Unit 2 - Growth And Development

OVERVIEW:

There are several meanings attached to the idea of development; the term is complex,
contested, ambiguous, and elusive. However, in the simplest terms, development can be
defined as bringing about social change that allows people to achieve their human potential. An
important point to emphasize is that development is a political term: it has a range of meanings
that depend on the context in which the term is used, and it may also be used to reflect and to
justify a variety of different agendas held by different people or organizations. The idea of
development declared by the World Bank, for instance, is very different from that promoted by
Greenpeace activists. This point has important implications for the task of understanding
sustainable development, because much of the confusion about the meaning of the term
'sustainable development' arises because people hold very different ideas about the meaning of
'development' (Adams 2009). Another important point is that development is a process rather
than an outcome: it is dynamic in that it involves a change from one state or condition to
another. Ideally, such a change is a positive one - an improvement of some sort (for instance,
an improvement in maternal health). Furthermore, development is often regarded as something
that is done by one group (such as a development agency) to another (such as rural farmers in
a developing country). Again, this demonstrates that development is a political process,
because it raises questions about who has the power to do what to whom.

COURSE OUTCOME: After the completion of this unit, the students will be able to:

1. Identify the classification, diversity & common characteristics of developing countries.

2. Identify various tools to measure economic development

COURSE MATERIAL:

THE EDITORIAL
Mario Pezzini Director, OECD Development Centre, 2020

The world is changing fast. The Coronavirus (COVID-19) crisis has impacted our lives in
previously unimaginable ways. The way we choose to adapt to this new reality – together or apart,
accelerating our efforts to address existing challenges or deferring them – will shape our reality in
the years to come.

The OECD Development Centre believes the international response to COVID-19 must combine
immediate and coordinated efforts to confront the health crisis and protect the most vulnerable
with a medium-term and long-term commitment, to enhance resilience by strengthening the local
economic and industrial base and improving national health and social protection systems.

As we survey current policy responses across the globe, we echo the voices from across the
private sector that call for avoiding protectionism and facilitating the continuous flow of goods and
services, including food, drugs and medical supplies. There are increasing concerns that as COVID-
19 will continue spreading across the globe, further trade restrictions could affect badly needed
medical supplies and generate supply-chain disruptions in food or other essential goods and
services. The repercussions of this would be particularly severe for developing countries.

Heterogeneity across developing economies and uncertainty as to the length and depth of the
effect of COVID-19 make it difficult to estimate the full impact of the crisis. There is a risk that the
global slowdown and the shutdown of domestic economic activities can erase years of hard-won
progress towards poverty reduction and worsen pre-existing structural challenges and inequalities,
 (cont )
compromising the already difficult trajectory to the Sustainable Development Goals (SDGs). While
the situation is severe, this extraordinary context could also be an opportunity to have governments
and other stakeholders work hand in hand to rebuild social trust and implement the long-term
policy reforms needed to strengthen fiscal capacities, increase resilience and promote a more
inclusive recovery.

This edition of the Business Insights on Emerging Markets comes at a critical time and is a
welcome contribution to the discussion on the policy levers that can bring about this recovery. It
provides private sector perspectives on existing barriers and potential enablers for business in areas
that can contribute to long-term investment and sustainable growth across emerging markets, from
new technologies in Latin America and smart cities in Asia to production transformation in Africa. In
spite of the pandemic, it will be more important than ever before to remain focused on pending
structural reform agendas included in this report, such as improving the investment climate,
promoting innovation, enhancing hard and soft infrastructure and closing the digital gap in terms
quality and coverage.

Even as we address aspects of immediate concern we must not lose sight of this long-term view.
Once we have managed this crisis, the challenges that existed before it will remain, or will be
exacerbated. The Development Centre will continue to promote a dialogue across countries at
different levels of development, together with a multiplicity of economic actors, including the
private sector, to design a truly global and sustainable recovery .

By:
Mario Pezzini Director, OECD Development Centre, 2020

The above material can be used as the student’s assignment for the next meeting. This
may be included in the course guide.

What is Economic Growth?

