CBM 321 14.

Nominal GDP - measures the value of output in a

- In macroeconomics, we deal with the consumer given period in the prices of that period, or as
markets, e.g., the agricultural products market, the sometimes put in current price
labor market, the medical services market, etc.
15. Expenditure Approach - measures GDP by adding
Key Concepts and Terms together all final expenditures

1. Macroeconomics - is a branch of economics that 16. Income Approach - measures GDP by adding the
focuses on the behavior and decision-making of an incomes paid by firms to factors of production and
economy two other items – depreciation and net indirect taxes

2. Great Depression - is an economic event that refers to 17. Production Approach - measures GDP by summing
the downturn of the economy the value-added of each firm in the economy
- Great depression happened during the 1930s that
affect the world economy Topic 1.1: Schools of Thought in Macroeconomics
Topic 1.1.1: The Roots of Macroeconomics
3. Classical Economist - believes that recession
(economic downturn) can be self-correcting with no - There are two major schools of macroeconomics, namely, (a)
government interventions those who believe that the market was best if they are left to
themselves, and (b) those who believe the government’s
4. Keynesian economist – believes that the government intervention can significantly improve the way the economy
needs to interfere in the economy to influence operates.
production and employment level
a. During the 1980s, the former is led by Milton
5. Fiscal Policy - is one policy that the government uses Friedman (University of Chicago) called the
to affect the economy through its tax and expenditure monetarist, while Franco Modigliani and James
decisions Tobin lead the other group called the Keynesians.

6. Expansionary Fiscal Policy - government should cut b. In the 1970's the monetarist arguments are taken over
taxes and/or raise spending by the New Classical Macroeconomist, and the other
side is replaced by the third-generation Keynesian
7. Contractionary Fiscal Policy - government should who may not entirely share many of Keynes' beliefs
raise taxes and/or cut spending but share the conviction that government policies will
enable the economy to work better.
8. Monetary Policy - this is when the government
controls the economy through the BSP The Keynesian Revolution

- when the government determines the economy's - One of the most important works in economic history
quantity of money was the Keynesian revolution

9. Income Policy - the government’s primary efforts to - In 1936 “John Maynard Keynes' General Theory of
regulate prices and wages Employment, Interest, and Money" was published.
Based on what was already known about the market
10. Supply-side Policy - supply-side policy proponents and its actions, Keynes set out to construct a theory
oppose the Keynesian idea that government should that would clarify the complex economic events of
intervene to increase aggregate demand; instead, they his time and the fundamental origin of
emphasize on AS and growth macroeconomics in the work of Keynes

11. Gross Domestic Product (GDP) - total market

value of all final goods and services produced in a
country within a specific period of time by factors of Topic 1.2: The New Classical School
production located within the economy
- Proponents of the New Classical Macroeconomics share the
12. Gross National Product (GNP) - is the value of all idea of Freedman, the group leader, including Robert Lucas,
final goods and services produced by domestically Thomas Sergeant, Robert Barro, and Edward Prescott and Nail
owned production factors within a given period Wallows of the University of Minnesota

13. Real GDP - measures changes in the physical output - The NCM argues that interventions are likely to make things
in the economy between different time periods by worse for the government
valuing all goods produced in the two periods at the
same price from the total GDP - NCM has three main working theories:
a. Economic agents maximize
 b. Expectations are rational 3. Income Policy - are direct attempts by the
c. Market clear government to control prices and wages

What are the implications of these assumptions? 4. Supply-side Policy - Proponents of these policies
argued that stimulating the supply of labor and capital
a. There is no possibility of involuntary unemployment. and increasing investment was the best way to
Any unemployed person who wants a job will offer increase the supply of goods and services.
to cut his/her wage until the wage is low enough to
attract an offer from some employer
Topic 1. 5: The Components of The Macroeconomy
b. Anyone with an excess supply of goods will cut
Macroeconomics focuses on four economic groups:
prices to sell
1. Household
2. Government (public sector)
c. Flexible adjustment of wages and prices leaves
3. Business (private sector), and
individuals all times in a situation in which they
4. the rest of the world (foreign sector)
work as much as they want, and firms produce as
much as they want
Topic 1.6: The Three Market Arena
d. In NCM, markets are continuously in equilibrium.
1. Goods and Services Market - In this market,
households and the government purchase goods and
Topic 1.3: The New Keynesians
services from firms in the goods and services market
- The New Keynesians emerge in the 1980s. This group
- Firms supply to the goods and services market while
includes George Akerlof and Janet Yallen and David Ronner
of the UC-Barkely; Olivier Blanchard of MIT, Greg Mankiw the household and government demand from this
and Larry Summers of Harvard, and Ben Mermanke of market
Princeton
2. Labor Market - Labor market interaction occurs when
- The New Keynesians don’t think the market is always clear, the government bought labor from the household and
but they try to understand and explain exactly why the market household supply labor in the market, while business
is failing and government demand labor

