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298 Cards in this Set
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Financial Intermediaries |
Institutions that provide financial services and products |
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Banks |
-Financial intermediary -institutions that are authorized by the BSP to accept deposits from the general public |
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Commercial Banks |
- a type of financial institution that accept deposit - can also issue accounts to depositors that allow them to issue demand checks -allowed to undertake trust functions - engage in short-term lending |
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Trust functions |
(Commercial Banks) Functions that involve management of funds for the benefit of persons who place their assets |
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Short-term lending |
(Commercial Banks) giving credit to businesses normally for periods within a given year |
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Unibanks/ Expanded Commercial Banks |
-commercial banks with enlarged powers related towards owning other financial institutions -allowed to own investments in other companies or other financial institutions |
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Bank of the Philippine Islands Metrobank |
examples of Unibanks |
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Thrift Banks |
composed of four savings banks rural banks, private development banks, stock savings, loan associations |
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Savings Banks |
allowed to accept deposits of the depositor's savings - allowed to engage in lending to clients for an allowed range of investments |
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Real state investments Personal finance Home-building and home development activities |
Range of investments allowed for savings banks |
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Rural banks |
-designed primarily to mobilize rural savings by accepting savings and time deposits and to provide a channel for funds from urban areas and the government sector for agricultural and individual activities in the countryside -can provide credit to small-scale farmers and to receive government assistance |
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Private Development Banks |
-needed to serve the community or a specific provincial unit -designed in order to be conduit for private development loans -allowed to accept time and savings deposits and to provide medium and long term credit to small and medium scale enterprise |
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Stock Savings and Loan Associations |
-financial institutions that are usually company-based which are created to provide service to their members -operate as credit unions |
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Credit unions |
provide salary loans and deposits from their members |
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Armed Forces Savings and Loan Association |
example of Stock Savings and Loan Associations |
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Philippine National Bank |
(Government Bank) -considered to be the dominant commercial bank in the country -facilitates the financial needs of industry and commerce and a recipient of government deposits |
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Development Bank of the Philippines (DBP) |
(Government Bank) -engages in a long-term development lending for as long as 8 years which is usually granted to industrial and agricultural projects |
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Land Bank of the Philippines |
(Government Bank) helps serve in the financing of the land reform program |
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Non-Banks |
-financial institutions that serve as further intermediaries of units with excess funds thus facilitating their investments -cannot offer lending service to the general public -cannot accept deposits |
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investment houses insurance companies pawnshops, money brokers, stock brokers government financial institutions (GSIS, SSS, Pag-IBIG Fund, PhilHealth) |
examples of Non-banks |
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Savings |
the stock of monetary assets like bank deposits, cash not spent, investment in securities |
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Household Savings (Voluntary Saving, Contractual Saving, Social Security Schemes) Government Savings Foreign Savings |
Types of Savings |
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Household Savings |
involves voluntary saving, contractual saving, social security schemes |
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Voluntary Saving |
the amount of saving that result from the normal preferences of households in the way they divide their incomes between consumption and saving |
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Contractual Saving |
when people buy personal life insurance and other forms of insurance as a preparation for future uncertainties |
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Social Security Schemes |
a devised and mandated saving plan of the government for the workers to save their current incomes -main purpose: to provide social insurance for the workers and their retirement time |
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Government Savings |
consists of the excess of revenues over expenditure |
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Dissaving |
happens when the government incurs deficit in the supposedly government savings |
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Foreign Savings |
the excess of imports over export revenues |
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fractional-reserved banking |
how banks make profit - charging interest on loans and charging fees |
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reserves |
assets that banks hold in the form of cold cash or of funds deposited by the bank with the central bank |
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discount rate |
percentage rate paid by banks on the money they borrowed from BSP |
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Automated Teller Machines |
-introduced to replace bank branches, save banks' operating expense -now serve as a revenue stream for banks |
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money supply |
-the quantity of money available - economy that uses commodity money: it is the quantity of the commodity -economy that uses flat money (PH): government controls it |