Display Slide, to discuss the difference about Economic Growth and Development. Professor
John L. Cornwall Professor of Economics, Dalhousie University, Halifax, Nova Scotia. Author
of The Theory of Economics defined “Economic growth” as, the process by which a nation’s
wealth increases over time. Although the term is often used in discussions of short-term
economic performance, in the context of economic theory it generally refers to an increase in
wealth over an extended period.
Growth can best be described as a process of transformation. Whether one examines an
economy that is already modern and industrialized or an economy at an earlier stage of
development, one may still find that the process of growth is uneven and unbalanced. Economic
historians have attempted to develop a theory of stages through which each economy must
pass as it grows. Early writers, given to metaphor, often stressed the resemblance between the
evolutionary character of economic development and human life—e.g., growth, maturity, and
decadence. Later writers, such as the Australian economist Colin Clark, have stressed the

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dominance of different sectors of an economy at different stages of its development and
modernization.

Economic growth is usually distinguished from economic development, the latter term being
restricted to economies that are close to the subsistence level. The term economic growth is
applied to economies already experiencing rising per capita incomes (Household’s income).

What is Economic Development?

It is defined as a sustained increase in the economic standard of living of a country’s

population, normally accomplished by increasing its stock of physical and human capital and
improving its technology.

Economic growth and economic development are often used interchangeably. However,
there are distinctions between the two concepts.

LEARNING ACTIVITY/:

The students will be asked to do a research output about countries with emerging economy. A
hard copy is expected to be submitted at the Guard House a week after the midterm.

READINGS:

Read Business Insights on Emerging Markets (Pls click https://bit.ly/2RTd1wy) and

http://www.oecd.org/dev/

MEASUREMENT:
The students are scheduled to take the on line quiz as per Course Guide.

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REFERENCE:

Payumo, C.S., Ronan, J.R., Maniego, N.L. & Camba, A.L. (2012). Understanding Economics.
Alteo Digital & Printers: Manila. Part 3. 145-236.
Todaro, M. P., & Smith, S. (2015). Economic Development (12th ed.). Pearson: New York,
United States. Chapter 13. 678-705.

https://www.google.com/search?
q=characteristic+of+an+emerging+economy&oq=characteristic+of+an+emerging+economy&aq
s=chrome..69
https://www.google.com/search?
q=what+is+development+in+economics&oq=What+is+development+in+ However,

https://www.britannica.com/topic/economic-growth

Lesson 4 – Development and Growth Concepts

LEARNING MATERIAL:

John Maynard KeynesJohn Maynard Keynes, detail of a watercolour by Gwen Raverat,

about 1908; in the National Portrait Gallery, London.Courtesy of the National Portrait Gallery, London

Theories of Growth
In discussing theories of growth a distinction must be made between theories designed to
explain growth (or the lack of growth) in countries that are already developed and those
concerned with countries trapped in circumstances of poverty. Most of what follows will be
confined to the former.

As the British economist John Maynard Keynes pointed out in the 1930s, saving and

investment are not usually done by the same persons. The desire to save does not necessarily
generate investment. If savers attempt to save a larger share of their income than before
(thereby consuming less) and if this is not matched by an equal increase in the desire of others
to invest, total spending will decline. A natural reaction on the part of business will be to cut
back on production, thereby reducing incomes earned in production. The final effect may be
a cumulative movement downward as total demand becomes insufficient to employ all of

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the labour force. This break in the circular flow of income and expenditure suggests the
possibility of a capitalist economy alternately experiencing periods of prolonged and
severe unemployment (when desired savings at full employment exceed what the economy
wishes to invest at full employment) and periods of serious inflation (when the inequality is
reversed). This situation had not been the case historically for developed economies until the
early 1970s. In the following discussion, some attention will be paid to the ways in which the
various theories of growth account for this important historical fact.

 Role of the Entrepreneur

Modern growth theory can be said to have started with Joseph A. Schumpeter. Unlike
most Keynesian or pre-Keynesian theorists, Schumpeter laid primary stress on the role
of the entrepreneur, or businessman. It was the quality of his performance that
determined whether capital would grow rapidly or slowly and whether this growth would
involve innovation and change—i.e., the development of new products and new
productive techniques. Differences in growth rates between countries and between
different periods in any one country could be traced largely to the quality of
entrepreneurship. The latter in turn reflected certain historical and cultural values carried
by the business class. Schumpeter also attributed much of the growth of technical
progress and of the supply of labour to the entrepreneur. Thus, in more modern
terminology, Schumpeter’s explanation of why demand and supply have grown more or
less at the same rate would be that supply adjusted to demand while demand in turn
reflected the activities and investments of the entrepreneur.

