LESSON 1: INTRODUCTION

Economics: An Introduction

Economics deals with the problem of scarcity. If society’s resources are

abundant and unlimited rather than scarce, then there would be no
problem to study. Society would simply produce anything and
everything it needs at any point in time and everyone would have as
much of everything he desires. But this is not the case, for there is a
basic and continuing problem of scarcity that man and society are
confronted with. Scarcity alone does not explain completely the
economic problem. Paired with a shortage of resources are the multiple
wants and desires of human beings.

Human beings have multiple wants and desires, resources have

alternative uses. Scarce resources need to be allocated among different
needs. If human beings have only one requirement (say food), coping
with scarcity would require only how to get the most food out of
existing resources. However, since men need many more material items
other than food, there arises the problem of determining the optimum
use of resources to satisfy competing needs.

To summarize, scarcity of resources plus multiplicity of human wants

equals economics. It is obvious to anyone that, at any given time, at
least some resources (e.g. land or capital) are scarce and that human
wants are almost unlimited. Thus, it is hard to deny the importance of
1 Economics
economics is theand
both today study offuture.
in the how societies use scarce resources
commodities
. and distribute
to produce valuable them among
different people.
Definition:
2 Economics may be defined as a science that deals with the
obtaining
. wealthofforman
activities the satisfaction
in
of his wants.

3. Economics is the art of making

4 living.
a Economics is the proper allocation and efficient use of available
maximum
. satisfaction
resources for of
the
human wants.
5 Economics is the branch of social science that deals with the
distribution
. and consumption
production and of goods and services and
their management.
6.Economics is the science that deals with the production, distribution,
and consumption of wealth, and with the various related problems of
labor, finance, taxation, etc. (Webster's New World)
7.Economics is the study of choice and decision-making in a world with
limited resources.

8.Right and prudent administration of assets, Public wealth, set of

services and economic interests.

9. The study of the choices people make to cope with scarcity.

10.Economics is the study of how to use our limited resources to satisfy

our unlimited wants as fully as possible.

Division of Economics:

Microeconomics is that branch of economics that deals with the

economic behavior of individual units such as consumers, firms and the
owners of the factors of production, for example, the price of rice, the
number of workers of PLDT, the income of Mr. Dorig, etc. Micro means
small, thus microeconomics deals with the study of the small units of
the economy.

Macroeconomics is that branch of economics that deals with the

economic behavior of the whole economy such as government,
business and household. Examples of macroeconomic studies are
national income, employment and inflation.

Microeconomics and macroeconomics are closely related, for example,

compared with the human body, the microeconomic units are the heart,
kidney, lungs and other parts. The macroeconomic unit is the human
body. A defect in part of the human body affects the whole body. The
same is true in the operation of economics.

History of Economics:

It has started to be known when Adam Smith’s book Wealth of Nations

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

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

Basic Economics Problem:

1. What goods and services to produce and how much?

A society must determine how much of each of the many possible goods
and services it will make, and when they will be produced. Will we
produce frozen pizzas or shirts today? A few high-quality shirts or many
cheap shirts? Will we use scarce resources to produce many
consumption goods (like frozen pizzas)? Or will we produce fewer
consumption goods and more investment goods (like pizza-making
machines, which will boost production and consumption tomorrow.

2. How to produce the goods and services?

It has to do with production and technology. As a general rule, goods
and services must be produced in the most efficient manner. This
means maximum output with minimum input without sacrificing quality.
The application of modern technology has increased output and
decreased cost of production. The use of advanced technology will
create more unemployment.

3. For whom are the goods and services?

One key task for any society is to decide who gets to eat the fruit of the
economy’s efforts. How is the national product divided among different
households? Are many people poor and a few rich? Do high incomes go
to managers or workers or landlords? Do the sick or elderly eat well, or
are they left to fend for themselves?

Economic System Model:

Economic system is a set of economic institutions that dominates a

given economy.

An institution is a set of rules of conduct, established ways of thinking,

or ways of doing things.
The purpose of an economic system is to solve the basic economic
problems. The main goal of economic system is high standard of living
for all its citizens.

1. Capitalism
Here, the factors of production and distribution are owned and managed
by private individuals or corporations. We can use different terms like
market economy, free-enterprise economy, or laissez faire economy for
capitalism. The essential characteristics of capitalism are:
 Private property
 Economic freedom
 Free competition
 Profit motive

2. Communism
It is the opposite of capitalism. The factors of production and distribution
are owned and managed by the state. It is also known as the command
economy or classless economy. The essential characteristics of
communism are:
 No private property
 No economic freedom
 Presence of central planning
 No free competition
 No profit motive.

3. Socialism
It is a combination of capitalism and communism. The major industries
are owned and managed by the state while the minor industries belong
to the private sector.

1
How Abunda
to Judge a Economic System:
. nce
2
The Growth
vital criteria to judge an economic system is as follows:
. Stability
3
. Security
4
. Efficienc
5 y
. Justice and
6 equity
. Economic
7 freedom
The Goals of
Economics:
1 Economic
. growth Full
2 employment
. Price stability
3 Economic
. freedom
4 Equitable distribution of wealth
. and income EconomicLESSON 2: THEORY OF WANTS
security
5
.
Demand and Consumer Behavior
6
.
Demand is the schedule of various quantities of commodities which
buyers are willing and able to purchase at a given price, time and
place. It is determined by factors such as:

1. Income
2. Population
3. Taste and preferences
4. Price expectation
5. Prices of related goods

Table: Individual demand schedule showing the inverse relationship

between price and quantity.
Pric Quantity
e Demanded
5 1
4 2
3 3
2 4
Individual
1 5 demand curve showing a down slopping curve. The position of
the demand curve indicates the inverse relationship between price and
quantity demanded.

Law of Demand states that consumers are most likely to buy more
goods and services as price decreases, and buy less goods and
services as price increases.
Validity of the Law of Demand

The law of demand states: as price increases, quantity demanded

decreases, and as price decreases, quantity demanded increases. Such
theory is only true if the assumption of ceteris paribus is applied. It
means “all other things equal or constant.” The law of demand is
correct if the determinants of demand are held constant. That is there is
no change in income, taste or population.

Elasticity of Demand

Demand elasticity refers to the reaction or response of the buyers to

changes in price of goods and services. There are five types of demand
elasticity to price changes of goods and services:
1. Elastic demand. A change in price results to a greater change in
quantity demanded. For example, a 10% change in price (increase or
decrease) creates a 20% change in quantity demanded (increase or
decrease). This means that the buyers are very sensitive to price.
2. Inelastic demand. A change in price results to a lesser change in
quantity demanded. For
example, a 20% change in price creates a 5% change in quantity
demanded. This means that buyers are not sensitive to price
change.
3. Unitary demand. A change in price results to an equal change in
quantity demanded. For
example, a 10% change in price results to a 10% change in quantity
demanded.
4. Perfectly elastic demand. Without change in price, there is an infinite
change in quantity demanded. Such situation occurs in a purely
competitive market.
5. Perfectly inelastic demand. A change in price creates no change in
quantity demanded.

Determinants of Demand Elasticity

6. Number of good substitutes. Demand is elastic for a product with

many substitutes. An increase in the price of such product induces
the buyers to look for good substitutes.
7. Price increase in proportion to income. If the price increase has very
little effect on the income or budget of the buyers, demand is
consumed
inelastic. Butincreases, the increase
if the price marginalinvolves
utility ofathat good tends to
diminish. Marginal
substantial amountutility
in proportion to the income of consumers,
demand is elastic.
3. Importance of the product to the consumers. Luxury goods are not
very important to majority of the people. On the other hand, the
essential goods are very important to people. Rice is important to
 refers to the additional satisfaction of a consumer whenever he
consumes one more unit of the same good. For example, the first
unit of a good like ice cream gives you a certain level of satisfaction
or utility. Now imagine consuming a second unit. Your total utility
goes up because the second unit of the good gives you some
additional utility. What about adding a third or fourth unit of the
same good? Eventually if you eat enough ice cream, instead of
adding utility, it makes you sick. This leads us to the fundamental
economic concept of marginal utility.