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Monetary Policy |
the control over the money supply -serves as a measure/action taken by the BSP to influence the supply of money in the economy -used by the government to be able to control inflation and stabilize currency - one of the two ways that the government can influence the economy -process by which the BSP/government controls the supply and availability of money, the cost of money, and the rate of interest |
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Monetary policy actions of the BSP |
aimed at influencing the timing, cost and availability of money and credit, and other financial factors, for the purpose of stabilizing the price level |
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Fiscal Policy |
other way of influencing the economy -makes use of government spending and taxes |
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Expansionary Monetary Policy Contractionary Monetary Policy |
Types of Monetary Policy |
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Expansionary Monetary Policy |
type of monetary policy setting that intends to increase the level of liquidity in the economy -tends to encourage economic activity as more funds are made available for lending by banks |
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Lowering policy interest rates Reduction of reserve requirements |
examples of expansionary monetary policy |
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Contractionary Monetary Policy |
type of monetary policy setting that intends to decrease the level of liquidity -tends to limit economic activity as fewer funds are made available for lending banks |
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Increase in policy rate Increase in reserve requirement |
examples of Contractionary Monetary Policy |
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liquidity |
money supply |
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Inflation Targeting |
(Monetary Policy) -revolves around meeting publicly announced preset rates of inflation -intends to bring actual inflation to their desired numbers by bringing about changes in interest rates, open market operations and others -standard: Consumer Price Index |
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Price Level Targeting |
-involves keeping overall price levels stable, or meeting a predetermined price level -similar to inflation targeting in altering interest rates to be able to keep the level constant throughout the years -flourishing and advanced economies opt not to use this method because it is perceived to be risky and uncertain |
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Monetary Aggregates |
(Monetary Policy) -focuses on controlling monetary quantities |
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Fixed Exchange Rate (a.k.a. Pegged Exchange Rate) |
(Monetary Policy) -focus: maintain a nation's currency within a narrow band |
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Gold Standard |
(Monetary Policy) -government allows its currency to be converted into fixed amounts of gold, vice versa -special kind of Fixed Exchange Rate policy or of Price Level Targeting -flawed because of the need for a large gold reserves of countries -no longer used |
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Money Supply Indicators |
found to contain necessary information for predicting future behavior of prices and assessing economic activity -used by economists to confirm their expectations and help forecast trends in consumer price inflation -tell whether to increase or decrease the money supply |
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Money aggregates |
measures that include not only money but other liquid assets |
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Narrow Money (M1) |
-includes currency in circulation -base measurement of the money supply and includes the cash in the hands of the public, peso demand deposits, tourists' checks from non-bank issuers, and other checkable deposits -funds readily available for spending |
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Broad Money (M2) |
-includes a broader set of financial assets held principally by households -contains M1 and peso saving deposits, time deposits and balances in retail money market, mutual funds |
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Broad Money Liabilities (M3) |
include M2 plus money subsitutes (promissory notes and commercial papers) |
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Liquidity Money (M4) |
M3 plus transferable deposits, treasury bils and deposits held in foreign currency deposits -almost all short-term, highly liquid assets are included |
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Open-market operations |
purchase and sale of government bonds -primary way in which the BSP controls the money supply |
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buy government bonds from the public |
done to increase money supply |
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sell government bonds |
done to decrease money supply |
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government bond |
bond issues by the national government, generally promising to pay a certain amount in a certain date as well as periodic interest payments |
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bonds |
debt investments whereby an investor loans a certain amount of money for a certain amount of time with a certain interest rate to a company or country |
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Repurchase and Reverse Repurchase |
carried out through the Repurchase Facility and Reverse Purchase Facility of the BSP |
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Purchase transactions |
BSP buys government securities with a dedication to sell it back at a specified future date at a predetermined interest rate |
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BSP's payments in purchase transactions |
increases reserve balances and expands the monetary supply |
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Reverse Repurchase |
government acts as the seller and works to decrease the liquidity of money |
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overnight to one month |
maturity of Repurchase and Reverse Repurchase transactions |
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Outright Transactions |
no clear intent by the to reverse the action of their selling/buying of monetary securities -creates a more permanent effect on the monetary supply |
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Foreign Exchange Swaps |