Schumpeter believed that capitalism by its very success “sows the seeds of its own
destruction.” The American economist Alvin H. Hansen argued in the late 1930s that
capitalism was in trouble in the United States for other reasons. According to Hansen,
the closing of the geographic frontier, the decline in the rate of population growth, and
the capital-saving character of recent innovations had all worked to increase the
likelihood of stagnation by reducing the need for investment. The savings available in a
mature economy would tend to exceed the amount that the economy would want to
invest (at levels of full employment) and by progressively larger amounts as time went
on. This condition naturally would lead to increasing rates of unemployment as the
discrepancy between demand and potential output widened. Hansen’s views were very
much coloured by the economic conditions of the 1930s. The record of the three
decades after World War II did much to overcome the pessimism generated by the Great
Depression.

 The role of Investment

In Keynes’s General Theory, investment played a key role in that it was presented as the
most important factor governing the level of spending in an economy, despite the fact
that it typically was only one-fifth to one-sixth of total spending. This paradox can be
understood in terms of a concept also developed in the 1930s, the multiplier. The
multiplier was the amount by which a change in investment would be multiplied in
achieving its final effect on incomes or expenditures. If, for example, investment
increases by $10, the extra $10 of expenditures will generate, assuming unemployed
resources, an extra $10 of production and subsequently incomes in the form of wages
and profit. This increase, however, is hardly the end of the matter since most of the
additional incomes earned will be respent on consumer goods. If nine-tenths of any
change in income is spent on consumer goods and one-tenth is saved, consumption will
increase by $9. But again, one person’s expenditures are another person’s income, so
that incomes now rise by $9 of which $8.1 is respent on consumer goods. The process
continues until expenditures, incomes, and production have increased by $100, of which

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 $90 is consumption and $10 the original change in investment. In this case the multiplier
is 10.

But investment may be a source of instability if it is not maintained at a rate sufficient to

stimulate demand for the production it is creating. Is there any guarantee that supply or
productive capacity will grow at the same rate as demand so that neither excess
capacity nor excess demand results? The British economist R.F. Harrod and the
American economist E.D. Domar put this question in a very simple mathematical form. In
their equations, the rate of growth of supply (i.e., the production function as defined
above) is equal to the rate of growth of capital stock. Through investment this capital
stock is augmented. The rate of growth of demand depends upon the rate of growth of
investment or, more correctly, upon the rate of growth of non-consumption expenditures.
Thus investment affects both demand and supply. But the Harrod–Domar analysis still
did not answer the question of what kept the system from becoming increasingly
unstable.

 Demand and supply

Much contemporary growth theory can be viewed as an attempt to develop a
theoretical model that would bring the rate of growth of demand and the rate of growth of
supply into line, since a model implying that capitalist systems are inherently unstable
would not correspond to the historical facts. Models of growth may be classified
according to whether they emphasize adjustments in demand (supply-determined
models) or adjustments in supply (demand-determined models). One of the better-
known examples of the supply-determined model was developed by the British
economist J.R. Hicks. Hicks assumed that the spending propensities of consumers and
investors were such as to cause demand to grow at a rate in excess of the rate of growth
of maximum output. This assumption meant that during any “boom” the economy would
eventually run into a “ceiling” that, while also moving upward, was moving less rapidly
than demand. The long-run rate of growth of the economy would be determined by the
rate of ascent of the ceiling, which in turn would depend upon supply factors such as the
rate of growth of the labour force and the rate of growth of technical progress
or productivity. If for some reason these were to grow more rapidly, then output would
also grow more rapidly as demand adjusted upward to the more rapid growth of supply.

An example of a demand-determined model of growth is one developed by the

American economist J.S. Duesenberry. In the Duesenberry model, spending
propensities of consumers and investors are such as to generate steady growth in
demand. Assume that instead of spending nine-tenths of any change in income on
consumer goods, as in the multiplier example above, they choose to spend 0.95. This
increase will cause the rate of growth of demand to increase. The question is whether it
will also cause the rate of growth of production to increase or whether it will merely result
in price increases. If productivity or technical progress responds to a higher rate of
growth of demand, as Duesenberry assumes, then production can grow more rapidly.
Although in both the Hicks and Duesenberry models demand and supply grow at the
same rate, the adjustment mechanisms are entirely different. In the Duesenberry model
supply adjusts to demand; in the Hicks model demand adjusts to supply.

