an immigrant or
for employment on a permanent basis.
3. A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year.
4. A citizen who has been previously
considered as a non-resident citizen and
who arrives in the Philippines at any time
during the taxable year to reside
permanently in the Philippines.
Corporation
A corporation, as used in income taxation,
includes partnerships, no matter how created
or organized, joint stock companies, joint
accounts (cuentas en participacion), and
associations or insurance companies.
However, it does not include:
a. a general professional partnership; and
b. a joint venture or consortium formed for the
purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
operating or consortium agreement under a
service contract with the government.
Resident foreign corporation - The term
applies to a foreign corporation engaged in
trade or business within the Philippines.
 
Non-resident foreign corporation - The
term applies to a foreign corporation not
engaged in trade of business in the
Philippines.
 General professional partnership v.
Ordinary business partnership

General professional partnerships

General professional partnerships are
partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business. [Section
22(B), NIRC]
 Persons engaging in business as partners in a
general professional partnership shall be liable
for income tax only in their separate and
individual capacities. [Section 26, NIRC]
 General professional partnership v.
Ordinary business partnership

General professional partnerships

General professional partnerships are
partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business. [Section
22(B), NIRC]
 Persons engaging in business as partners in a
general professional partnership shall be liable
for income tax only in their separate and
individual capacities. [Section 26, NIRC]
Ordinary business partnership

 An ordinary business partnership is

considered as a corporation and is thus
subject to tax as such.
 Partners are considered
stockholders and, therefore, profits
distributed to them by the partnership
are considered as dividends.
The essential elements of a partnership
are:
(1) an agreement to contribute money,
property, or industry to a common
fund; and
(2) an intent to divide the profits among
the contracting parties.
 Unregistered partnership v.
co-ownership for tax purposes
 If the activities of co-owners are limited
to the preservation of the property and
the collection of the income therefrom, in
which case, each co-owner is taxed
individually on his distributive share in the
income of the co-ownership.
 If the co-owners invest the income in
business for profit, they would be
constituting themselves into a
partnership taxable as a corporation.
 General Principles of Income Taxation
in the Philippines

1. A citizen of the Philippines residing

therein is taxable on all income derived
from sources within and without the
Philippines.
2. A non-resident citizen is taxable only
on income derived from sources within
the Philippines.
3. An individual citizen of the Philippines
who is working and deriving income
from abroad as an overseas contract
worker is taxable only on income from
sources within the Philippines
 Provided, that a seaman who is a
citizen of the Philippines and who
receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged
exclusively in international trade shall
be treated as an overseas contract
worker.
4. An alien individual, whether a
resident or not of the Philippines, is
taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on
all income derived from sources within
and without the Philippines.
6. A foreign corporation, whether
engaged or not in trade or business in
the Philippines, is taxable only on
income derived from sources within the
Philippines.
 Some rules on taxation of the various
taxpayers

Who are taxed on their global income?

1. Resident citizens
2. Domestic corporations

Who are taxed only on their income from

sources within the Philippines?
1. Non-resident citizen
2. Overseas contract workers
3. Alien individual, whether a resident or not of
the Philippines
4. Foreign corporation, whether engaged or not
in trade or business in the Philippines
 
Who are taxed based only on their net
income?
1. Resident and non-resident citizens
2. Resident alien and non-resident alien
engaged in trade or business in the
Philippines
3. Domestic corporation
4. Resident foreign corporation
Who are taxed based on their gross
income?
1. Non-resident alien not engaged in
trade or business in the Philippines
2. Non-resident foreign corporation
Treatment of some special items

1. Forgiveness of indebtedness
The cancellation and forgiveness of
indebtedness may, dependent upon the
circumstances, amount to:
a. a payment of income;
b. a gift; or
c. a capital transaction.
If, for example, an individual performs
services for a creditor who, in
consideration thereof cancels the debt,
income to that amount is realized by the
debtor as compensation for his service.