the actual exchange of 2 currencies at a specific date at a rate agreed upon the deal date and the reverse exchange of the currencies at a farther date in the future also at an interest rate agreed on deal date |
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Acceptance of Fixed-Term Deposits |
introduced by BSP to expand its liquidity management |
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SPecial Deposits Account (SDA) |
consists fixed terms deposits by banks and institutions affiliated with the BSP |
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Standing Facilities |
BSP extends loans, discounts, and advances to banking institutions to increase the volume of credit in the financial system |
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rediscounting |
a standing credit facility provided by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to their clients |
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peso rediscounting Exporter's Dollar and Yen Rediscount Facility |
2 types of rediscounting in the BSP |
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Reserve Requirements |
required amounts that banks can't lend out to people |
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reserves |
a maintained amount of money in banks |
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Regular or Statutory Reserves Liquidity Reserves |
forms of reserves |
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Bangko Sentral ng Pilipinas |
central monetary authority -provides policy directions in the areas of money, banking and credit -exists to supervise operations of banks and exercises regulatory powers over non-bank financial institutions -keeps aggregate demand from growing rapidly (inflation) or too slowly (high unemployment) |
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promote price stability |
primary objective of BSP |
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Monetary Aggregate Targeting Approach |
BSP's past monetary framework |
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Monetary Aggregate Targeting Approach |
based on the assumption that there is a stable and predictable relationship between money, output and inflation -In effect, BSP controls inflation indirectly by targeting money supply under this |
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Monetary Aggregate Targeting complemented with some form of inflation targeting |
approach wherein BSP can exceed the monetary targets as long as the actual inflation rate is kept within program levels and policymakers monitor a larger set of economic variables in making decisions regarding the appropriate stance of monetary policy |
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Inflation Targeting |
current approach -focuses on maintaining a low level of inflation -main goal: achieve price stability as the ultimate goal of the monetary policy - adapted in January 2002 |
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Exchange Rate Role of Monetary Aggregates Measurement of Inflation and Liquidity Trap Budget Deficit and External Debts Fiscal Dominance |
Monetary Policy Issues |
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Exchange Rate |
-plays a significant role in monetary transmission mechanism and can have a large impact on inflation rates -Issue: extent of the exchange rate pass-through or ERPT to domestic prices |
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Monetary Aggregates |
normally not good indicators of future economic policy requirements due to unreliability of measurement |
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Errors in CPI measurement |
can lead to ineffective and unsuitable monetary policy response by the policy |
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liquidity trap |
happens when inflationrate declines too much leading to a threat of deflation -a situation in which there are zero nominal interest rates, persistent deflation and deflation expectations |
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Fiscal Theory of the Price Level |
Theory that states that it is not the non-interest bearing money but the total nominal liabilities including interest-bearing notes and future fiscal surpluses that matter for price-level determination |
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Bangko Sentral ng Pilipinas |
central bank of the Republic of the Philippines |
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Central Bank of Philippines |
central monetary authority established on 3 January 1949 |
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3 July 1993 |
when was BSP established |
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Hare-Hawes Cutting Bill |
Philippine independence bill approved by the US Congress |
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Department of Finance and the National Treasury |
administrators of the country's monetary system during the Commonwealth period |
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US dollar |
standard currency during Commonwealth period |
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R.A. No. 7653 |
Central Bank Act signed by Fidel Ramos on 14 June 1993 |
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Liquidity Management Currency Issue Lender of last resort Financial Supervision Management of foreign currency reserves Determination of exchange rate policy Banker, financial advisor and official depository of Government, its political subdivisions and GOCCs |
Functions of the BSP |
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Liquidity management |
BSP function -BSP formulates monetary policy aimed at influencing money supply consistent with its primary objective |
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Currency issue |
BSP function BSP has the exclusive power to issue the national currecy |
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notes and coins issued by the BSP |
fully guaranteed by the Government and are considered legal tender for all private and public debts |
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Lender of last resort |
BSP function BSP extends discounts, loans and advances to banking institutions for liquidity purposes |
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Financial Supervision |
BSP function supervises banks and exercises regulatory powerts over non-bank institutions performing quasi-bankin functions |
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Management of foreign currency reserves |
BSP function maintain sufficient international reserves to meet any foreseeable net demands for foreign currencies in order to preserve the international stability and convertibility of the peso |