 Economic Stagnation

The rise in unemployment rates and the slowdown in growth rates of GNP and per
capita incomes throughout the capitalist world beginning in the early 1970s is clearly a

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 case where demand and supply did not grow at similar rates. Many economists turned
their attention to developing theories to explain this prolonged period of stagnation. A
common theme in much of their work was the adverse effects of high unemployment and
low utilization of the capital stock on investment and, therefore, on productivity growth.

The high unemployment rates for labour and capital are initially traced to policies
restricting aggregate demand that were pursued by monetary and fiscal authorities from
the first half of the 1970s. This policy response was widely interpreted by economists as
an effort by the authorities to reduce inflation rates that had begun to accelerate in the
latter 1960s. The continued use of restrictive policies is then related to fear on the part of
the authorities that any attempt to restimulate their economies would merely bring back
inflation.

Tighter labour markets resulting from any such stimulative policies are seen to
increase the bargaining power of labour, thereby leading to larger wage demands and
settlements that in turn feed into prices, causing price inflation to accelerate. This leads
to yet higher wage demands in order to protect real wages and thus an explosive wage–
price spiral. In addition, more stimulative aggregate demand policies are perceived to
result in balance of payments difficulties at existing exchange rates. But any attempt to
avoid larger payments deficits by reducing the exchange rate leads to the “importation”
of inflation through higher prices of imported goods. The result of such considerations is
reluctance of the authorities to attempt to create full employment through stimulative
policies.

What emerges from these theories is a chain of causation that describes the way in
which, in the period since World War II, inflation and growth have become causally
connected through the responses of governments to actual and anticipated inflationary
pressures. Inflation and the fear of inflation lead to slow growth and high unemployment
because the inability of governments to bring inflation under control at full employment
by other means—e.g., an income policy—constrains governments
to implement restrictive policies to combat or forestall inflationary pressures. Such
responses lead, as they did in the early 1970s, not only to high rates of unemployment of
capital and labour but also to low rates of investment and productivity growth. Stagnation
is the result, and such a scenario is a likely prospect for capitalism in the future.

 Foreign trade
Little has been said about foreign trade. Yet growth in most economies is very much
dependent upon imports and the ability to export in order to pay for imports. The fact that
some economies recovered relatively quickly from World War II and grew much more
rapidly in the postwar period than others has stimulated a great deal of comparative
analysis in growth theory. The exceptionally high growth rates in Japan and Germany
compared to the general sluggishness of the British economy are related to foreign
trade. Economists have pointed to the periodic balance of payments crises experienced
by Britain and the lack of such crises in Germany. During a boom, as incomes rise the
demand for imports will rise also as a natural feature of prosperity. But if exports do not
also rise at the same time, the authorities may be forced to take fiscal or monetary
countermeasures and slow down the economy in an effort to bring imports and exports
back into balance. Or exports may fail to grow sufficiently because labour costs are
rising very rapidly and pushing up prices of exports faster than in competing countries.

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 A policy of encouraging growth has the effect of keeping the demand for imports high
and making labour markets tight, thereby tending to push up money wage rates. At the
same time, such a policy also tends to encourage innovations and investment projects
that are very productive, particularly if the demand pressures are sustained. A “stop”
policy naturally has just the opposite effects, both good and bad from the point of view of
a country’s balance of payments. The question is which policy will in the long run result
in less rapidly rising costs and prices. Many writers have argued that if demand
pressures are maintained the response or adjustment of productivity and therefore of
supply to these pressures will be such that the country will soon find itself in a more
competitive position. Running an economy “flat out,” however, is likely to cause a short-
run balance of payments crisis and lead to devaluation of currency.