If, however, a creditor merely desires to

benefit a debtor and without any
consideration thereof cancels the debt, the
amount of the debt is a gift from the
creditor to the debtor and need not be
included in the latter’s gross income.
If a corporation to which a
stockholder is indebted forgives the
debt, the transaction has the effect of
payment of a dividend. [Section 50,
Revenue Regulations 2]

2. Recovery of amounts previously

written off
Considered as income
 Guide Questions in Determining
Taxable Income

1. Is there a gain or income?

2. Is the gain or income taxable? Is it excluded
or exempt?
3. What type of income is it: income includible
in the gross income, passive income, capital
gains, income derived from other source?
4. To what class does the taxpayer belong:
individual or corporate, citizen or not or
domestic or foreign, resident or not, engaged
in trade or business or not?
 Tax on Individuals
Preliminary points on taxation of individuals
How taxed?

An individual citizen, both resident and non-

resident, and an individual resident alien are
taxed similarly.
A non-resident alien engaged in trade or
business shall be subject to the same income
tax rates as a citizen and a resident alien.
Thus, only a non-resident alien who is not
engaged in trade or business is taxed
differently from the other individual
taxpayers.
On what income taxed?

A resident citizen is taxed on all

income from sources within and outside
the Philippines. The tax base is net
income.
A non-resident citizen is taxed only on
income from sources within the
Philippines. The tax base is net income.
An alien, whether resident or not, is
taxed only on income from sources
within the Philippines. However, the tax
base for a resident alien and non-
resident alien engaged in trade or
business is net income while the tax
base for a non-resident alien not
engaged in trade or business is gross
income.
 Types of income taxed

1. Items of income included in the gross

income
2. Passive income
3. Capital gains from sale of shares of
stock not traded in the stock exchange
4. Capital gains from the sale or
exchange of real property
Tax on Individual Citizen (Resident and
Non-Resident) and Individual Resident
Alien

Items of income included in the gross

income
A schedular rate of five percent (5%) to
₱125,000 + 32% of excess over
₱500,000.00 by 01 January 2000 is
imposed on items of income of an
individual citizen and individual resident
alien which are properly includible in the
gross income.
 Rates of tax on certain passive income

1. Interest from any currency bank deposit

and yield or any other monetary benefit from
deposit substitutes and from trust funds and
similar arrangements – 20%
2. Royalties, except on books, as well as other
literary works and musical compositions –
20%
3. Royalties on books, literary works and
musical compositions – 10%
4. Prizes over ₱10,000.00 – 20%
Note: Prizes less than ₱10,000.00 are
included in the income tax of the individual
subject to the schedular rate of 5% up to
₱125,000 + 32% of excess over
₱500,000.00)
5. Other winnings, except PCSO and lotto,
derived from sources within the
Philippines – 20%
6. Interest income derived by a resident
individual (Note: non-resident citizen not
included) from a depository bank under
the expanded foreign currency deposit
system – 7.5%
7. Interest income from long-term
deposit or investment evidenced by
certificates prescribed by BSP
a. Exempt if investment is held for more
than five years
b. If investment is pre-terminated,
interest income on such investment
shall be subject to the following rates:
20% - if pre-terminated in less than 3
years
12% - if pre-terminated after 3 years to
less than 4 years
5% - if pre-terminated after 4 years to
less than 5 years
8. Cash and/or property dividends
Ten percent (10%) final tax by 01
January 2000 on the following:
a. Cash and or property dividend
actually or constructively received from
a domestic corporation or from a joint
stock company, insurance or mutual
fund companies and regional operating
headquarters of multinational
companies
b. Share of an individual in the distributable
net income after tax of a partnership except a
general professional partnership of which he
is a partner
c. Share of an individual in the net income
after tax of an association, joint account, or a
joint venture or consortium taxable as a
corporation of which he is a member or a co-
venturer

 
Capital gains from the sale of shares of stock
not traded in the stock exchange
1. Not over ₱100,000 – 5%