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Determination of exchange rate policy |
BSP function determined the exchange rate policy of the PH current: market-oriented foreign exchange rate policy |
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BSP |
the banker, financial advisor, official depository of the Government |
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Monetary Board |
exercise the powers and functions of the BSP |
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BSP Governor |
chairman of the Monetary Board -chief executive officer of the BSP and is required to direct and supervise the operations and internal administration of the BSP |
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BSP governor, five members of the private sector, one member of the Cabinet |
Composition of the Monetary Board |
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Monetary Stability Sector |
BSP operating sector takes charge of the formulation and implementation of the BSP's monetary policy (serving the needs of all banks: accepting deposits, servicing withdrawals, and extending credit through rediscounting facility) |
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Supervision and Examination Sector |
BSP operating sector enforces and monitors compliance to banking laws to promote a sound and healthy banking system |
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Resource Management Sector |
BSP operating sector serves the human, financial and physical resource needs of the BSP |
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alleviating poverty contributing to the global fight against money laundering increasing transparency of monetary policy improving the financial literacy of the public |
BSP's advocacies |
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microfinance |
BSP's flagship program for poverty alleviation |
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Anti-Money Laundering Act |
implementation of BSP's support of the global fight against money laundering |
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Public information campaigns |
conducted by the BSP to increase public awareness |
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Consumer education program |
proactive stance by the BSP to improve the basic financial literacy of the public |
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Price Stability Financial Stability Efficient Payments and Settlements System |
Pillars of BSP |
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Price Stability |
First pillar of BSP |
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monetary policy |
the BSP promotes price stability through this |
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Financial Stability |
2nd pillar of BSP |
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prudent banking supervision and regulation |
BSP promotes financial stability through |
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Efficient Payments and Settlement System |
3rd pillar of the BSP |
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providing the necessary infrastructure to facilitate high-value transactions |
BSP promotes an efficient payments and settlement system through |
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Price stability |
-prices neither increase nor decrease markedly - preserves purchasing power |
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inflation |
how are price changes measured? -sustained increase in the average price of good we usually consume -the percentage change in the average price of a basket of goods and services in a given period |
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Monetary Policy |
How can price stability be achieved -Actions by a central bank to manage and regulate the supply of money to attain stable prices and ultimately promote economic growth |
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Inflation targeting framework |
how does the BSP conduct monetary policy? |
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2 sea lions bearing a shield On the shield: a key 7 bezants/roundels a scale Above the shield: chevron from which a rising sun originates Below the shield: a scroll with the Latin inscriptions Sigil. Thesaur. PHil |
Department of Finance coat of arms |
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2 sea lions |
taken from the Royal Spanish flag used by Legaspi |
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key |
symbolizes economic development |
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7 bezants/roundels |
-7 gold coins represent the 7 original bureaus under the DOF |
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scale |
represents the judicious management of government resources |
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Seal of the Treasury of the Philippine Archipelago |
meaning of the Latin inscriptions |
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gold (abundance) purple (courage) blue (peace) |
colors of DOF |
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Civil Service Act of 1901 |
formally organized the Department of Finance and Justice on 01 September 1901 |
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ReorganizationAct No. 2666 |
divided the Department of Finance and Justice into 2 departments on 18 November 1916 |
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Presidential Decree No. 1397 |
transformed DOF into the Ministry of Finance unde a parliamentary government on 02 June 1978 |
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Executive Order No. 127 and No. 127-A |
reorganized the MOF on 30 January 1987 and 22 July 1987 respectively |
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Executive Order No. 292 |
Administrative Code of 1987 reverted MOF to DOF on 25 July 1987 |
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Economic Growth |
societal goal of DOF |
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Fiscal Strength |
sectoral goal of DOF |
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Department of Finance |
a government institution that formulates fiscal policy |
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revenue generation |
basic function of DOF |
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Bureau of Internal Revenue (BIR) Bureau of Customs (BOC) Bureau of Treasury (BTR) Bureau of Local Government Finance (BLGF) Insurance Commission (IC) National Tax Research Center (NTRC) Central Board of Assessment Appeal (CBAA) Philippine Deposit Insurance Corporation (PDIC) Philippine Export-Import Credit Agency (PHILEXIM) |