 Mathematical growth theories

In addition to the theories discussed above, a large body of literature has developed
involving abstract mathematical models. Because this field of analysis is so technical,
only a general picture of the kinds of problems and questions discussed can be given.
First, a set of equations is drawn up describing what the model builder feels are the
important relations between economic variables such as output, capital, investment,
and consumption. These equations must relate economic variables to one another at
different points in time: for example, output last year determines consumption this year,
which in turn helps to determine output this year and therefore consumption and output
next year. It is possible to work out the movements of the variables over as long a period
as desired. At the centre of much of this analysis is the concept of a steady-state rate of
growth: one in which all the economic variables contained in the set of equations grow at
the same constant rate equal to the growth of the labour force.

A related class of studies attempts to take account of the welfare of workers and
consumers in the maximization of growth. These “optimal growth” models seek to
maximize consumer satisfaction over time. In a model such as this the solution will not
be the highest possible growth rate but one that will maximize the welfare of consumers.
The importance of such models for planners would seem to depend on the realism of
their assumptions as to consumer desires and technology.

Model building and theorizing about growth has proceeded on various levels of
abstraction. Some of the work is of little practical value, in the sense that its explanatory
value is negligible. Such studies, however, may stimulate other work that is helpful in an
understanding of the growth process. Some models, while realistic, are not applicable to
all economies. Thus, a model that neglects international trade is of little use to a
European economist trying to understand the more basic causes of differences in growth
rates between countries. (Economic Growth by John L. Cornwall, 2020 edition), (Ref: :
https://bitly.is/2GiKcaj)

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Below is a table showing the comparison of Development and Growth

Economic Development Economic Growth

Brings qualitative and quantitative Brings quantitative changes in the

Effect changes in the economy economy

Development relates to growth of Growth refers to a gradual increase in one

human capital indexes, a decrease in of the components of Gross Domestic
Growth inequality, figures, and structural Product; consumption, government
changes that improve the general spending, investment, net exports
population’s quality of life

Economic Development usually relates to Economic growth usually relates to

the utilization and development of optimum utilization and development of
Utilization
unused resources in the under – under-utilized resources of developed
developed countries countries

It implies changes in income, saving and It refers to an increase in the real output
investment along with of goods and services in the country like
Implication
Progressive changes in socio-economic increase the income in savings, in
structure of country ( institutional investment etc.
and technological changes)

Concerned with structural changes in the

Scope Growth is concerned with increases in the
economy
economy’s output

Display another slide, to let the students to take note of the following facts:

1. Economic growth is a narrower concept than economic development

2. Economic growth can be measured by an increase in country’s GDP (gross domestic
product).
3. Economic growth does not take into account the size of the informal economy also
known as “Black Economy” which is an unrecorded economic activity.
4. Economic growth does not take into account the depletion of natural resources which
might lead to pollution, congestion and desease.
5. Develoment alleviates people from low standards of living into proper employment with
suitable shelter.
6. Development however is concerned with sustainability which means meeting the needs
of the present without compromising future needs.
7. Those environmental effects are becoming more of a problem for Governments now that
the pressure has increased on them due toGlobal warming.

LEARNING OUTCOME:

A graded recitation about the topic.

MEASUREMENT:

The students will take the on line quiz via Google form.

9
REFERENCES:

Payumo, C.S., Ronan, J.R., Maniego, N.L. & Camba, A.L. (2012). Understanding Economics.
Alteo Digital & Printers: Manila. Part 3. 145-236.
https://app.bitly.com/Bk6l6rWpH4k/bitlinks/2GiKcaj

https://www.un.org/sustainabledevelopment/economic-growth/

Lesson 5 – Sustainable Development Goals

LEARNING MATERIAL:

Sustainable development is hard to define and harder to achieve. The process of expansion
may have various indicators that demonstrates the evolving awareness by the local or
international community of the complex nature of development and its implications for society,
the economy and the environment. Whilst the development of goals, targets, and indicators
shows a stronger commitment to defining and monitoring constituent elements, sustainable
development is more than the sum of its parts. It is an outcome of positive synergies between
multiple elements, and may be undermined by negative trade-offs between them. A transparent
dialogue is relevant between the society, business sector and the government.
The student will be asked to watch the video on “ 2030 Agenda” for four (4) minutes.

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 The student after viewing the video can form into small groups of 3 to 4 members, use
messenger chat room to discuss at leasr one important content of the three (3) top economic
goals mentioned in the video. Agenda.

Core Values of Development

In this study, development can be broadly conceptualized as the sustained promotion of an

entire society and social system toward a better human life. What constitues a good life or a
good quality of life? The author of the book “Understanding Economics” would help the students
realize this things. This will be learned by the students as they write a research on the Quality
of Life. (Please refer to the course guide).