2. Indifference curve. The word “indifference” means showing no bias,

or neutral. Suppose there are five combinations of two products (like
meat and fish). The first combination can be 5 kilos of meat and 1
kilo of fish while another combination is composed of 5 kilos of fish
and 1 kilo of meat, and so on. Since all the combinations give the
same level of satisfaction or utility, the consumer would be
indifferent as to which combination he receives. It means any
combination would be desirable for him. By definition, an
indifference curve is a curve that shows different combination of two
goods which yield the same level of satisfaction. Indifference curves
are useful in the sense that they indicate the degree of substitution
of one good for another. The ability to substitute one good for
another is an important scope in consumer behavior. Such concept is
Combinatio
illustratedKilos of marginal
by the Kilos ofrate
Fishof substitution. It indicates the rate
ns at which Meat
a consumer would exchange units of one product for
A additional5units of another
1 product.
B 4 2
Table: An indifference schedule showing the various combinations of
C
meat and fish3 3
D 2 4
E 1 5
A consumer’s indifference curve: Every point on an indifference curve
indicates a combination of two products that provides same level of
satisfaction.

Budget Line

A budget line indicates the various combinations of two products that

can be purchased by the consumer with his income, given the prices of
the products. A consumer has a fixed budget, so he has to spend his
due to the
money budget.
wisely For example,
to able the unit
to maximize price of bothHe
his satisfaction. products is P25.
has several
The total budget of
combinations of two products to choose, but at the same time his
choice is limited
the consumer is P150. It is possible for him to buy 5 units of A and 1 unit
of B, or 5 units of B and 1 unit of A. Just have a look at the table to find
the various options of the consumer.

Table: Budget line schedule showing the various combinations of two

products with a fixed budget of P150 and the unit price of both the
Units of product
products is P25. A Units of product B Total Expenditures
5 1 P 125 + P 25 = P 150
4 2 P 100 + P 50 = P 150
3 3 P 75 + P 75 = P 150
2 4 P 50 + P100 = P 150
1
A graphical illustration of5 budget line. P 25 + P125 = P 150

Supply and Pricing in Competitive Markets

Supply is the schedule of various quantities of commodities which

producers are willing and able to produce and offer at a given price,
place and time. Its determinants are:
1. Technology
2. Cost of production
3. Number of sellers
4. Prices of other goods
5. Price expectations
6. Taxes

Table: Individual supply schedule showing the direct relationship

between price and quantity.

An Individual supply curve showing an upward slope. The position of the

supply curve indicates a direct relationship between price and quantity
supplied.

Law of Supply

As price increases, quantity supplied also increases, and as price

decreases, quantity supplied also decreases. This direct relationship
between price and quantity supplied is the law of supply. However, the
law of supply is only correct if we apply the assumption of ceteris
paribus. This means the law of supply is valid if the determinants of
supply are held constant.
Elasticity of Supply

Supply elasticity refers to the response of the sellers/ producers to price

change of goods. There are five types of elasticity of supply or types of

responses of producers to price changes:

1. Elastic supply. A change in price results to a greater change in
quantity supplied. This
means that producers are very responsive to price change. For
example, with a 10% increase in price, they increase their quantity
supplied by 20%.
2. Inelastic supply. A change in price results to a lesser change in
quantity supplied. This
shows that producers have very weak response to price change.
3. Unitary supply. A change in price results to equal change in quantity
supplied.
4. Perfectly elastic supply. Without change in price, there is an infinite
change in quantity supplied.
5. Perfectly inelastic supply. A change in price has no effect on quantity
supplied.

Determinant of Supply Elasticity

The determinant of supply elasticity is the time involved in the ability of

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

The Law of Supply and Demand

The law of supply and demand states that when supply is greater than
demand, price decreases. When demand is greater than supply, price
increases. When supply is equal to demand, price remains constant.
This is the market price or the equilibrium price. It means that both
sellers and buyers have mutual agreement.

LESSON 3: ANALYSIS PRICE SYSTEM

Analysis of the Price System

One favorable argument for the price system is its efficiency in

distributing goods and services. On the part of the producers, they tend
to produce those products that give them maximum profits. On the
time, the welfare of the consumers is enhanced because they are the
beneficiaries of quality products at low prices.

Another argument in favor of price system is the presence of personal

freedom. Producers are free to produce any product to satisfy their own
economic interests as long as those do not conflict with legal and moral
traditions. Other freedoms include the free choice of workers or
employees. Employees are also free to choose their employers. Buyers
are also free to purchase any product that gives them maximum
satisfaction.

Criticisms against the Price System

As a matter of fact, the free competition does not exist long enough.
Self-interests of businessmen force them to drive away their rivals
through competition. Another strategy is to merge their companies for
market advantage. The small ones find it difficult to compete with the
big ones. In the process of competition, the big companies become the
price leaders.

Another case against the price system is the unfair distribution of goods
and services. Only the very few rich can have a decent life under the
price system. Moreover, social goods like anti-pollution, rural
electrification, irrigation, or highways cannot be allocated efficiently
through the price system. Usually these require a huge financing, and
yet the returns of investment take a long time and profits may not be
attractive. Hence, only the government is willing to undertake such
projects.

The Role of the Government

Keeping in mind the limitations of the price system, the government has
to regulate and supervise production, distribution and consumption of
goods and services. The government provides incentives in the
production of goods and services that greatly contribute to the socio-
economic development of the country. The government interferes in the
allocation of the goods and services in order to protect the welfare of
the poor. At the same time, the government has to control the
consumption of goods and services that are wasteful and detrimental to
the growth of the economy. In developing countries, the role of the
government is more active. Infrastructures like roads, bridges,
communication facilities, electrification, schools and hospitals have to
be set up. These speed up the process of economic growth. Economic
growth means more employment, production and income. And this
situation leads to the high standards of living.
 LESSON 4: PRODUCTION
Production

Production is the creation of goods and services to satisfy human wants.

The factors of production are called the inputs of production, and the
goods and services that have been created by the inputs are called the
outputs of production. The factors of production are classified as fixed
factor (fixed input) and variable factor (variable input). A fixed factor
remains constant regardless of the volume of production. In case of
variable factor, it changes in accordance with the volume of production.
The process of transforming both fixed and variable inputs into finished
goods and services is called the theory of production. The technical
relationship between the application of inputs and the resulting
maximum obtainable output is known as the production function.

Kinds of Utilities in Production

Form Utility. Utility could be increased in a certain commodity by

changing its form. Raw materials are indeed useful, but they could be
made more useful by reshaping them. Trees in the forest serve man in
one way or another, but they are of little use to him unless the
lumberman cuts them down and saws them into boards. Fresh fish can
satisfy our want for food better if it is properly cooked to suit our taste.
Coal and iron extracted from the bowels of the earth keep us warm and
provide us with the raw materials for our tools and machinery.
Lumbering, fishing, mining, all of these so-called extractive industries
create form utility. Agriculture is another industry that creates form
utility. The farmer, by careful preparation and fertilization of the soil,
produces all sorts of crops.

Place Utility. Goods can be made more desirable by moving them about.
Matter in the wrong place is dirt, but in the right place it is wealth. After
harvesting the crop, it is of little use to the farmer unless it is brought
to town and sold to the people who consume it.

Possession Utility. The rice in the granary of the farmer, after satisfying
his needs for that commodity will not be as useful as when it is brought
to market and sold to the final consumers. Similarly, an automobile in
the shop of the dealer is not as useful as in the hands of the person
who needs a car. The selling of the rice or of the car is an activity that
creates what is known as possession utility.

Time Utility. Time is an important factor that influences the utility of

goods. There are some utilities that cannot be kept for a long time and
wait to satisfy the maximum need for them. During the mango or
lansones season, great quantities of these fruits go to waste or
other commodities. The development of cold storage and refrigeration
has partly solved the problem of preserving these perishable
commodities until such time as they are more useful.