- The New Keynesians arguments are: - Businesses are usually the main labor demanders,
although the government is also a major employer of
a) The market sometimes does not clear even when labor in the market
individuals are looking out for their interests
- The overall labor supply in the market will be based
b) Information problems and the cost of changing prices on the decision made by households
lead to some price rigidities, which help cause
macroeconomic fluctuations in output and - Household members must determine whether to be a
employment part of the workforce and how many hours they are
going to render for work

c) It is argued that firms are reducing wages on the labor - The rest of the world also demands labor
market to reduce labor costs and are also likely to
eliminate the low quality of labor 3. Money Market - Household purchase stocks and
bonds from the firms in the capital market are
Topic 1.4: The Role of Government in The Macroeconomy sometimes referred to as the financial market

The government uses four types of policies to control - Household supply funds in the money market to
the macroeconomy: receive extra revenue in the form of stock dividends
and bond interest
1. Fiscal Policy - the government collects taxes from
households and firms and spends it through various - Households often need (borrow) money from this
items such as purchasing missiles, building parks, market to fund various household purchases and
providing social security payments, and building activities
highways
- Businesses borrow money from the money market to
2. Monetary Policy – the government controls the fund new buildings, in the expectation of gaining
quantity of money in the economy through the BSP more in the future

- The government borrows by bonds issuance

 • Includes sales of goods and services, assets, and
- The rest of the world is borrowing from the financial transfers
market and even lending to the financial market as
well • Exports - sales of domestically produced goods to
other countries
- Most of the lending and borrowing is managed by
financial institutions • Imports - goods bought from other countries

Topic 1.7: National Income Accounting • (x-m) = Nx

- is the measurement of indicators of national
output/income; .e.g. GDP, GNP Measurement of economy’s output:

Topic 1.7.1: The Circular Flow of GDP The Gross Domestic Product (GDP)
• The GDP measures the market value of all final
GDP is the overall market value of all final products and goods and services produced within an economy in a
services produced in a country within a specified period of given period
time by factors of production located within the country. It
includes houses, all goods, the value of services, airplane • GDP only measures current production (Transfer
rides, professors' lectures, etc. payments and transactions involving goods produced
in other periods are not included in the calculation of
• summarizes the transactions between the different GDP)
economic agents
• GDP is usually expressed in the currency of a
• agents: households, firms (business), banks, particular country, e.g., Philippine peso
government, and foreigners (RoW - rest of the world)

• Assumption: The economy composed of households • GDP includes final goods and services only:
and firms only (Microeconomics) o Final goods - goods and services that
are not purchased for the purpose of
• Households: own factors of production, consume producing other goods and services or
goods and service for resale

• Firms: hire factors of production to produce goods Eg. Rice (final) and palay or
and services unhusked rice (intermediate
product)
• Upper loop of the circular flow diagram: transactions
in the goods and services markets o Including intermediate goods and final
goods will result in “double counting”
• Lower loop: transactions in the factor markets