Factors that may contribute to lack of progress of a country:

 weak agriculture sector that failed to raise the incomes of the rural poor;
 growth that is primarily based on consumption and not creating employment
opportunities;
 high population growth;
 income inequality, which remains relatively high;
 inability of the government to provide sufficient basic services;
 vulnerability of poorer communities to natural disasters and civil unrest.
Issues in Economic Develoment

 Population Growth
 Food Shortages
 Third World Debt

Two Major Sources of Loans by Countries:

1. International Monetary Fund (IMF) – it is an international agency whose primary goals

are to stabilize international exchange rates and to lend money to countries that have
problems financing their international transactions.

2. World Bank - An international agency that lends money to individual countries for
projects that promote economic development. Only 20% of the World Bank’s funding
comes from contributions; the other 80% comes from retained earnings and investments
in capital markets.

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LEARNING ACTIVITY/HOMEWORK:

1. Submit five (5) examples of local projects financed each by IMF and World Bank in a
Short bond-paper and to be uploaded to my email address josefina_colcol@yahoo.com
on December 10, 2020.

2. Write down the 17 economic goals of United Nations.

MEASUREMENT:

The students in this class has to take the quiz via google form on __________.

REFERENCES:

https://www.jstor.org/stable/j.ctv3t5rcm.17?seq=4#metadata_info_tab_contents

https://www.un.org/sustainabledevelopment/economic-growth/

Lesson 6 - The Role of Government and Financial Institutions

COURSE MATERIAL:

The students must realize that the government is the only biggest entity that influence the
level of aggregate demand. In the same manner, the biggest spender and income earner in the
economy. Through the national budget, the government outlines its spending plans for the year,
and through taxation, its spending plan is funded.

The government source its funds based on the taxes levied from the income of people,
business and property, enough to understand why it is called as the lifeblood of the government.
The government pays the salaries and wages of its civilian workers and the Armed Forces. It

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spends on infrastructure projects and pays for the delivery of Government services. It
subsidizes selected industries and effect transfer payments to a number of entities and
individuals in the economy. It finances its spending through tax collection and other sources.

Display slide 1, to show the government’s multi-faceted role in the economy.

1. As an income earner. The government generates earnings through its various agencies
and government-owned and controlled corporations such as BIR, Customs, License-
issuing agencies, Local Government Units, It receives dividends from government-held
corporations such as PNB, GSIS, SSS, DBP, Ports and Airports Authorities, etc.

2. As a consumer. The government buys various supplies and equipment for its numerous
agencies, e.g. computers, bond papers, binding machine, cars and trucks, books and
many others.

3. As an employer. The government employs millions of people in various positions in the

different government agencies and corporations including those in the military.

4. As an investor. The government invests mostly in areas where private investors shy
away from, either because of high risk involved, or because very huge capital is
required, or because there is long gestation period before a particular project generates
income, e.g. railways, airports and sea ports, dams, power plants, etc.

5. As a borrower. Just like any economic entity, government also borrows, either directly
from the public, e.g., bonds and other government securities; or from the banks, both
local and foreign; and from multi-lateral financial institutions, e.g., World Bank, ADB, etc.

Spending Purposes

Display slide 2, Government spends money for a variety of reasons, including supply of

goods and services that the private sector would fail to do, such as public goods, including
defence, roads and bridges; merit goods, such as hospitals and schools; and welfare payments
and benefits, including unemployment and disability benefit.

1. To achieve supply-side improvements in the macro-economy, such as spending

on education and training to improve labour productivity.
2. To reduce the negative effects of externalities, such as pollution controls.
3. To subsidize industries which may need financial support, and which is not available
from the private sector. For example, transport infrastructure projects are unlikely to
attract private finance, unless the public sector provides some of the high-risk finance,
as in the case of the UKs Private Finance Initiative – PFI. During 2009, the UK
government provided huge subsidies to the UK banking sector to help deal with
the financial crisis. Agriculture is also an industry which receives large government
subsidies. See: CAP.
4. To help redistribute income and achieve more equity.
5. To inject extra spending into the macro-economy, to help achieve increases
in aggregate demand and economic activity. Such a stimulus is part of
discretionary fiscal policy.

