GOVERNMENT IN THE

MACROECONOMY &
DEMAND AND SUPPLY
BUS ECON 2 - MACROECONOMICS
LEARNING OBJECTIVES:
• Identify the role of government in macroeconomy.
• Discuss government budget, expenditure and
revenues.
• Differentiate a budget surplus from a budget
deficit.
• Discuss demand and its determinants
• Discuss supply and its determinants

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 GOVERNMENT IN THE MACROECONOMY

• Government buys goods and services for its

day-to-day operations and projects,
participates in financial markets through
borrowing and lending, and collects taxes.
• Its policies, affect the different economic
agents and their transactions.

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 GOVERNMENT IN THE MACROECONOMY (CONT.)
• organizations of individuals
-particular set of institutions and people
• authorized by formal documents
-legally empowered
• make binding decisions on behalf of a
particular community
-externally: war, trade, border control, ...
-internally: tax, education, health, welfare, ...
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 GOOD GOVERNANCE
• Rule of law
-government can take no action that has
not been authorized by law
-citizens can be punished only for actions
that violate an existing law
• Property rights
• Regulatory regime
• Macroeconomic policies
• Absence of corruption
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 GOVERNMENT’S POWER
• ability to get people or groups to do what
they otherwise would not do
• to develop institutions
• to carry out policies
• sometimes unpopular
• has to be sufficiently strong

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GOVERNMENT IN THE MACROECONOMY (CONT.)

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GOVERNMENT IN THE MACROECONOMY (CONT.)
• ROLE OF THE GOVERNMENT
1. Provide goods and services, example:
defense
2. Provide merit goods, example: Education
3. Maintain competition, example create and
enforce antitrust laws and regulate
monopolies
4. Redistributing income, example: taxes and
benefits
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 GOVERNMENT IN THE MACROECONOMY (CONT.)
• ROLE OF THE GOVERNMENT
4. Correct for externalities, example: reduce
externalities and encourage increased production
of goods and services that have positive
externalities.
5. Stabilize the economy, example: reduce
unemployment, inflation and promote economic
growth
6. Maintain the legal and social framework, example
define and enforce property rights and establish a
monetary system
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 THE GOVERNMENT BUDGET
• The government budget presents the public
sector’s expenditures and sources of finance.
Government expenditures indicate how much
government spends and on what activities.
• It is the sources of finance state where the money
that government spends comes from.
• It lays down what the government plans to spend
and how it is going to fund it. It is presented once a
year to congress.
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THE GOVERNMENT BUDGET (CONT.)
• GOVERNMENT BUDGET presents the public
sector’s expenditures and sources of finance.
• There are 3 types of government budget: balanced
budget, surplus budget and deficit budget.
• BALANCED BUDGET- estimated government
expenditure is equal to expected government receipts
in a particular financial year. It is beneficial since it
ensures economic stability, and government can
refrains from imprudent expenditures.
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THE GOVERNMENT BUDGET (CONT.)
• SURPLUS BUDGET- when government
revenues exceed the estimated government
expenditure in a particular financial year.
• DEFICIT BUDGET refers to the budget
government where expenditure exceeds the
expected government revenue in a particular
financial year.
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THE GOVERNMENT BUDGET (CONT.)
• 2 PRIMARY COMPONENT OF GOVERNMENT
BUDGET - CAPITAL BUDGET AND THE
REVENUE BUDGET
• Capital budget accounts for the assets and
liabilities under the government.
• Revenue budget accounts for the total revenue
generated and the expenses met through this
revenue.
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THE GOVERNMENT BUDGET (CONT.)

• THE PURPOSE OF GOVERNMENT

BUDGETING to prevent business
fluctuations of inflation or deflation to
achieve the objective of economic
stability.

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THE GOVERNMENT BUDGET (CONT.)
• The biggest source of government funds is taxation.
• Taxes in the Philippines are collected by two tax collecting agencies:
Bureau of Internal Revenue and Bureau of Customs.
• Taxes collected by these agencies include income taxes of
individuals and businesses, property taxes, residence taxes, import
taxes, inheritance taxes, gift taxes and other specific taxes.
• The government also earns income from non-tax revenues such as
collections of fines and fees, licenses and registration charges and
others.
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THE GOVERNMENT BUDGET (CONT.)
Reasons why government borrow funds;
1. Due to political reluctance to raise taxes.
2. Government-sponsored capital improvement should be paid
for gradually over the life of the investments by those who will
be taxpayers while the improvements are providing benefits.

3. A deliberate use of the budget to stimulate the economy.

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TABLE 1. The National Government cash budget of the
Philippines in Billion pesos,
1996-1998
Item 1996 1997 1998
1. Revenues 417.2 485.1 540.9
2. Expenditures 399.7 470.4 524.9
3. Budget Surplus (deficit) 17.5 14.7 16.0
4. Financing Account (17.5) (14.7) (16.0)
5. Net Domestic (12.8) (5.1) (1.4)
6. Net External (4.7) (9.6) (14.6)
Source: NSCB (1999) Philippine National Statistical
Yearbook
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BUDGET DEFICIT
⮚is the difference between all receipts and expenses
in both revenue and capital account of the
government.
⮚occurs when expenses exceed revenue and
indicate the financial health of a country. The
government generally uses the term budget deficit
when referring to spending rather than businesses
or individuals. Accrued deficits form national debt.
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 GOVERNMENT DEBT
• This is the borrowing by the public sector.
• The public sector will need to borrow when expenditure
is greater than income.