Service Utility. Production is not only confined to material goods but also
to immaterial goods or services. There are many persons who never
handle material goods but are considered productive because they
create certain utilities by rendering valuable and necessary services to
the community; they are engaged in service production. The people
engaged in the so- called learned professions and those who render
personal services create service utility. The services of professors,
lawyers, doctors, priests and ministers, singers, dancers, government
officials and also those of servants, cooks, waiters, and housemaids are
included in service production.
1 Total cost – is the sum total cost of production. It is
.Economic
interests Costs
and
composednormal profits.rents,
of wages,
2.Fixed cost – is a kind of cost that remains constant regardless of the
volume of production. Even if there is no production, there is still cost.
Examples are the expenditures on machines and buildings.
3. Variable cost – is a kind of cost that changes in proportion to
volume of production. If
there is no production, there is no cost. More production means more
4.
costs.Average
Examplescostare– is also called
wages and rawunit cost. It is equivalent to total cost
materials.
AC divided by quantity.
=T
C
5 Q Marginal cost – is the additional or extra cost brought about
. by producing
additional one
unit. It is obtained by dividing change in total cost by
change in quantity. MC= ΔTC
ΔQ

6 Explicit cost – is also called expenditure cost. These are payments

factors
. toof production
the owners oflike wages, interests, electric
the
7
bills, Implicit
and cost – also called non-expenditure cost. The factors of
so forth.
the
. production belong to
users.
8 Opportunity cost – is a foregone opportunity or
. alternative benefit.
Short Run and Long Run Period

Short run refers to a period of time that is too short to allow an

enterprise to change its plant capacity, yet long enough to allow a
change in its variable resources.

Long run refers to a period of time that is long enough to permit a firm
to alter all its resources or inputs

Economies of Scale

Economies of scale may be classified as internal and external

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

Appropriate Techniques of Production

Labor-intensive technology means more labor inputs and less capital

inputs. Capital-intensive technology means more machines and less
labor. Poor countries should use labor-intensive technology and
advanced countries should use capital-intensive technology.

Conclusion

In the production of goods and services one must always consider the
type of products that one is to produce, for whom the products are to
be produced , how are these products to be produced and how long will
it take to produce the products. Thus one must take into consideration
1 cost
the Principles of Macroeconomics
of producing the product by
, the techniques in production, the
.lengthCase and Fair Economics by
of time and the utility of the products that are to be produced.
3
2 Principles ofand
Samuelson Economics
Nordhausby
. Roberto Medina
References:
 LESSON 5: BUSINESS ORGANIZATION
Business Organizations

The main economic activity is production. Almost all production activity

is done by specialized organizations.

There are different forms of business organizations, from very simple to

complex. The choice of a form of business organization depends on
one’s resources, objectives, and perceptions. There are three most
common forms of business organizations in a capitalist economy. These
are single/sole proprietorship, partnership and corporation.

Single/sole proprietorship.
This is the oldest and simplest form of business organization. It is also
the easiest to put up. This is owned and usually managed by one
person.

Advantages:
1.It is easy to form and dissolve. It requires a small capital and there are
no legal papers needed except the usual business license from the
Department of Trade and Industry and a business permit from the
city/municipal government.
2.All profits belong to the business owner. This is the greatest advantage
to the entrepreneur as there is no one else to share the profit with.
3. The owner is the boss. He makes his own decisions and executes
them the way he
likes. For example, he can change his business hours, products, prices,
or style of management.
4. Tax advantage and less government regulation. Usually the
1 Unlimited
owner pays liability.
only the In case of business loss, the owner
obligations.
.income tax. He
assumes Theis liable
the to
allgovernment the regulation
extent of his
financial personal
is almost nil. The only time the
2 Lack including
properties of stability.
sole proprietor If thethe
dealssaving.
with owner dies, it is is
government the end he
when of the business
pays the license,
family
.permit, orand
unlessrelatives
members
tax. can of
continue
the the business.
3.Limited amount of capital. Sometimes the proprietor meets difficulty
in securing the capital for a large scale enterprise. Unless the proprietor
Disadvantages:
has large resources of his own, this proves a distinct disadvantage.
4.Difficulties of management. The owner assumes the responsibility for
such diverse tasks as purchasing, merchandising, extending credits,
so forth. He
financing, may be capable
employing personnel,of handling
and some of these
functions but not all.
Partnership

Article 1967 of the Civil Code defines partnership as an organization

where “two or more persons bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing
the profits among themselves. There are two types of partners: general
and limited. The liability of a general partner extends up to his personal
properties while a limited partner is only liable to the extent of his
contribution in the business.

Advantages:
1.It is easy to organize. The partnership is much easier to form than a
corporation. The
legal requirements include articles and by-laws of partnership to be
submitted to the SEC, verification of business name with SEC,
registration of business name with the Bureau of Commerce, Bureau of
Internal Revenue for a TIN (tax identification number), business permit
3 Thecity/municipal
from the partners get all the
hall andprofits. This stimulates
a registration them towith
of employees improve
SSS.
. their business.
2.Availability of more capital and credit. Partners can pool their
skills
4 to the–and
More
resources organization. It is saidand
better knowledge
properties, equipment, that twoothers
skills.
and heads are better
Each –partner
and than
theseone.
contributes
use for
This kind
.security
his in of combination
knowledge
obtaining and provides
bank loans. betterare
Suppliers management in to
more willing terms
extendof
planning, decision-making, and implementation compared
more credit to a partnership than to a single proprietorship. with sole
proprietorship.

1 Unlimited liability. Each general partner is personally responsible

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

1. General-liable for partnership obligations to the extent of their

private properties
2. Limited-those who cannot be held for partnership obligations
3. Capitalist- contributes money or property
4. Industrial- contributes expertise, ,skills and services
5. Managing-administers the operation and manages the business
directly
6. Liquidating-handles affairs of dissolution of the business
7. Ostensible-publicly makes known his connection with the
partnership
8. Secret-identity is not publicly made known
9. Dormant- both a secret and silent partner
10. Nominal- partner in name only

Corporation

It is an artificial being created by operation of law, having the right of

succession, and the powers, attributes, and properties expressedly
authorized by law or incident to its existence. The shares or certificates
of ownership of a corporation are called stocks. The owners of stocks
are called stockholders or shareholders. There are two types of
corporations: private or close corporation and open corporation.

Advantages:
2. Easy to raise capital. A corporation can sell shares of stock to the
fund publicliability.
1. Limited for addition
The stockholders have a limited liability. In case the
s. Perpetual life.
corporation becomes Thea life of a corporation
failure, does
the creditors cannot
layend with
their theon the
claim
key
3. owners.
assets of theItcorporation
withdrawalcanorexist for
death and50 years
of not onand
the is
assets of the stockholders.
4 Specialized
subject to renewal. management. A corporation can hire professionals. It
its
. human
has funds to develop
resources.

Disadvantages:
1 Difficult to organize. Sometimes it requires the services of a lawyer
.to prepare
and anthe legal documents. The legal requirements include
accountant
submission of articles of
incorporation and by-laws to SEC, registration with BIR and DOLE,
acquisition of a business permit from city/ municipal hall and a license
from the DTI. It also has to get approval from other agencies like
Central Bank, Food and Drug Administration and many others
depending on the nature of the products and services.
2.Strictly regulated and supervised by the government. Corporations
have to submit their financial reports every year to concerned
government agencies. They have to comply with government laws,
policies and regulations. Government regulation and supervision on
corporations are close compared with the other forms of business
organizations.
3.Some corporations are socially irresponsible. They sell substandard
goods and pollute the environment.
4. Formal and impersonal employer-employee relationship. A
corporation has several
layers of management. The top management seldom or do not
associate with the workers or clerks of the corporation.

Cooperatives

The cooperative code defines a cooperative as a duly registered

association
1 Open and of persons,
voluntarywith a common bond of interest, who have
voluntarily
. joined Democratic
membership together to achieve a lawful common social or
economic
2 controlend, making equitable contributions to the capital required
and
. accepting a fair on
Limited interest share of the risks and benefits of the undertaking
in capital with the universally accepted principles of cooperation,
3 accordance
which
. include of
Division thenet
following:
4 surplus
. Cooperative
Objectives of
1
5 education
To encourage savings among members;
Cooperatives.
. Cooperation
To generate fundswith and extend credit to the members for
2
6 other
productive purposes; To encourage among members
. cooperatives
systematic production and marketing;
3 To provide goods and services and other requirements
. to the members; To develop expertise and skills
4 among its members;
members;
. and lands and provide housing benefits for the
To acquire
8.
5 To members;
establish, own, lease, or operate cooperative banks, cooperative
wholesale
. and retail
To promote and complexes,
advance theinsurance
economic,andsocial,
agricultural/industrial
and
processing
6 enterprises,
educational statusand
ofpublicthe
markets.
.
7
.
Types of
Cooperatives
1 Credit cooperative. Create funds in order to grant loans for
. productive purposes. Consumer’s cooperative. Procures and
non-
2 distributes commodities to its members and
3
members.
. Producer’s cooperative. Undertake joint production in agriculture
. and industry. Marketing cooperative. Engages in the supply of
markets
4 their products.
production inputs to members and
5.Service
. cooperative. Undertakes medical and dental care,
hospitalization, transportation, insurance, housing, labor, electric light
and power, communication, and other services.
6.Multipurpose cooperative. Combines two or more of the business
activities of different types of cooperatives.