Bureaus, Agencies, Government Corporations under the supervision of DOF |
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Fiscal policy |
the use of government spending and taxation to influence the level of economic activity - in theory: can be used to prevent inflation and avoid recession |
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Disincentives of Tax Cuts Side Effects of Public Spending Poor Information Time Lags Budget Deficit Other Components of AD Depends on Multiplier Crowding Out Monetarist Critique |
Criticisms of Fiscal Policy |
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Expansionary fiscal policy |
cause an increase in the budget deficit which has many adverse effect |
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Crowding out |
occurs when increased government spending results in decreasing the size of the private sector |
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Classical economists |
they argue that the government is more inefficient in spending money than the private sector thus there will be a decline in economic welfare |
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Increased government borrowing |
can put upward pressure on interest rates |
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Monetarists |
argue that in the LRAS is inelastic thus an increase in AD will only increase inflation |
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1. Distorts decisions about (a) consumption, (b) saving, (c) investment, (d) production 2. Leads to inefficient allocation of resources 3. Undermines the confidence in financial instruments as a form of savings 4. Results in loss of purchasing power 5. Has negative effects on income redistribution 6. Slows economic growth |
Effects of high and volatile inflation on the economy |
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First Quarter Storm Civil Unrest |
cause of 1972 inflation |
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First Oil Crisis |
cause of 1974 inflation |
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Second oil shock; Debt crisis |
cause of 1980-1982 inflation |
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Economic recession; People Power |
cause of 1984-1985 inflation |
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Oil price hike, peso depreciation, natural calamities |
Cause of 1981-1982 inflation |
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Oil price hike and rise in price f agricultural commodities |
cause of 2008-2009 inflation |
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Monetary POlicy |
the tool of central bank to control inflation by influencing the level of money supply |
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availability of money |
the level of money or credit supply which a central bank can directly control (Level Money and Credit) |
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cost of money |
"price" of savings/ investment which influences how much and where money goes (Price of Money and Credit) |
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Quantity Instruments (level of money and credit) Price instruments (price of money and credit) |
Monetary Policy Instruments used by BSP |
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Quantity instruments |
control the availability or level of loanable funds directly |
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Reserve requirements rediscounting |
Example of quantity instruments |
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Price instruments |
influence the rate of return on financial instruments |
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policy interest rates: RRP and RP rates |
examples of price instruments |
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Open market operations Reserve requirement Rediscounting operations Fixed-term deposits |
Monetary Policy Instruments used by the BSP |
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Open market operations (OMO) |
buying and selling of government securities from/to the public -repurchase and reverse repurchase agreements |
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RP/RRP rate |
the main policy instrument commonly called the policy rates |
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Open Market Purchase of GS/ Lower RRP rates |
To increase liquidity so that BSP releases money |
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Open Market Sale of GS? Raise RRP rates |
To decrease liquidity so that BSP gets money |
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Reserve Requirement (RR) |
what banks are required to keep in resereve |
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liquidity reserves |
in the banks' vaults |
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regular reserves |
reserves with the BSP |
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Lower RR |
to increase liquidity so that banks will have more money for lending and investments |
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Raise RR |
to decrease liquidity so that banks will have less money for lending and investments |
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Rediscounting operations |
standing credit facility provided by the BSP to help banks meet temporary liquidity needs |
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Rediscounting rate |
the interest rate charged to rediscount loans |
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Reduce rediscount rate |
done to increase liquidity so that banks are encouraged to borrow from BSP |
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Raise rediscount rate |
done to decrease liquidity so that banks are discouraged to borrow from BSP |
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Fixed-term deposits |
special deposit accounts facility consists of fixed-term deposits by banks and by trust entities of banks and non-bank financial institutions with the BSP |
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Lower SDA rate |
to increase liquidity so that banks are discouraged to deposit with the BSP |
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Raise SDA rate |
to decrease liquidity so that banks are encouraged to deposit with the BSP |
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Aggregate demand |
people's and firms' willingness to spend on goods and services |
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by influencing aggregate demand |
how monetary policy manages inflation |
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Interest rate channel |
Increase policy interest rate Increase Market interest rate Decrease domestic liquidity Decrease aggregate demand Decrease inflation |