With government and foreign agents 3 Approaches for measuring GDP

• Need to account for: 1. Expenditure Approach - measures GDP as the sum of
a. Government purchases of goods and expenditures on final goods and services
services.
b. Government payments for factor services 2. Income Approach - measures GDP as the sum of
(wages, rent, interest, profit). incomes of factors of production (wages, rent,
c. Transfer payments between different agents. interest and profit)
d. Firms and households pay taxes to
government. - Uses the lower loop of the circular flow diagram:
e. Taxes paid on income, property, goods, and sum of payments to the various factors of
services. production
f. Transactions with the foreign sector.
- The income approach measures GDP by adding
• Transfer payments – are transactions wherein one together the incomes paid by firms to factors of
party is not obliged to deliver a good or service in production and two other items – depreciation
return for the payment. and net indirect taxes
- Examples: retirement benefits, unemployment
benefits,4P's (CCT) scholarships, and donations. 3. The Production Approach - measures GDP by
summing the value-added of each firm in the
economy
Transactions with foreign sector
 4. Value-added Approach – measures GDP as the sum
of value added at each stage of production (from D - accounts for the wear and tear of physical capital
initial to final stage)
- “D” is treated as a business cost  not included
Notes of the 3 approaches in NOS. However, “D” is part of “I” in the
expenditure side of the national accounts
• The expenditure approach, income approach, and the
value-added approach all come up with the same IBTS - includes taxes on the use or purchase goods
estimate of the GDP. They are equivalent approaches and services and grants from government to firms (E.
g sales taxes, value added tax)
• In the income approach, profit is also considered a
payment to the entrepreneur. So, the incomes are (1) - Not included in NOS but is part of the market
wages, (2) rent, (3) interest, and (4) profit prices, of which the items in the expenditure
accounts are quoted
• In the value-added approach, only the value added in
each stage of production are included. If we add the The distinction between GDP and GNP
value of intermediate product with the value of the
final product, we commit the sin of “double- GNP = GDP + Net Factor Income from the Rest of the World
counting” (NFY/RoW)

THE NATIONAL ACCOUNTS OF THE PHILIPPINES • NFYRoW - measures the difference between the
earnings of Philippine residents in other countries and
• same principles as above but need to adjust in order foreign residents in the Philippines
to accommodate the realities in modern economies
GDP GROWTH RATE
Expenditure approach
GDP YR.2 LESS GDP YR.1 OVER GDP YR. 1
GNP = C + G + I + (X –M) + SD TIMES 100

C - spending of households and private non-profit Nominal or Current GDP vs. Real GDP
institutions on goods and services
o Non-durables - goods and services that Nominal or current GDP – referred to as the final value of
are consumed rapidly goods and services based on the existing prices on the period
of production
o Durable goods - that last for a longer - Also referred as the current market price
period of time
Nominal GDP grows in 3 ways:
I - investment spending of domestic agents. Its major 1. Output rises and prices remain unchanged
components are “changes in” Fixed Capital and 2. Prices rise and output is constant
Changes in Stocks 3. Both output and prices rise (Tucker 2008)

G - government’s payments for the salaries of its Real GDP - Is the value of all final goods and services
workforce as well as purchases of goods and services produced during a given time period based on the prices
 used for the government’s day to day operations existing in selected base year
and projects
We can convert Nominal GDP to real GDP by using
X - earnings from the rest of the world on goods the ff. formula:
and non-factor services produced in the country
Real GDP = Nominal GDP/ GDP Deflator x 100
M- the country’s purchases of goods and non-
factor services from the rest of the world
GDP SHORTCOMINGS
SD - accounts for accounting and reporting errors in
the accounts. Needed to ensure that GDP value from GDP excluded the ff:
all approaches is the same 1. Nonmarket Transactions / unpaid activities (e.g.,
homemade services (repair and maintenance,
Income Approach childcare, backyard gardening)

GDP = COE + NOS + D + IBTS GDP ignores the value of these activities.
- In a simple world, GDP = COE + NOS. In Nonetheless:
practice, require two adjustments (D and IBTS) 2 reasons why nonmarket are excluded from GDP
 1. Extremely difficult to collect data and assign • Human cost and benefits
value • GDP gives us a ballpark idea of how much we
produce, not necessarily how well off we are
2. Difficult to determine w/c nonmarket
transaction to exclude or include Topic 1.7.3: Problem in Measuring GDP

2. Distribution, kind, and quality of products a. Sometimes the output is not valued correctly
as it is traded on the market. This includes
a) GDP is blind what fraction of the volunteer work, do it yourself, and
population consumes most of a government activities and services.
countries GDP
b. The changes in the price of products are
b) GDP also wears a blindfold with respect difficult to account for. Computers, for
to the quality and kinds of goods and example, improved tremendously as their
services prices decrease.

c) GDP does not reflect whether the c. Some activities measured as adding to GDP
products/services produced are of good is represent the use of resources to avoid or
quality or not. GDP only accounted how contain "bad" such as crime or risk to
much have been produced national security