Conclusion

The study of the four types of business organization provided a

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

1 Management
The notes are takenby Feliciano
from Fajardo.
the books:
. Business organization and management by Gutierrez,
2 Pura and Garcia.
. LESSON 6: MACROECONOMICS CONCEPTS
Macroeconomic Concepts

Macroeconomics is the study of the behavior of the economy as a

whole. It examines the overall level of a nation’s output, employment,
and prices.

Fundamental concerns of macroeconomics policy:

1 Why do output and employment sometimes fall, and how can
reduce
. unemployment be
2
d? What are the sources of price inflation, and how can it be
. kept under control? How can a nation increase its rate of
3 economic growth?
. All market economies show patterns of expansion and contraction
known as business cycles. During business-cycle downturns, such as
services fall, andproduction
the recession, millions of people lose
of goods their jobs. For much of the
and
postwar period, one key
goal of macroeconomic policy has been to use monetary and fiscal
policy to reduce the severity of business-cycle downturns and
unemployment.
Sometimes countries experience periods of high unemployment,
which persist even
when their economies are expanding. Macroeconomics examines
the sources of such unemployment and after diagnoses, can even
suggest possible remedies such as reforming labor market institutions
through reducing the incentives not to work or increase wage flexibility.
The lives of millions of people depend upon whether macroeconomics
can find the right answers to these questions.
When it comes to second question, economists have learned
that high rates of price
inflation have a corrosive effect on market economies. A market
economy uses prices as a yardstick to measure economic values and as
a way to conduct business. During periods of rapidly rising prices, the
yardstick loses its value: people become confused, make mistakes, and
spend much of their time worrying about inflation eating away their
incomes. That’s why macroeconomics has increasingly emphasized
price stability as a key goal.
When taking under consideration question three, the
macroeconomics is also concerned with the long-run prosperity of a
country. Over a period of decades and more, the growth of a nation’s
productive potential is the central factor in determining the growth in its
real wages and living standards. Over the past years, rapid growth in
Asian countries such as Japan, South Korea, and Taiwan sent average
incomes for their citizens soaring. Countries want to know the
ingredients in a successful growth recipe. Does running a big budget
deficit or a big trade deficit have harmful long-run effects on growth?
What is the role of investment in physical capital, in research and
development, and in human capital? Should the government nourish
key industries through subsidies and industrial policy, or does a hands-
off policy work better? A complication in considering the three central
issues is that there are inevitable tradeoffs among these goals.
Reducing the budget deficit may mean accepting slower growth in the
short-run. Increasing the rate of growth of output over the long run may
require greater investment in knowledge and capital; this investment
lowers current consumption of food, clothing and recreation. Of all the
macroeconomic dilemmas, the most agonizing is the choice between
low inflation and low unemployment. There are no simple formulas for
resolving
increase in these dilemmas,
the volume and macroeconomics
of goods differ onbythe
and services produced anproper
approach
economy. It istogenerally
take when
a confronted with high inflation, rising
unemployment, or stagnant growth. But with sound macroeconomic
understanding, at least the inevitable pain that comes from choosing
the best route can be minimized.
factor in an increase in the income, of a nation. It is conventionally
measured as the percent rate of increase in real gross domestic
product, or GDP.

Stages of economic growth

One theory in determining the stages of economic growth is based

on exchange systems. That is from barter economy to money economy,
and finally to a credit economy. Another approach is based on the
dominant productive sectors of the economy. According to this theory
as stated by British economist Colin Clark, there are three stages of
1 Agriculture
economic is the main source of employment and income.
growth:
. Manufacturing industry becomes the major economic activity as a
2 country develops. Service industries grow to be the dominant
.
further develops.
feature of the economy as a country
3
. Another theory of classifying the stages of growth is the doctrine
of Rostow, an American economic historian. In his book Stages of
Economic Growth, the transition of a country’s economy from
underdevelopment to development passes through several stages such
as:
1 Traditional society
. Pre-conditions for
2 take-off Take-off
. Drive to maturity
3 Age of high mass
. consumption
Some
4 economic growth
.
models:
1
5 Ricardian model. - Here the key factor is land. This means
priority
. in the attainment
agriculture of economic growth.
is the first
2.Harrod-Domar. - The key factor in this model is physical capital like
machines, buildings, equipment, and so forth. According to this model,
the input is capital, and its efficiency is determined by the number of
output it can produce.
3.Kaldor model. - Here the key factor is technology, which is embodied
in physical capital. Japan is an example which has achieved economic
growth through technology.

Inflation
services decrease
There when
is inflation prices
when increase.
there Inflation
is a rising creates
general levelmore inflation.
of prices.
When prices
Increase keep isoninflation or we can say that it is decrease in the
in prices
value of money. Demand for goods and
increasing, people are inclined to spend their money before it loses its
value. Inflation encourages more consumption and less saving.

Types of inflation:

1.Demand-pull inflation. - This type of inflation occurs when demand for

goods and services exceed supply. This is based on the law of supply
and demand. Another cause of demand – pull inflation is the excess
money supply. When money supply increases without corresponding
increase in production of goods and services, prices rise.
2.Cost-push inflation. - An increase in the cost of production results to an
increase in prices. Cost increases whenever there is an increase in
wages, oil prices, or prices of raw materials.
3.Structural inflation. - This view explains that the inability of some
sectors of our economy to response immediately to demand for goods
and services. When supply cannot meet demand, prices increase. If
there are no obstacles or constraints (financial, physical or
institutional), whenever prices rise, producers are encouraged to enter
the market. This increases supply, and therefore prices fall. However,
there are instances where supply cannot be increased, at least in a
short period. Since supply falls, prices of such scarce products rise. And
this is inflation for such particular products.

LESSON 7: BUSINESS CYCLES

Business Cycles
Understanding the business cycles will be useful in understanding the
phases which an economic system undergoes to bring about the use of
the resources.

2
Phases Recession: Both production
of the business cycles and employment are falling down.
. Prosperity:
1. Depression: Both
This production
is the peak of and
theemployment are atThere
business cycle. their lowest
is full
3 levels. Under such
employment, and the national output is at full capacity. Output can for
condition, no businessman is willing to invest because the demand no
.longer and
goods services is also at its lowest point.
be increased because productive resources are at full capacity
4. Recovery: Both production and employment rise towards full
or fully employed.
employment

Business Cycle Theories

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

Full employment
When there is an available job for every person who is willing and able
to work, it is full employment.

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

Unemployment and its types

Disguised unemployment is a situation where individuals are actually
working but they do not contribute to production.
Types of Unemployment
3.Frictional unemployment is caused by interruptions in production for
technical reasons, or when workers are temporarily laid off due to
renovation works.
4.Structural unemployment: A change in technology renders the skills
and talents of some workers obsolete.
5.Cyclical unemployment: This is caused by the fall of business activities
in the economy. When aggregate demand decreases, production
declines. Some workers have to be laid off.
6.Seasonal unemployment: During slack periods, many workers in
farming and construction are laid off.

1 Principles of Macroeconomics by
Conclusion
.2
The Economics
Case andof
concepts by
Fair Samuelson
recovery, and
recession, expansion, depression are terms
.
we Nordhaus
have encountered since time immemorial. These concepts dealt
with how we have attained levels of growth in relation to the
employment and unemployment of our resources. As we understand the
concepts, we are also made aware of the different effects of the same
in our society
 LESSON 8: MEASURING NATIONAL OUTPUT AND
INPUT

Measuring National Outputs & Income

Gross National Product - It is the total market value of all final goods and
services produced by citizens in one year.

The real economic achievements of any country are measured by the

number of goods and services its citizens have produced in a given
year. If we depend on the market value of final goods and services, it is
not most of the time accurate because of price fluctuations. In case of
inflation (high prices), the market value of GNP naturally increases. In
case of deflation (low prices), the market value of GNP is low.

GNP at current prices is money GNP. It is obtained by multiplying the

number of final products and services by prevailing market prices. It is
expressed as: P X Q = GNP.