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transmission channels |
how monetary policy action affects prices and the rest of the real economy |
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Interest Rate Channel Credit Channel Expectations Channel Asset Prices Channel Exchange Rate Channel |
Transmission Channels of Monetary Policy |
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High prices of agricultural products HIgh prices of oil products Significant government policy changes that directly affect prices Natural disasters and calamities affecting major parts of the economy |
Supply Side Factors |
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Target savings |
Estimated income- Planned expenses |
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Actual savings = target |
no change in saving/spending pattern |
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actual savings> target |
save less/ spend more |
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actual savings < target |
save more/ spend less |
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Inflation Targeting |
involves the central bank publicly announcing an inflation target which it promises to achieve over a certain period |
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1. Set a target inflation rate 2. Forecast the future path of inflation 3. Compare forecast with the target 5. The difference determines how much monetary policy has to be adjusted |
Essential elements of Inflation Targeting |
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New Zealand Canada Israel United Kingdom Sweden Australia South KOrea Iceland Norway Spain Finland |
Inflation Targeting Industrial Countries |
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Chile Czech Republic Poland Mexico Brazil Colombia South Africa Thailand Hungary Peru Philippines |
Inflation Targeting Developing Countries |
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Simple framework which can be easily understood Allows greater focus on price stability Forward looking Enables comprehensive approach to monetary policy Increases accountability of BSP and helps build credibility |
Why adopt Inflation Targeting |
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Exchange rate targeting Monetary aggregate targeting |
Alternative monetary policy frameworks |
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Exchange rate targeting |
value of the currency is fixed monetary and fiscal policies are conducted to sustain that fixed exchange rate country "imports" the credibility of a major central bank |
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Monetary aggregate targeting |
directed at a particular rate of growth in monetary aggregates assumes stable relationship between money, output and prices |
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MV=PY |
Quantity Theory of Money |
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money supply |
M in Quantity Theory of Money |
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velocity of money |
V in Quantity Theory of Money |
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Price level |
P in Quantity Theory of Money |
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Quantity of output |
Y in Quantity Theory of Money |
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government |
sets inflation target |
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15-21 months |
time during which inflation should be on target |
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Monetary Board |
meets every 6 weeks to decide on monetary policy stance |
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Advisory Committee |
makes recommendations to the MB on the monetary policy stance |
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BSP |
assesses economic conditions forecasts inflation conduct monetary policy |
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Liquidity growth consumption growth Wages Employment Capacity utilization |
indicator of build-up of demand pressures |
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wage increases transport fare hikes |
evidence of second-round effects of supply shocks |
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inflation expectations exchange rate interest rate differentials global economic and financial developments |
other indicators |
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BSP adjust policy rates |
done when inflation is not on target |
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BSP communicates -highlights of MB meetings - inflation report -press statement |
done when inflation is on target |
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Neutral/ unchanged |
this is how monetary policy settings need to be when forecast=target, no change in interest rates; monetary stance is appropriate |
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Contractionary/Restrictive |
this is how monetary policy settings need to be when forecast>target, (raise interest rates; monetary stance is too expansionary) |
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Expansionary/ Accommodative |
this is how monetary policy settings need to be when forecast < target |
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High prices of agricultural products high prices of oil products significant government policy changes that directly affect the prices |
Circumstances when BSP is not help accountable for deviations from inflation target |
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Forward-looking comprehensive promotes transparency increases accountability |
inflation targeting process |
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DOF |
responsible for the preparation of the annual and medium-term revenue program of government |
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Department of Budget and Management |
responsible for expenditures |
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Fiscal policy |
manifested in the government's policies on revenues and expenditures |
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Revenue component Expenditure component |
2 components of fiscal policy |
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Revenue component |
obtaining funds for government operation by collecting taxes, fees and charges and/or borrowing |
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Expenditure component |
spending of funds to provide goods and services |
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deficit |
when expenditures are larger than the funds received |