3. Neglect of Leisure time d. The underground economy output is

- In general, wealthier nation becomes, the more difficult to measure.
leisure its citizens can afford. Thus, rather than
working longer hours, workers often choose to e. Gross Domestic Products disregard all
increase their time for recreation and travel activities in which money or goods change
- As such, GDP also understates well-being hands but in which there were no new goods
because no allowance is made for people and services are being produced. GDP is
working fewer hours concerned only with new, or current,
production. Old output produced will not be
4. The underground economy counted because it was already accounted
back at the time it was produced examples:
a) Illegal gambling selling of used cars, resold house.
f. GDP excludes output produced abroad by domestically
b) Manufacture and sale of illegal drugs and owned factors of production.
guns
Topic 2: GLOBAL ANG INTERNATIONAL BUSINESS
c) Loan sharking and illegal lending

d) Small time trading such as:

 Ambulant selling of food Key Concepts and Terms
products, cigarettes etc. 1. Countries – are sovereign states that have specific
geographical regions and have distinct cultures, languages,
- if underground economy is sizable, GDP understates and people
economic performance
2. Global – concerning the entire earth and not just one or two
5. Economic Bads regions
- More production means larger GDP regardless of - synonymous to worldwide and universal, and it also
pollution created in the production process means unlimited, unbounded, general, and comprehensive
- Air, Water, and noise pollution are economic
bads that impose costs on society and 3. International – concerning two or more nations
environment
4. International Business – comprises the impact of the above
Shortcomings of GDP as a Measure of National Economic practices on domestic and international markets
Well-being Topic 2.1: Global vs. International
- When economies go global, there is free trade,
• Production that is excluded migration, technological, political, military, and
– Household production socio-cultural interaction and sharing between
– Illegal production nations
– The underground economy (e.g., illegal - Global means the integration of different nations
gambling/drugs) as a single unit
• Treatment of leisure time
 - Being global means that they have branches and 1. Political and Legal Differences - Each nation possesses
offices in many countries and their products are different political and legal environment practices that differ
distributed worldwide from the domestic economy of the foreign market
- Also, they have investments in different
countries where their products are sold 2. Cultural Differences - In international business, cultural
- International means the interaction between two differences are considered to be one of the most challenging
countries regardless of national boundaries problems in international marketing
- It only affects the countries that are involved
- It involves import and export of products 3. Economic Differences - The economic environment in
between the two countries international business can vary from country to country
- They don’t hold any investments in each other’s
countries 4. Differences in The Currency Unit - In international business
activities, the currency unit plays an important role that varies
Topic 2.2: International Business from one nation to another and sometimes may cause
International Business activities take place in problems such as currency convertibility and also the
different aspects such as: problems of exchange rate fluctuations
- Movement of goods from country to another
(exporting, importing, trade) 5. Differences in The Language - Differences in the language
- Contractual agreements that allow foreign firms are one of the common problems that an international
marketer often encounters
to use products, services, and processes from
other nations (licensing, franchising)
6. Differences in The Marketing Infrastructure - Different
- The formation and operation of sales,
countries may vary widely on the availability of their
manufacturing, research and development, and
marketing facilities and its nature
distribution facilities in foreign markets
7. Trade Restrictions - In international business activities,
Features of International Business
trade restrictions or barriers, particularly import control,
- The main feature of international business is that
become a very important problem faced by the international
they operate on very large scales and involve
marketer
multiple jurisdictions
- Another feature is that they integrate the 8. High Costs of Distance - Distance is one of the factors
economies of multiple economies considered in international business that contributes additional
- Thirdly, international businesses and MNC’s cost when the markets are far located from each other
also have the distinction of emerging from only a
few developed countries 9. Differences in Trade Practices - Every nation’s trading
- Also, they face fierce competition practices and customs differ from one nation to another
Determinants of Culture:
Challenges of International Business
a. Material culture - Material culture
a. Economic Environment – the economy of discusses technological goods
countries may be industrialized, emerging, being utilized by most of the
or less developed which results to variations population
especially in education, infrastructure,
technology, and healthcare b. Cultural preferences - Preferences
b. Political Environment – being involve in for products, foods, product quality
international business means dealing with levels, and brands my differ in
different governments which in turn may be every international market
viewed as positive while the other as
exploitative c. Languages - The Languages used in
c. Cultural Environment – it is considered to be a country affect the marketing
one of the most difficult to understand activities, brand names, gathering
component of a foreign nation of data through interviews,
d. Competitive Environment – it is constantly advertising, and business
changing according to the economic, relationships
political, and cultural environments which
means that competition may exist from a d. Education - Education refers to the
variety of sources, and the nature of level of completed educational
competition may change from place to place attainment in a region that can be
an indicator of the quality and
Topic 3: International Business Differences potential workforce and consumers'
status
 e. Religion - Religion is considered to coordinated practices and regulations regarding environmental
be the major cultural influencer that protection.
can affect the lives of individuals