Measuring GNP
GNP can be measured in at least two different ways, both of which yield
the same result. One way of measuring the GNP is from the buyer's
point of view, or in terms of aggregate demand. Also known as the
expenditure approach to measuring GNP, this method calculates the
value of the GNP as the sum of the four components of GNP
expenditures: consumption, investment, government purchases, and
net exports.

The expenditure method accounts for the source of the monetary

demand for products and services. The largest component,
consumption, includes the value of all the goods and services
purchased by consumers during the year. The investment category
includes the production of buildings and equipment as well as the net
accumulation of inventories. Financial investments, which involve only
transfer payments rather than the production of capital goods, are not
counted. Government purchases include only expenditures for goods
and services, not transfer payments such as Social Security. Net exports
include the value of all goods produced in the country but sold abroad,
minus the value of goods produced abroad and imported into the
interest
country. income, depreciation, and indirect
business taxes.
Since every transaction involves a buyer and a seller, the GNP can also
be calculated from the seller's point of view, which focuses on where
money payments go. The method, also known as the income approach,
measures GNP as the sum of all the incomes received by all owners of
resources used in production. Such income payments are known as
Employee compensation includes all payments relating to labor,
including fringe benefits and taxes paid on labor. Rental income is paid
for the use of capital goods. Proprietary income represents payments to
owners of business firms. Corporate profits are earned by the
shareholders of a business. Interest income is received for lending
financial resources. Depreciation is a charge against assets used in
production. The indirect business tax refers to sales tax, which
represents part of the payments for goods and services that are not paid
to any of the income recipients.

The measurement of GNP is fairly complex and follows a set of rules

that, while generally agreed upon, may nevertheless appear somewhat
arbitrary. For example, housing is treated in a manner that protects
GNP calculations from changes in the rate of home ownership. All
occupant-owned housing, as opposed to rental housing, is treated in the
GNP accounts as if rented. Thus, the rental value of occupant-owned
housing is included as a service in the GNP along with the rental value
of houses that are actually rented.

GNP measures the value of final products and services, so it is

necessary to avoid double- counting the many intermediary products
that are bought and sold in the economy. Products and services are
counted as part of the GNP when they reach their final form.

Some important final products are actually excluded from the GNP. Many
household activities are excluded, as are all illegal goods and services.
In the case of housework, the services of a hired maid are considered
part of the GNP, but not if the same services are performed by a
member of the household. The exclusion of domestic chores has a
greater effect on the calculation of the GNP of lesser-developed
countries, where households may produce their own food and clothing
to a greater extent.

The treatment of government expenditures also affects GNP

calculations. All government expenditures are considered final; there is
no attempt to categorize them as intermediate and final. The effect of
this rule is an upward bias in the GNP. In addition, all government
expenditures are considered as current consumption rather than as
investments; they are measured only once, in the year in which they
occur.
increaseFinally,
in GNPgovernment goods
only benefits andrich
the very services, which
who own the are usually not
productive
sold resources. are valued at cost in the GNP.
in the marketplace,

Limitations of GNP

1. It does not show the allocation of goods and services among the
members of society. It only shows the number of goods and services
2.GNP accounting in less developed countries in understated. There are
many economic transactions especially in the rural areas that are not
registered in the market. For example, backyard poultry, fishing and
other small-scale income-producing activities whose products are only
intended for family consumption. Only market transactions are reflected
in the GNP.
3.The evils of economic growth like pollution, congestion and dirty
environment are not reflected in the GNP. The cost of such destruction
to the health of human beings, and to the balance of nature is very
high. And this is not subtracted from the GNP.

4.GNP only measures the number of goods and services but not the
quality of goods and services. Needless to say, quality is an important
feature as it affects the well-being of people.
5. Income or products from illegal sources are not included in the
GNP. Examples are
gambling, unlicensed money lending, and narcotics business.

Price Index
When newspapers tell us “inflation is rising,” they are really reporting
the movement of a price index. A price index is a measure of the
general price level; more precisely, it is a weighted average of the
prices of a number of goods and services. The most important price
indexes are the consumer price index, the GDP deflator, and the
producer price index.

The Consumer Price Index (CPI)

In economics, a Consumer Price Index (CPI, also retail price index) is a
statistical measure of a weighted average of prices of a specified set of
goods and services purchased by wage earners in urban areas. It is a
price index which tracks the prices of a specified set of consumer goods
and services, providing a measure of inflation. The CPI is a fixed
quantity price index and a sort of cost-of-living index.

The CPI can be used to track changes in prices of all goods and services
purchased for consumption by urban households. User fees (such as
water and sewer service) and sales and excise taxes paid by the
consumer are also included. Income taxes and investment items (like
stocks, bonds, life insurance, and homes) are not included.

For example assume that consumers buy three commodities: food,

shelter, and medical care. Using 1995 as the base year, we reset the
price of each commodity at 100 so that differences in the units of
commodities will not affect the price index. This implies that the CPI is
also 100 in the base year. [= (0.20 X 100) + (0.50 X 100) + (0.30 X
100)]. Next, we calculate the consumer price index. Suppose that in
 = 106.4

In other words, if 1995 is the base year in which the CPI is 100, then in

1996 the CPI is 106.4. Gross Domestic Product

It is the total market value of all final goods and services produced
within the territories of a country in one year. Incomes derived from
investments or wealth in foreign countries is excluded. In a country
whose economy is dominated by multinational corporations or
foreigners, the GDP is bigger than GNP.

GDP is used for many purposes, but the most important one to measure
the overall performance of an economy.

LESSON 9: INTERNATIONAL TRADE

International Trade and Theory of Comparative Advantage

International trade refers to exchange of goods and services between

one country and other countries. Because of geographical conditions
and technological monopoly, countries produce various products, and
no one country can create all kinds of products. With free international
trade, countries can exchange their goods with one another. Hence,
each country has the opportunity to purchase all the goods and
services from other countries which it cannot produce.

Free international trade appears more in theory. For economic and

political reasons, there have been trade barriers on the movement of
goods and services among countries.

Bases of International Trade

1.Distribution of economic resources. The distribution of natural

resources, labor and capital goods among countries is not even. When
a top Japanese government official saw the United States, he said God
has not been fair in the distribution of natural resources. The arable
land of Japan is only about 15 percent of its total land area. And during
winter, half of this is covered with snow. Countries which have
abundant skilled labor are most efficient in the production of labor-
price of goods.
intensive
products.
2.Technological efficiency. All other things being equal, a country which
has the most efficient technology can produce goods at the lowest
price, with the best quality, and the highest quantity. Difference in
technological efficiency results to difference in quality and
The Importance of International Trade

International economics is concerned with allocation of economic

resources among countries. Such allocation is done in the world
markets by means of free trade; the best products are produced and
sold in a free competitive market. One fundamental principle in
international trade is that one should buy goods and services from a
country which has the lowest price, and sell his goods and services to a
country which has the highest price. This is good for the buyers and the
sellers. Another thing is that no country in the world can be
economically independent without a decline in its economic growth.
Even the richest countries buy raw materials for their industries form
the poor countries.

Barriers to International Trade

In theory, free trade benefits everybody and every country. It has been
said that tariffs and other trade barriers only encourage inefficiency,
restrict commerce, and reduce the general standard of living. But the
theory of free trade came from a world which is no longer relevant with
existing realities.

During the time of Adam Smith, Great Britain was the leading industrial
power, and was greatly benefited from free trade. Free trade prospered
because there were abundant world markets and only a few key
countries. Former Harvard professor Henry Kissinger pointed out that
today’s world economy, by contrast, contains many trading nations of
widely different cultural backgrounds with great variations in labor
costs and standards of living, each claiming sovereign control over its
economic decisions. In such conditions, competition becomes more
ruthless and its impact more drastic.