• National Debt
• This is the total amount that the public sector owes to those
who have loaned it money.
• When there is a budget surplus then there will be a
reduction in national debt.
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PROBLEMS WITH HIGH NATIONAL DEBT
• Crowding out – high government borrowing may starve
the private sector of funds for investment.
• Interest rates may have to rise to encourage
lenders to lend money to the government
• Inflation may occur – increasing prices
• National debt is increased – high taxes/spending
cuts to repay
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BUDGET SURPLUS
• the amount of extra money available to a
government because it has spent less
money than it earned.
• occurs when income exceeds
expenditures.

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GOVERNMENT REVENUES
• Also known as National revenues.
• It is the money received by government from
taxes and non- tax sources to enable it to
undertake government expenditure.
• The government’s total revenues are divided
into tax revenue and non-tax revenue.
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GOVERNMENT REVENUES (CONT.)
⮚Tax revenue is the income that is gained
by government through taxation.
⮚Non-tax revenue or non-tax receipts are
government revenue not generated from
taxes. For example - bond issues and profits
of state-owned companies.

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 GOVERNMENT REVENUES (CONT.)
• FUNCTIONS OR PURPOSES OF GOVERNMENT REVENUES
a. to finance the goods and services they provide to
citizens and businesses
b. to fulfil their redistributive role.
• IMPORTANCE OF GOVERNMENT REVENUE
a. to provide services to the public
b. aid to fund education, health care. agriculture and
among others
c. payment of services or salaries and wages of public
servants.
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GOVERNMENT REVENUES (CONT.)
Table 2 Revenues of the Philippine National Government, 1995-1997
(as a percentage of total revenues)
Item 1995 1996 1997
Tax revenues 86.0 90.5 87.4
Of which
Taxes on net income and profit 30.8 33.6 34.8
Taxes on property 0.1 0.1 0.2
Taxes on goods and services 23.5 26.5 27.7
Taxes on international trade and 27.1 25.8 20.2
transactions
Others taxes 4.5 4.5 4.5
Non-tax revenues 14.0 9.5 12.7
TOTAL 100.0 100.0 100.0

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GOVERNMENT EXPENDITURE
• It indicate how much government spends and on
what activities. ALSO REFERRED AS
GOVERNMENT SPENDING.
• It refers to the distribution and use of the funds the
government finance has raised, so as to meet the
needs of economic construction and various
causes.
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GOVERNMENT EXPENDITURE (CONT.)
A. IMPORTANCE:
It provides subsidies, free education and
healthcare facilities to the poor people.
B. ITS IMPACT TO THE ECONOMY:
It can contribute positively to economic growth.
And considered as an important tool of fiscal policy.

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TYPES OF GOVERNMENT
SPENDING/EXPENDITURE
1. Capital spending – helps create productive
capacity like Building of hospitals and
infrastructure
2.Current spending - day-to-day running costs of
the government
3.Transfer payments - a payment to an individual or
firm were there is no economic benefit given
in return.
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GOVERNMENT SPENDING/EXPENDITURE (CONT.)
Table 3 Expenditures of the Philippines national government,
1996-1998
(as a percentage of total expenditure)
Item 1996 1997 1998
Personal Services 34.6 38.3 39.9
Maintenance and other operating 12.9 11.6 11.7
expenses
Debt Service 19.2 16.0 14.5
Net Lending 0.3 0.2 0.1
Transfer Payments 20.9 19.6 20.2
Capital outlay 12.2 14.3 13.7
Total 100.0 100.0 100.0

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•DEMAND
⮚is the amount of goods and services consumers are
willing to purchase given a certain price.
⮚is an economic principle referring to a consumer's
desire to purchase goods and services and willingness
to pay a price for a specific good or service.
• The law of demand: “the higher the price, the lower
the quantity demanded”

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DETERMINANTS OF DEMAND
a. income- increase in income yields an
increase in demand.
b. tastes and preferences
c. price of related goods like substitutes and
complements
d. changes in speculation
e. population
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SUPPLY
• - fundamental economic concept that describes the total
amount of a specific good or service that is available to
consumers.
• - the amount of a resource that firms, producers,
labourers, providers of financial assets, or other
economic agents are willing and able to provide to the
marketplace or to an individual.
• LAW OF SUPPLY
“price and quantity supplied of a good are directly
proportional”
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DETERMINANTS OF SUPPLY

a. Prices of inputs or cost of producing the

goods
b. Technology
c. Taxes and subsidiaries
d. Number of sellers or firms in the
industry
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