f. Ethics and values - Ethics and TOPIC 5: BASIC THEORY USING DEMAND AND
values influence international SUPPLY IN TRADE
business, especially on the conduct
of business in another country 1. Law of Demand – the inverse relation between
demand price and quantity demanded
g. Social organization - Social
organizations are composed of
family and groups, the prevalence
2. Demand – a fundamental aspect of market exchanges
of special-interest groups, and
and economic activity
attitude toward them
3. Demand Curve – represents the demand relation
Topic 4: Globalization between demand price and quantity demanded
•Globalization - it promotes and increases interactions
between different countries around the world just like - Nothing more than a graphical representation of the
multinational corporations which operates in two or more law of demand
countries that plays a huge role in economic globalization.
•Globalization in Geography - it is about making connections
4. Supply – a fundamental aspect of market exchange
between places on a global scale. For example, the use of
and economic activity
digital technology and rapid transportation which linked
- Based on the ownership and control of scarce
countries, business, and people around the world.
resources
•Economic Globalization - increases the size of the economy
in every country by improving the living standard and level of
education of the people. Topic 6: Theories of International Trade
•Financial Globalization - through this, the financial markets
become deeper and more sophisticated when they integrate
with world markets, increasing the financial alternatives for Topic 7: Government Policy and International Trade
borrowers and investors. One example of this is the stock Policy
market wherein countries around the world are financially
1. The General Agreement on Tariffs and Trade
connected because of the fluctuations which affects the rate of
(GATT) – a multinational treaty that now covers
the stocks.
eighty percent of the world trade
•Cultural Globalization - it is the transmission of ideas,
meanings, and values around the world in such a way as to
extend and intensify social relationships. For example, the 2. The WTO – established on January 1, 1995
Indian restaurants near schools with more Indian students or
Muslim students. - The embodiment of the Uruguay Round resulting
to the succession of GATT
•Political Globalization - it is the continuity of political
relationships between countries such as the UN, NATO,
WTO, which debates and regulate international politics and
trade. 3. Specific Tariff – the fixed amount of money per
physical unit or according to the weight or
•Sociological Globalization - it is associated with rapid and measurement of the commodity imported or exported
significant human changes and examples of this are the
internationally popular films, books, and TV series which
people are easily influenced to.
4. Ad Valorem Tariff – “Ad Valorem” is the Latin word
•Technological Globalization - the increasing speed of of “on the value”
technological diffusion across the global economy which we
benefit by adopting to innovation. - When the duty is levied as a fixed percentage of
the traded commodity’s value, it is called a
•Geographic Globalization - (same ra sa Globalization in Valorem Tariff
Geography)
•Ecological Globalization - since we are seeing the same
Planet, this globalization refers to the internationally
5. Sliding Scale Tariff – the import duties that vary with
the prices of the commodities are termed sliding scale 19. Embargo – a severe trade restriction that completely
duties bans the importing of products from another country
or forbids exporting its own products to that country
6. Revenue Tariff – imposed primarily for generating
more revenues for the government
20. Local Content Requirement - instead of placing a
quota on the number of goods that can be imported,
7. Protective Tariff – imposed to protect the home the government can require that a certain percentage
industries from the cut-throat competition from the of goods be made domestically
foreign-produced goods
21. Product Standards – government imposes standards
8. Non-discriminatory Tariffs – the uniform tariff rates for the goods and if not met it is rejected
are applicable to all the commodities irrespective of
the country of origin 22. Domestic Content Requirement – governments
impose this to boost domestic production
9. Discriminatory Tariff – the varying tariff rates exist
for different commodities 23. Product Labelling – certain countries insist on
specific labeling of the products
10. General and Conventional Tariff – the state
legislature makes provision for the adjustment of 24. Packaging Requirements – certain nations insist on a
tariff rates as and when required to fulfill the particular type of packaging of goods
obligations of international commercial agreements
25. Foreign Exchange Regulation - the importer must
11. Maximum and Minimum Tariffs – a country has ensure that adequate foreign exchange is available for
maximum and minimum tariff rates for every import of goods by obtaining clearance from
commodity exchange control authorities before concluding the
contract with the supplier
12. Multiple Column Tariff – consists of three different
tariff rates: a general rate, an international rate, and a 26. State Trading – certain items are imported or
preferential rate exported only through canalizing agencies like
MMTT (Minerals and Metal Trading Corporation of
13. Retaliatory Tariffs - if a foreign country has imposed India)
tariffs upon the exports from the home country and
the latter imposes tariffs against the products of the
former, the tariffs resorted to by the home country Topic 7.1.1: World Trade Organization (WTO)
will be regarded as the retaliatory tariffs - General Agreement on Tariffs and Trade
(GAAT) was established in 1947 under the
14. Countervailing Tariffs - if the foreign country has decision of United Nations Organization (UNO)
been exporting large quantities of its products in the to overcome economic issues
market of the home country on the strength of export - GATT emerged from the ashes of the Havana
subsidies, the home country can neutralize the 'unfair Center
advantage' enjoyed by foreign products through - 23 nations agreed to continue extensive tariff
imposing duties upon them as they enter the territory negotiations for trade concessions at Geneva
of the home country - The agreement was signed on October 30, 1947
and came into existence from January 1, 1948
15. Import Duties – the home country imposes tariff upon - During the Uruguay Round, a critical juncture
the products of the foreign countries as they enter its occurred which may be called the Final Act
territory - The Dunkel Agreement was signed by 12
countries where WTO finally emerged on
16. Export Duties – the home country’s product become January 1, 1995
subject to tax as they leave its territory to be sold in
the foreign market