Other Arguments for Trade Barriers

1.Military self-sufficiency. There is a need to protect industries which

manufacture goods and materials for national defense and security.
Strategic military goods are not sold to enemies.
2.Local standard of living. To a country with a high standard of living, it
is argued that tariffs are needed to protect such living standard. The
Exchange
inflow of cheap foreign products will reduce the prices of the local
Rates and ultimately wages and the level of living will also fall.
goods,
3.Local employment. It is contended that be restricting imports, the
level of employment rises. This will stimulate production in the local
economy in view of the absence of foreign competition. Of course,
more production requires more workers.
A foreign exchange is the price of foreign money relative to the local
money. For example, the price of $1 is ₱53. In other words it requires
53 units of our peso to buy 1 unit of U.S.
dollar. Under a floating exchange rate, the price of a dollar relative to
our peso is determined by the market forces of demand and supply.
This means exchange rate between the dollar and the peso fluctuates.
In case the price of a dollar increases, let us say to ₱55 to
$1, then the dollar has appreciated and the peso has depreciated.
Depreciation can also be called currency devaluation. Strictly speaking,
devaluation refers to the increase of price of gold relative to a currency.
For example, one ounce of gold is worth $60. Supposing it has become
$600, this means the value of the U.S. dollar has decreased 10 times.

An exchange rate can be overvalued or undervalued. The value of a U.S.

dollar relative to peso is determined by the demand and supply of
dollars. Supposing the real market value of a dollar is ₱53. If the official
rate of the government (Central Bank) is ₱50, then our peso is
overvalued. Overvalued because it requires only ₱50 and not ₱53 to buy
a dollar. It is cheaper to buy goods and services from a country with
undervalued currency than from the one with an overvalued currency.

Determinants of Exchange Rates

Without government restrictions or regulations on the buy and sell of

dollars, the price of the dollar is determined by market forces such as:

1.Relative income changes. An increase in the purchasing power of the

Filipinos tends to raise the imports of the U.S. goods. This means
demand for U.S. dollars also increases. As a result, the price of the
dollar rises, and the value of our peso depreciates. Conversely, a rise in
the purchasing power or real income of the Americans tends to increase
imports of Philippine goods. Such situation increases the value of the
peso relative to the dollar, because the supply of dollars in the
Philippines increases.
2.Relative price changes. In case prices of goods and services are much
higher in the Philippines than in the United States, Filipinos are inclined
to buy from the United States because of cheaper prices. This results to
a greater demand for dollars, and so its price increases. This means the
value of the peso declines. On the other hand, a fall in the prices of
goods in the Philippines
Trade Protection increases demand for Philippine products from
for the Less
the U.S. residents.
Developed Countries This reduces the exchange rate of the dollar.
3.Relative interest rates. Supposing interest rates are higher in the
Philippines than in the United States. These attract U.S. investments
and reduces Filipino investments in the U.S. These results to an
increase in the supply of dollars in the Philippines while the demand for
The theory of free trade is basically based on the concept of
comparative advantage. Industrial countries should sell finished
products while agricultural countries should sell raw materials. In this
case, the agricultural countries will have no chance to industrialize
their
economies which is the best way to achieve high economic growth.
Agricultural economies have remained poor because the prices of their
products in the world markets are low while those of the industrial
countries are high.

The most widely used trade barriers are tariffs and import quotas. A
tariff is an excise tax on imported goods while an import quota limits
the number of goods to be imported. Nations built trade barriers to give
their infant industries a chance to develop and grow. During the
formative industrial development of United States, Germany, Canada,
and other countries in Western Europe, they protected their infant
industries against the industrial goods of Great Britain.

Conclusion

The word had indeed become smaller due to the development in

technology. This is most true in the field of telecommunication and
transportation. Thus the relations among countries have become more
intense. In this regard, the most important concern remains to be
economic. The exchange of goods and services would always be a major
concern
1 for counties
Principles havebydifferent
of Economics Roberto needs and different levels of
G. Medina
productivity
. responsible
Principles for different
of Macroeconomics products.
by Karl E. CaseThus the knowledge of
international
2 and Raytrade remains
C. Fair crucial
Economics byinFeliciano
order that individual players in the
international
. Fajardo scene or market may be guided accordingly
Questio
3
1
ns:
. What are the bases of
References:
. international trade? What are the
2 barriers to international trade
. What is exchange rate?
3 What are the factors that affect
. exchange rates? LESSON 10: FISCAL POLICY
4
Fiscal Policy
.
Fiscal policy refers to the revenue and expenditure measures of the
policy we mean the process of budget.
public shapingBy taxation
fiscal and public expenditure
to help dampen the
swings of the business cycle and contribute to the maintenance of a
growing, high- employment economy, free from high or volatile
inflation. In formulating fiscal policies, the voters, the President and his
cabinet (executive branch) and the legislative body (congress or
general assembly) are involved. In a true democratic society, the
welfare of the people is promoted through the budget. The most
important needs of the economy and the people are given top priority.
However, in not a few cases, political interests of government officials
are the first considerations. For instance, many government projects
appear
1 immediately
Provision before
for social goodsthe election time.
The
. objectives
Equitable of fiscal policy
distribution of are:
wealth
2 and income Maintain high
. employment
3 Ensure price stability; and
. Sustain a satisfactory rate of
The
4 national
economicbudget
growth contains specific provisions for the funding of
projects
. and programs geared toward the attainment of the
aforementioned
5 policy objectives. The budget is focused towards the
promotion
. of the welfare of the poor masses. It is the President of the
Republic,
6
together
. with the cabinet members, who prepare the national budget.
The proposed budget is submitted to the legislature for discussion and
approval.

Discretionary Fiscal Policy

A discretionary fiscal policy is one in which the government changes tax
rates or spending programs, usually by passing new legislation. The
principal weapons of discretionary fiscal policy are public works, other
capital programs, public-employment projects, and changes in tax
rates.

Public works include creating jobs, building hospitals, schools, and roads
as well as other infrastructures needed for a growing economy. Other
public works investments, such as electrification, proved enormously
beneficial to underdeveloped areas, and transportation projects.

At the other extreme from highly capital-intensive, long-duration public

works projects are public-employment projects. The idea behind these
programs is simple: If the problem is high unemployment, why not just
create jobs directly? Public-employment projects are designed to hire
unemployed workers
snowballing into for arecession.
a deep short timeVarying
in public
taxjobs, after
rates canwhich people
be used to
either
can stimulate
move or jobs in the private sector.
to regular

A third approach to discretionary fiscal policy is making temporary

changes in income taxes. Tax cuts can keep disposable incomes from
falling and prevent an economic decline from
restrain an economy. Many advocates of discretionary stabilization
policy see varying tax rates as the ideal fiscal weapon. Once taxes have
been changed, consumers react quickly; a tax cut is spread widely over
the population, stimulating spending on consumption goods and
including an economic upturn.
Shortcomings of Fiscal Policies
Many government programs and projects are very good. They are
always intended for the good of the people, especially the poor masses.
However, when it comes to results, it is already different. Such projects
are not properly managed or implemented. Either the implementers or
managers are inefficient or some very powerful groups have hampered
the success of such programs for economic or business reasons. For
example, the land reform program in most of the less developed
countries is a failure.