Local government is extremely important in terms of the administration of spending. For

example, spending on the NHS and on education are administered locally, though local
authorities. Approximately 75% of all public spending is by central government, and 25% is
by local government.

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Central and local government (public sector) spending

Using public spending to stimulate economic activity has been a key option for successive
governments since the 1930s when British economist, John Maynard Keynes, argued that
public spending should be increased when private spending and investment were inadequate. 
There are two types of spending:

1. Current spending, which is expenditure on wages and raw materials. Current spending is
short term and has to be renewed each year.
2. Capital spending, which is spending on physical assets like roads, bridges, hospital
buildings and equipment. Capital spending is long term as it does not have to be
renewed each year – it is also called spending on ‘social capital’.

Nature and Purposes of Taxation

Display slide, to discuss to the students. Taxation is known as the only tool of fiscal policy,
defined as an “inherent right of the state to levy and collect a portion of each individual and
entity’s income from productive endeavors within the states’ political boundaries. And since it is
an inherent right of the state, this means absolute right, taxation laws were enacted to limit this
right. That is the reason why taxation is graduated, and in most countries, it is progressive.
When we say graduated, means taxes to be paid are divided into several brackets of income;
and progressive, means that the higher the income, the higher the income, the higher will be the
tax rate to be paid, and vice-versa. (Show example on the other slide).

Taxation is very important for the government to exist, for without it no government can ever
exist, as taxes are the lifeblood of the government. Citizens pay taxes, in the expectation that
the government will protect them and provide them with the necessary environment to enable
them to live in safety and perform their productive activities without fear or hesitation.

The Bureau of Internal Revenue is the tax-collecting arm of the government for individual
and corporate income taxes. The Bureau of Customs is the government-collecting arm to
import taxation.

Characteristics of a Sound Taxation System

1. It should have a Fiscal Adequacy
2. It should have Administrative Feasibility
3. It should have Equity
4. It should be Consistent and Compatible with the Nation’s Economic Direction

Procedure of Taxation

Basically, taxation is legislative in character and all tax measures emanates from Congress.
The House of Representatives enact taxation bills which goes down to the Senate. Then to the
joint conference committee and finally, to Malacanang for the President’s approval or in few
instances, veto.

Once the tax measure is approved and published in the gazette, it becomes a law. Then it is
forwarded to the tax collection agency concerned for implementation. The tax measure
normally provides for sanctions and penalties for violators.

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  Tax Evasion – means the taxpayer or entity subjected to tax, paid taxes but did not pay
the correct amount.
 Tax Avoidance – means that the person or entity subjected to tax did not pay any tax at
all.

Below are persons or entities under the law which are exempted from paying taxes.
1. Those who earn very little
2. Entities such as cooperatives
3. Business in selected favored industries e.g. exports and pioneering
And non-profit organizations.

Important facts about Fiscal Policy:

1. Taxes may either be direct or indirect.
2. Funding sources normally come from two principal sources: tax collection and
borrowing.
3. Both government expenditure have multiplier effect in the economy.
4. Fiscal Policy affects Aggregate Demand and Aggregate Supply.

Importance of Timing in Policy Implementation

Impact of Expansionary and Restrictive Fiscal Policy based on:
1. Keynesian Model
2. Crowding-Out Model
3. New Classical Model
4. Supply-Side Model

READINGS:
To read economic strategies: Fiscal Policy, Monetary Policy and Foreign Trade Policy in the
Philipine setting.

LEARNING OUTCOME/HOMEWORK:

Kindly enumerate at least 5 projects where the government had direct involvement based on the
roles enumerated above.

MEASUREMENT:

The students will take a ten (20) point quiz via google form.

REFERENCES:

Cuevas, R.C., Paraiso, O.C., and Larano, L.C. (2011) . Macroeconomics. Mutya Publishing
House, Inc.

Payumo, C.S., Ronan, J.R., Maniego, N.L. & Camba, A.L. (2012). Understanding Economics.
Alteo Digital & Printers: Manila. Part 3. 145-236.

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https://www.economicsonline.co.uk/Global_economics/Fiscal_policy_government_spending.html#:~:te
xt=Government%20spends%20money%20for%20a,including%20unemployment%20and%20disability
%20benefit.

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