17. Import Quotas – are legal restrictions on the Topic 7.2: What is GATT?
quantities of imports that are imposed by the
- A forum where the contracting parties meet from
domestic government
time to time to discuss and solve their trade
problems and negotiate to enlarge their trade
18. Export Subsidy – payments made directly to
- It has been a permanent international
domestic producers to encourage exports of
organization having a permanent Council of
production to the foreign sector
Representative with headquarters at Geneva
 - Its function is to call international conferences to Round at Marrakesh, Morocco, and the GATT
decide on trade liberalizations on a multilateral disappeared and was absorbed by the WTO on
basis January 1, 1995
- After the Uruguay Round, GATT expanded to
other sectors on international trade like
Topic 7.1.2: GATT ‘Rounds’ of Global Trade Negotiations intellectual property rights services and
investment, agriculture and textiles

a. First Round – talks held in Havana in 1947, 23

countries formed GATT and exchanged tariff Topic 7.1.3: World Trade Organization (WTO)
concessions on 45,000 products worth 10B USD - Established on January 1, 1995
- 76 members on the first day and now has 146
members, India is one of the founder members
b. Second Round – ten more countries joined GATT - It is composed of the Ministerial Conference and
and was held in Annecy, France in 1949; customs and the General Council
tariffs on 5,000 additional items of international trade - The Ministerial Conference is the highest body
were reduced and is composed on the representatives of all the
Members
c. Third Round – organized in Torquay, England in - MC are executives and is responsible for
1950-1951 wherein 38 member countries participated carrying out WTO functions
and adopted tariff reduction on 8,700 items - MC meets atleast once every two years

d. Fourth Round – held in Geneva in 1955-1956 where

countries decided to further cut duties on goods Topic 7.1.4: Differences Between GATT and WTO
entering international trade worth 2.5B USD
1. GATT has no status whereas the WTO has a legal
e. Fifth Round – took place during 1960-1962 at status
Geneva where goods subject to tariff cut amounted to 2. GATT sets separate agreements while WTO set
5B USD on 4,400 items and 26 countries participated permanent and binding decisions for all members
3. GATT dispute settlement was lazy while WTO is
f. Sixth Round or the Kennedy Round – US Congress faster and binding on all parties
passed the Trade Expansion Act on October 1962 4. GATT meets once in a decade while WTO are timely
which authorized the Kennedy administration to 5. GATT rules are only applied to goods while WTO
make a 50% tariff reduction in all commodities includes both goods and services