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surplus |
when revenues are bigger than spending |
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sound fiscal policy |
key to achieving macroeconomic stability and critical for sustained growth and poverty reduction |
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unsound fiscal policy |
can lead to inflation, crowding out, uncertainty and volability |
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Global financial crisis Natural disasters Contingent liabilities becoming due |
Ability to face"shocks" |
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1. Greater access to capital markets 2. more foreign direct investments (FDIs) 3. More receptive to free trade and its benefits 4. Increased income-generating opportunities |
Enhanced competitiveness due to the strong fiscal position |
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1. Efficient and effective resource generation 2. Productive and meaningful expenditure program 3. sustained and manageable level of public debt 4. Strong, transparent and accountable government owned and controlled corporations (GOCCs) 5. Ability to address new emerging issues |
Characteristics of Sound Fiscal POlicy |
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mobilizing resources |
robust tax and non-tax revenue collections -equitable tax structure -efficient administration machinery plug leakages reduce distortions |
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market expectation |
the government has the continued ability to generate resources to service its debt |
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long maturities optimum mix of currencies that minimize impact of currency movements |
structure of public debt |
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subsidies tax exemptions |
government infusions |
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GOCCs performance |
affects the government's consolidated public sector position |
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Climate change; environmental concerns Capital market development governance |
new, emerging issues |
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Maintaining fiscal support while securing fiscal sustainability |
key challenge |
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improve tax compliance provide inputs in monitoring the use of taxes work closely with government |
role of private sector |
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international trade finance |
important economic concepts involved in exchange rates |
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open economy |
an economy that engages in international trade |
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ratio of the country's exports or imports to its GDP |
useful measure of openness of the economy |
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Balance of International Payments |
systematic statement of all economic transactions between that country and the rest of the world |
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Current account Financial account |
major components of balance of international payments |
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Current account |
represents spending and receipts on goods and services along transfers |
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Financial account |
includes purchases and sales of financial assets and liabilities |
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stocks and securities |
asset transactions |
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credit |
transaction earns a foreign currency recorded as a plus item exports |
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debit |
transaction involves spending foreign currency recorded as a negative item imports |
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zero (0) |
current account +financial account |
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trade balance |
consists of merchandise imports or exports |
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trade surplus |
excess of exports over imports favorable balance of trade |
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trade deficit |
excess of imports over exports unfavorable balance of trade |
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General Rule in Financial Account drawn from Double-Entry Business Accounting |
1. Debits: increase in country's assets and decrease in liabilities 2. credit: decrease in country's assets and increase in liabilities |
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Foreign trade |
involves the use of different national currencies |
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Foreign Exchange Rates |
price of one currency in the terms of another currency -determined in the foreign exchange market |
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foreign exchange market |
market in which currencies of different countries are trade and foreign exchange rates are determined |
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foreign currencies |
traded at the retail level in many banks and firms specializing in business |
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equilibrium foreign exchange rate |
rate at which the currency willingly bought is just equal to the currency willingly sold |
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Depreciation |
fall in the price of one currency in terms of one or all others |
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Appreciation |
rise in the price of a currency in terms of another currency |
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Devaluation |
a country's official foreign exchange rate is lowered |
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revalution |
increase in the foreign exchange rate |
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financial account |
how monetary policy can affect exchage rate |
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exchange rates movements |
serve as a balance wheel to remove disequilibria in the balance of payments |
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Purchasing Power Parity |
applies better in the long run in the short run -exchange rates tend to move with changes in relativeprice levels of different countries -raises the per capita output of low-income countries when applied to measure the purchasing power of incomes in different countries |
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International Monetary System |
denotes how foreign exchange are ctermined, for transactions that cross national boundaries -determines how FOREX rates are set and how governments can affect them |