Fiscal policy is very effective during economic depression. The

government has to spend more money on public works in order to
create employment. This results to more income and consumption that
stimulate the private sector to produce goods and services. And this is
the beginning of economic recovery. However, during a period of
economic boom, the government finds it politically difficult to increase
taxes and reduce government expenditures. Many people do not
understand why the government should increase taxes and reduce
government expenditures at the time when the economy is prosperous.
They do not know that such fiscal measures are designed to prevent
inflation.
Fiscal Functions
There are three major fiscal functions:
1.Allocation function. Private goods like rice, soap, or cake are allocated
in the market. Those who have the money and they are willing to
acquire such goods can purchase them. They just exchange their
money with such goods. However, in the case of most social goods it is
not efficient to allocate them through the market system. For example,
Ayala avenue is a public or social good. If all those who use the street,
including pedestrians, have to pay, then there would be a great delay in
the movement of persons and transportation facilities. Another example
is the anti-malaria or anti-pollution project in a community. It is not
economically feasible to exclude those houses that do not like to buy
the project. Whether they pay or not they get the benefits of the
project. So, there is no need to sell the project to the community. If it is
the felt need
of wealth andofincome
the community,
is only forthen the government
politicians, should
philosophers andclean
poets.the
In
community through
economics, income health and sanitation programs. Such programs are
funded by taxes paid by the people. The government also sells private
goods at a lower price, and in many countries in Europe and America,
such goods are even free for those who cannot afford to buy them in
the market. They are given free food, clothing and shelter, medicare
and education. In the Philippines, there are also goods and services
distribution is determined by the prices of factor ownership, like land,
labor, capital, and entrepreneurship ability. This economic theory
appears good but in countries where there is no just distribution of the
factors of production, only very few have high incomes while the great
masses have very low incomes. In less developed countries, most of the
peoples own only labor. Because of very limited economic activities,
there is a surplus of labor supply. Thus, wages are very low. This means
most people in countries live below poverty line. Social reforms fight for
distributive justice. They claim that the productive resources of society
should be fairly distributed among its members. If this is done, the gap
between the rich and poor is narrowed. Economic opportunities are
available to all regardless of religion, race or belief. Such situations
exist only in the richest countries of the world. Even a poor country,
through its fiscal policies can contribute to distributive justice.
Progressive taxation is a good example. This is based on the ability to
pay.
3. Stabilization function. One goal of fiscal policy is the attainment of
economic stability. When there are no problems of unemployment and
inflation, then the economy is said to be stable. The government
through the fiscal tools of taxation, borrowings, and expenditures can
minimize or eliminate the problems of unemployment and inflation. The
government should give top priority to projects which are very efficient
in generating jobs and incomes for the people. Such productive projects
do not only reduce unemployment but also inflation rate. More supply
of goods means lower prices. This is the law of supply and demand. In
the same manner, taxation can help in reducing inflation rate. If the
kind of inflation is caused by oversupply of money in relation to the
number of goods available in the economy, the solution of the
government is increase taxes in order to reduce the disposable income
of the buyers. Most individuals are not happy about such fiscal policy.
They believe that taxes should be lowered during inflation because
their purchasing power falls. What they do not understand is that when
there is an oversupply of money, demand for goods and services
increases. Since supply is limited, prices go up. The tax increase should
only be temporary just enough to control the demand for goods and
services while efforts are being done by the government in increasing
supply of goods and services.

LESSON 11: TAXATION

General
EssentialPrinciples of Taxation
Characteristics of Tax
Taxation is a means of raising funds for the operations of the
government, especially its public services.

Taxes are very important as they constitute the life of our economy and
society. It is not possible for a government to exist permanently if it has
1 It is an enforced contribution. A tax is not a voluntary payment
imposition
. is in noand
or donation wayitsdependent upon the will or assent of
2 It is generally
the person taxed. payable in money.
. It is proportionate in character. A tax is laid by some rule of
to
3 which persons share
apportionment the public burden. It is ordinarily based
according
4
. theItability
on is levied of persons or property. A tax may also be imposed on
to pay.
rights
. or privileges.
acts, In each case, however, it is only a person who pays
transactions,
the tax.
5.It is levied by the state which has jurisdiction over the person or
property. The object to be taxed must be subject to the jurisdiction of
the taxing state. This is necessary in order that the tax can be
enforced.
6. It is levied by the law-making body of the state. The power to
tax is a legislative
power which under the constitution only Congress can exercise through
the enactment of tax statutes.
7. It is levied for public purpose or purposes. Taxation involves, and
a tax constitutes, a
charge or burden imposed to provide income for public purposes – the
support
1 As to of subject
the government, the administration of the law, or the
matter or object:
.payment of public
Personal, expenses.
poll, or capitation. Tax of a fixed amount imposed on
within
a a specified
persons territory, whether citizens or not, without regard to
residing
their property
.Classification of or the occupation or business in which they may be
engaged.
Taxes They Example:
are Community (formerly residence) tax.
b.Property.
classified: Tax imposed on property, whether real or personal, in
proportion either to its value, or in accordance with some other
reasonable method of apportionment. Example: Real estate tax.
c.Excise. Any tax which does not fall within the classification of a poll tax
or property tax. It is said that an excise tax is a charge imposed
upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation, profession
or business. Examples: Income tax, value-added tax, estate tax
Note: This tax is not to be confused with excise tax imposed on
certain specified articles
manufactured or produced in, or imported into, the Philippines, “for
domestic
2 As tosalewhoorbears
consumption or for any other disposition.”
the burden:
. Direct. Tax which is demanded from the person who also shoulders
a
tax; orthe taxburden of the
for which the taxpayer is directly liable or which he cannot
.
shift to another. Example: Corporate and individual income taxes.
b. Indirect. Tax that is demanded from one person in the expectation
and intention that he shall indemnify himself at the expense of another.
Examples: Value-added tax; excise taxes on certain specific goods;
customs duties.
3 As to determination of amount:
. Specific. Tax of a fixed amount imposed by the head or number, or
of
a weightby someor measurement;
standard it requires no assessment (valuation) other
than
. a listing or classification of the objects to be taxed. Examples:
Taxes on distilled spirits, wines, fireworks, and others.
b. Ad valorem. Tax of a fixed proportion of the value of the property with
respect to which the tax is assessed; it requires the intervention of
assessors or appraisers to estimate the value of such property before
the amount due from each taxpayer can be determined. Examples:
Real estate tax; excise taxes on cigarettes, gasoline and others;
customs
4 As to duties
purpose:
. General, fiscal, or revenue. Tax imposed for the general purposes
a
i.e., toofraise
the government
revenue for governmental needs. Examples: Income tax;
.
value-added tax, and almost all taxes.
b. Special or regulatory. Tax imposed for a special purpose, i.e., to
achieve some social or economic ends irrespective of whether
revenue is actually raised or not. Example:
Protective tariffs or customs duties on imported goods.
5 As to scope:
. National. Tax imposed by the national government. Examples:
revenue
a taxes; customs
National internal duties and national taxes
b
imposed
. Municipal or local.
by special laws.Tax imposed by municipal corporations or local
Examples:
. Real estate
government tax;
units.
professional tax.
6 As to graduation or rate:
. Proportional. Tax based on a fixed percentage of the amount
a of the
receipts, property,
or other bases to be taxed. Examples: Real estate taxes; value-
.
added tax; and other percentage taxes.
b.Progressive or graduated. Tax the rate of which increases as the tax
base or bracket increases. Examples: Income tax; estate tax; donor’s
tax.
c.Regressive. Tax the rate of which decreases as the tax base or bracket
increases, i.e., the tax rate and the tax base move in opposite
directions. We have no regressive taxes.

Tax Distinguished from other Terms

1.Toll – It has been defined as a sum of money or the use of something,
generally applied to the consideration which is paid for the use of a
road, bridge or the like, of a public nature.
a A toll is a demand of proprietorship, while a tax is a demand of
. sovereignty;
government.
b A toll is paid for the use of another’s property, while tax is paid for
c.The
. amount
the supportofof toll
thedepends upon the cost of construction or
maintenance of the public improvement used, while there is generally
no limit on the amount of tax that may be imposed; and
d.A toll may be imposed by the government or private individuals or
entities, while a tax may be imposed only by the government.

2. Penalty – It is any sanction imposed as a punishment for violation of

law or acts deemed injurious. Thus, the violation of tax laws may give
a
rise toAimposition
penalty is ofdesigned
penalty.to regulate conduct, while a tax is
revenue;
. generally intended to raise
b
and A penalty may be imposed by the government or private
a
. tax individuals
may be imposed only bywhile
or entities, the
government.
3 Special assessment – It is an enforced proportional contribution
especially
. from benefited
owners of bylands
public
a A special assessment is levied only on land;
improvements.
. It is not a personal liability of the person assessed, i.e., his
the
b land liability is limited only to
c
. It is based wholly on benefits; and
involved;
. It is exceptional both as the time and place. A tax, on the other
application.
d hand, has general
.
4.License or permit fee – It is a charge imposed under the police power
for the purposes of regulation. License is rather in the nature of a
special privilege, of a permission or authority to do what is within its
terms.
a.License fee is the legal compensation or reward of an officer for
specific services, while tax is an enforced contribution assessed by
sovereign
b. authorityfor
It is imposed to regulation,
defray public expenses;
while a tax is levied fro revenue;
c. It involves an exercise of police power, while a tax involves the
powe exercise of the taxing
r; d. Its amount should be limited to the necessary expenses of
while inspection
there is generally no limit on the amount of tax that
and regulation,
e
may be It is imposed on the right to exercise a privilege, while a tax
imposed;
.persons and
is imposed also on
f. Failure
property; andto pay a license fee makes the act or business illegal while
does not necessarily
failure to pay a make
tax the act or
business illegal.
 5 Debt – A tax is not a debt in the ordinary sense.
. A debt is generally based on contract, express or implied, while
a tax is based on law; A debt is assignable, while a tax cannot
. generally be assigned;
b A debt may be paid in kind, while a tax is generally payable in
. money;
c A debt
sanction may be the subject of set-off or compensation, while a
for non-
. tax
fpayment
A is
of generally
debt not; when it is so stipulated
draws interest
tax; or when there is
does
.d A
notperson cannot
drawwhile
default, interest be imprisoned for
except only when
a tax the non-payment of debt,
. while imprisonment is a
delinquent.
e
.
Requirements of a good tax system:
1 The distribution of the tax burden should be equitable. This
to
. paymeans
tax based
that on his ability
a person hasto pay.
2.Taxes should not ruin the efficient market system.
3.Taxes should serve as tools in facilitating economic stability and
economic growth. Taxes can greatly help solve or minimize the
economic problems of inflation and unemployment.
4 Tax administration should be efficient. This refers to the
. productivity of tax collection. The cost of tax administration and
5 its compliance should be economical.
Approaches
. to Equitable Taxation