- Paved the way for the Kennedy round of trade

negotiations at Geneva in May 1964 which were Topic 7.2: Trade Barriers
to be completed by June 30, 1967
- 62 countries participated and tariff reduction Free Trade vs Protectionism
amounted to 40B covering 4/5 of the world trade
- Free Trade is a laissez-faire approach with no
restrictions on trade
- It is also the absence of trade barriers or
g. Seventh Round or Tokyo Round – launched in restrictions on foreign trade
September 1973 under GATT’s auspices - Protectionism or trade restrictions hold that
- Its objectives were set out in the Tokyo international trade regulation is vital to ensure
Declaration reaching six programs that markets function properly
- Exists in many forms such as: tariffs, subsidies,
and quotas
h. Eight Round or the Uruguay Round – began at Punta
Del Esta in Uruguay in September 1986 and Topic 7.2.2: Trade Restrictions
concluded by the end of 1990 - Majority of the nations in the world impose trade
- Talks broke down during the meeting in Brussels restrictions to protect domestic industries
in December 1990 and restarted in February
1991 that continued until August 1991 Topic 7.2.2: Trade Barriers: Tariff
- On December 20, 1991, Author Dunkel, the then
Director-General of GATT proposed the Dunkel - A tariff is a duty or tax imposed by the
Draft Text which was a document that concluded government of a country upon the traded
the Uruguay Round by December 15, 1993 commodity as it crosses the national boundaries
- On April 15, 1994, 123 Ministers of member - High tariffs certainly have the effect of
countries ratified the results of the Uruguay restricting the volume of international trade
 - Negative tariff means expansion of foreign trade rates while preferential applies to the products
originating from colonial countries and is kept
Types of Tariffs: lower
a. Specific Tariff – fixed amount of money per physical
unit or according to the weight or measurement of the
commodity imported or exported (e.g. wheat, rice, k. Retaliatory Tariff – the home country does not either
fertilizers, cement, sugar, cloth, etc.) have the object of raising revenues or protecting
- Cannot be levied on high valued goods such as home industries but of acting in retaliation
diamonds, jewelries, watches, TV sets, motor
cars, paintings, etc. l. Countervailing Tariffs – the unfair advantage given
by export subsidies is offset

b. Ad Valorem Tariff – taxes are levied on the products’

value disproportionately higher than their physical Topic 7.2.3: Trade Barriers: Non-Tariff
characteristics such as weight or measurement
c. Sliding Scale Tariff – import duties that vary with the - Refer to restrictions that result from prohibitions,
prices of the commodities conditions, or specific market requirements that
make importation or exportation difficult and
costly
d. Revenue Tariff – in less developed countries,
government rely on this type of tariff as a source of
revenue Import Quotas – legal restrictions on the quantities of imports
that are imposed by the domestic government
e. Protective Tariff – the higher the tariff, the greater, - Both measures benefit domestic producers, but
maybe the protective effect of tariff from the home harm domestic consumers because of the higher
industries prices and reduced supplies
f. Non-discriminatory Tariffs – also called as a single
column tariff which imposes uniform tariff to all
commodities of the country of origin Export Subsidies – effectively increases the overall revenue
received by the domestic firms when exporting production,
g. Discriminatory Tariff – also known as double-column which is bound to encourage exports
tariff wherein varying rates of tariff exist such as
products from favored countries are subject to lower
tariff Embargo – a severe trade restriction in which a nation
completely bans the importing of products from another
h. General and Conventional Tariff – in conventional country or forbids exporting its own products to that country
tariff, changes regarding tariff rates are only possible
through negotiations and agreements reached
between concerned countries
Other Non-Tariff Trade Barriers
- In general tariff, the state legislature provides a. Local Content Requirement – the government require
adjustment on tariff rates when required to fulfill that a certain percentage of goods can be made
the obligations of international commercial domestically
agreements
i. Maximum and Minimum Tariff – the legislature fixes
these tariff rates, and the government is authorized to
apply specific tariffs to the goods imported from b. Product Standards – imposes standards for goods, if
different countries not met, then rejected
- Minimum tariffs are applied to products from
“The Most Favored Nations” c. Domestic Content Requirement – to boost domestic
- The maximum tariff rate is used to improve production
bargaining position of the home country to
foreign countries d. Product Labelling – certain countries insist on
specific labeling of the products