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Fixed- exchange rates Flexible/floating exchange rates Managed exchange rates |
3 major exchange rate systems |
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fixed exchange rates |
governments specify the exact rate at which currencies will be converted into other currencies |
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gold standard |
most important fixed-exchange rate system |
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flexible exchange rate |
exchange rates move purely under the influence of supply and demand government neither announces nor takes steps to enforce one used by US, Euroland, Japan |
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managed exchane rates |
middle ground of exchange rates -determined by market forces but governments buy or sell currencies or change their money supplies to affect their exchange rate -sometimes government lean against the winds of private markets |
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GATT-WTO IMF WORLD BANK BRETTON WOODS |
International Monetary Institutions |
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public debts |
absorb private savings that otherwise would support private investment |
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1. Increase in debt will increase the interest rates 2. Higher real interest rates will discourage businesses from investing in capital goods 3.Inflow of foreign funds will encourage an appreciation of the high-debt-burden country's currency |
Burden of Public Debt |
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Supply of private capital shock = |
money of households - supply capital by saving in private and public assets |
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Official Development Assistance |
a loan or grant administered with the objective of promoting sustainable social and economic development and welfare of the Philippines |
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Republic Act 8182 |
ODA Act of 1996 |
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ODA resources |
must be contracted with governments of foreign countries with whom the Philippines has diplomatic, trade relations or bilateral agreements or which are members of the United Nations, their agencies and international or mutilateral lending institutions |
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International Bank for Reconstruction and Development (IBRD/ World Bank) International Monetary Fund |
international financial institutions established along with the United Nations |
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Aid |
supporting 'developing' country economies to industrialize, attracting large-scale investments of capital and technical expertise that would lead to western style industrial development |
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UN and Bretton Woods Institutions |
became mechanisms for action on development |
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The Paris Declaration |
focuses on recipient ownership, alignment,harmonisation,managing for results, mutual accountability |
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1. Eradicate extreme poverty and hunger 2. Achieve universal primary education 3. Promote gender equality and empower women 4. Reduce child mortality 5. Improve maternal health 6. Combat HIV/AIDS, malaria and other diseases 7. Ensure environmental sustainability 8. Develop a Global Partnership for Development |
UN's 8 Millennium Development Goals (crucial to poverty alleviation) |
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failure to place human rights and justice at the heart of development |
limitation of Paris Declaration |
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bilateral donors |
member states of the United Nations that provide development assistance directly to recipient countries |
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Australia Belgium Canada Denmark Finland Germany Ireland Italy the Netherlands Norway Spain Sweden Switzerland United Kingdom United States |
major bilateral assistance providers |
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legal and judicial development security system management and reform human rights and post-conflict peace building |
areas which they provide assistance to |
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Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) |
forum if major bilateral donors establishes to promote the volume and effectiveness of aid |
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Paris Declaration on Aid Effectiveness |
represents a broad consensus among the international community about how to make international development aid more effective |
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Multilateral aid |
delivered through international institutions (United Nations, World Bank, and Asian Development Bank) |
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Multilateral organization |
an international organization whose membership is made up of member governments who collectively govern the organization and are its primary source of funds |
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Multilateral aid |
generally seen as a less political form of aid |
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1. less political form of aid 2. pools resources 3. help coordinate donors |
why donor countries give aid through multilateral institutions |
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lack of accountability |
one of the biggest problems of multilateral aid |
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Asian Development Bank European Union Food and Agriculture Organization (FAO) International Atomic Energy Association International Fund for Agriculture Development (IFAD) International Labor Organization (ILO) United Nations Childrens Fund (UNICEF) United Nations Development Programme (UNDP) United Nations Population Fund (UNFPA) |
Multilateral donors |
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multilateral development banks (international financial institutions) |
play an important role in shaping development policies and practices of less wealthy countries -largest source of development finance in the world - strongly influence the directionof development policies through the generation of technical research, analysis and statistics concerning aid and development |
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Bretton Woods, New Hampshire, United States (july 1944) |
where the international conference convened and resulted in the IMF and WB |