e. Packaging Requirements – certain nations insist on a

j. Multiple Column Tariff – consist of three different particular type of packaging of goods
tariffs: general, international, and preferential
- General and international tariff rates can be f. Foreign Exchange Regulation - importer must ensure
equivalent to the minimum and maximum tariff that adequate foreign exchange is available for import
 of goods by obtaining clearance from exchange -starting a subsidiary of a domestic firm in a foreign country
control authorities before concluding the contract
with the supplier
Benefits of FDI
g. State Trading – certain items are imported or
exported only through canalizing agencies FDI offers benefits to both the investor and the foreign host
country
Topic 7.2.4: Five Reasons for Placing Tariffs •for businesses:
a. Domestic Employment – decreasing imports and -market diversification
increasing domestic production also increases local
employment -tax incentives
-lower labor costs

b. Low Foreign Wages - Placing tariffs on imports -preferential tariffs

produced by foreign workers who receive lower
-subsidies
wages "level the competitive playing field" compared
to domestic goods produced by higher-paid domestic •for the host country:
workers
-economic stimulation
c. Infant Industry – tariffs on imports protect the “infant
-development of human capital
industry” while it matures and develops
-increase in employment
d. Unfair Trade – tariffs balance the competitive playing
field since some foreign producers import and sells -access to management expertise, skills, and
products at lower prices in a domestic economy technology

e. National Security – tariffs can increase security in the

national economy which discourage imports

Topic 8: Foreign Direct Investment

Foreign Direct Investment -FDI has become an important
source of external finance for the developing countries which
promotes growth, innovative capacity, and effective marketing Disadvantages of FDI
skills that can compete in the global markets
•displacement of local business - cannot compete with foreign
-FDI became an essential mechanism for global economic large firms
integration
•profit repatriation - large capital outflows
-a type of foreign investment in which foreign investors own
assets and control the activities that produce revenue flows in
the recipient country Types and Examples of FDI
-includes capital transfer and management transfer There are two main types of FDI:
-an investment in a company or organization in another •Horizontal - the business conducts the same activities but in a
country by a group in one country to create an abiding interest foreign country
-one can make a FDI by gaining a permanent interest or •Vertical - the business conducts different activities abroad but
extending business to a foreign country are still related to its main activity
-an investment into a foreign firm is considered an FDI if it However, two other forms of FDI have also been observed:
establishes a lasting interest and by means of lasting interest it
is obtaining atleast 10% of the firm's voting power •Conglomerate - acquires unrelated business in a foreign
country which requires overcoming two barriers to entry:
entering the foreign country and entering a new industry
Methods of FDI •Platform - business expands to foreign country but the output
from the foreign country is exported to a third country
-acquiring voting stock in a foreign company
-mergers and acquisitions
Topic 9: Regional Economic Integration
-joint ventures with foreign corporations
Regional Economic Integration -an arrangement between market and this kind of employment can tax
nations that typically involves reducing or eliminating barriers the resources of member countries
to trade and coordinating monetary and fiscal policies
•Loss of National Sovereignty - due to
-aims to lower prices for consumers and suppliers and increase international agreements, member countries
cooperation between the countries may have to give up more of their political
and economic rights
-often referred to as regional integration
-an integrated world that makes sure products, services, and
people pass across borders easily through faster customs
procedures, a more favorable business climate, and alignment
of regional regulations and standards

4 Main Types of Economic Integration

•Free Trade Area - member countries abolish all trade barriers
within themselves but are free to independently establish trade
policies with non-member nations (NAFTA - North American
Free Trade Agreement)
•Customs Union - barriers to trade between member countries
are being lifted - members agree to treat trade similarly with
non-member countries
•Common Market - has the same operation like free trade and
customs union, primary benefits are that workers from
member countries no longer need visa or work permit to work
in this market (COMESA - Common Market for Eastern and
Southern Africa)
•Economic Union - countries sign an agreement to follow
common economic policies (EU - European Union)
Trade Bloc - a free trade zone or almost free trade
zone created by one or more tax, tariff, and trade agreements
between countries

Pros and Cons of Creating an Economic Integration

Pros
•Trade Creation - create more opportunities
for countries to trade with cheaper prices for
consumers because of reduction or removal
of tariffs
•Employment Opportunities - help expand
job opportunities
•Consensus and Cooperation - member
nations may find it easier to understand
smaller nations which results to a closer
political cooperation
Cons
•Trade Diversion - member countries may
trade more from each other than non-
member countries
•Employment Shifts and Reductions - due to
an increase demand of labor, member
countries may move to a cheaper labor