Good citizens have the responsibility to contribute a fair share to the

cost of government. Certainly, the payment of tax is a burden to all
those who have the duty to pay because of their income and wealth.
But such burden can be made less painful by the government trough
the concepts benefit received and ability to pay.
1.Benefits received: People pay their taxes in accordance with the
benefits they received from government projects. It is like buying
goods and services in the market. Those who do
not receive benefits do not pay taxes. However, there are government
projects in which it is not possible to exclude those who do not pay, like
antipollution project. Moreover, there are
spillover benefits whose payments are difficult to determine.

2.Ability-to-pay: Such ability is determined by their income and wealth.

Those who have more incomes or wealth pay more taxes than those
with less incomes or wealth.
1 Progressive tax – is one whose rate increases as
.
Tax income increases.
Structures

The following tax structures show the relationship between rates and
incomes:
2.Regressive tax – is when its rate decreases as income increases.
Actually, there are no regressive taxes. Our tax system is said to be
regressive because the main portion of our tax revenues comes from
indirect taxes.
3.Proportional tax – is one whose rate remains constant regardless of
the size of the income.
Exemptions from Taxation
It has been the policy of the government to give tax exemptions to
certain economic activities in order to encourage and promote their
growth such as cooperatives, cottage industries, infant industries and
rural banks among others. In addition, organizations or institutions
which are engaged in non-profit undertakings, together with some
specific financial benefits or incomes, are exempted by the Tax Code
and
2 special laws.
Benefits Examples
received are:
by members from GSIS.
1.
. Corporations or associations organized and operated
Social security benefits, retirement gratuities, solely
pensions, and for
religious,
received
3 charitable,
by
other scientific, athletic, or cultural purposes.
retired benefits
similar
4
employees.
. Benefits received from the U.S. government through the U.S.
. Veterans Administration. Donations to special welfare, cultural
5 and charitable institutions.
. LESSON 12: INCOME TAXATION
Income
Taxation In
General
Income Tax
• Income
tax has
been
defined as
a tax on
all yearly
profits
arising
from
property,
profession, trade or business, or as a tax on a person’s income,
emoluments, profits and the like.
• It is generally regarded as an excise tax. It is not levied upon
persons, property, funds or
profits but upon the right of a person to receive income or profits.
• Income means accession to wealth, gain or
Purposes of income taxation
flow of wealth.
1.To provide large amounts of revenues.
2.To offset regressive sales and consumption taxes.
3.Together with estate tax, to mitigate the evils arising from the
inequalities in the distribution of income and wealth, which are
considered deterrents to social progress, by imposing a progressive
•Conwi v. CTA [213 SCRA 83]: Income may be defined as an amount of
money coming to a person or corporation within a specified time,
whether as payment for services, interest, or profit from investment.
•Commissioner v. BOAC [149 SCRA 395]: Income means “cash received
or its equivalent.” It is the amount of money coming to a person within
a specific time. It is distinct from capital for, while the latter is a fund,
income is a flow.
•Fisher v. Trinidad [43 Phil 973]: Stock dividend is not an income. It
merely evidences the interest of the stockholder in the increased
capital of the corporation. An income may be defined as the amount of
money coming to a person or corporation within a specified time,
whether as payment for services, interest, or profit for investment.
Income v. capital
•Capital is a fund or property existing at one distinct point of time while
income denotes a flow of wealth during a definite period of time.
• The essential difference between capital and income is that capital
is a fund or property
existing at one distinct point of time; income is a flow of services
rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a
period of time. Capital is wealth, income is the service of wealth.
[Madrigal v. Rafferty, 38 Phil 414]
• Capital is the tree while income is the fruit.

Sources of Income

What produces

income?
• The term
“source of
income” is not
a place but the
property,
activity or
service that
produced the income. In the case of income derived from labor, it is the
place where the labor is performed; in the case of income derived from
the use of capital, it is the place where the capital is employed; and in
the case of profits from the sale or exchange of capital assets, it is the
place where the sale or transaction occurs.
•Commissioner v. BOAC: The source of an income is the property,
such types
activity of income
or service by produces
that the NIRC or
theother
income. For the source of income
special laws.
to be considered as coming from the Philippines, it is sufficient that
income is derived from activity within the Philippines.

Sources of income
1.Sources within the Philippines
Requisites for income to be taxable
1.There must be a gain or profit.
2.The gain must be realized or received.
3.The gain must not be excluded by law or treaty from taxation.

Gain must be realized or received

•This implies that not all economic gains constitute taxable income.
Thus, a mere increase in the value of property is not income but merely
an unrealized increase in capital.

When is income considered received?

1.actual receipt
2.constructive receipt

Income constructively received

•Income which is credited to the account of or set apart for a taxpayer
and which may be drawn upon by him at any time is subject to tax for
the year during which so credited or set apart, although not then
actually reduced to possession.

To constitute receipt in such a case, the income must be credited to the

taxpayer without any substantial limitation or restriction as to the time
or manner of payment or condition upon which payment is to be made.
[Section 52, Revenue Regulations 2]

Examples of constructive receipt

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

Are the following items income?

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

Tests to determine realization of income

1.Severance test
As capital or investment is not income subject to tax, the gain or profit
derived from the exchange or transaction of said capital by the
taxpayer for his separate use, benefit and disposal is income subject to
tax.

2.Substantial alteration of interest test

•Income is earned when there is a substantial alteration of the interest of
a taxpayer, i.e. increase in proportionate share of a stockholder in a
corporation.
•Income to be returnable for taxation must be fully and completely
realized. Where there is no separation of gain or profit, or separation
of increase in value from capital, there is no
income subject to tax.
•Thus, stock dividends are not income subject to tax on the part of the
shareholder for he had the same proportionate interest in the assets of
the corporation as he had before, and the stockholder was no richer
and the corporation no poorer after the declaration of the dividend.
•However, if the pre-existing proportionate interest of the stockholder is
substantially altered, the income is considered derived to the extent of
the benefit received.
•Moreover, if as a result of an exchange of stocks, the person received
something of value which are essentially and fundamentally different
from what he had before the exchange,
income is realized within the meaning of the revenue law.

3. Flow of wealth test

The essential difference between capital and income is that capital is a
fund whereas income is the flow of wealth coming from such fund;
capital is the tree, income is the fruit. Income is the flow of wealth
other than as a mere return of capital.

Classes of Income
Kinds of taxable income or gain
1. Capital gains - Capital gains are gains or income from the sale or
exchange of capital assets. These include:
property which
a.Income are not in shares of stock of domestic corporation
from dealings
capital
whetherassets.
or not through the stock exchange;
b.Income from dealings in real property located in the Philippines; and
c. Income from dealings in other capital assets other than (a) and (b).

2. Ordinary gains - Ordinary gains are gains or income from the

a. Business income
•Income from trading, merchandising, manufacturing or mining
• Income from practice of profession
•Note: The term “trade or business” includes the performance of the
functions of a public office. [Section 22(S), NIRC]
b. Passive income
• Passive income from Philippine sources subject to final tax
• Passive income from Philippine sources not subject to final tax
• Passive income from sources outside the Philippines
c. Passive income again
• Interest income
• Rentals/Leases
• Royalties
• Dividends
• Annuities and proceeds of life insurance/other types of insurance
• Prizes and winnings, awards, and rewards
• Gifts, bequests, and devises
d.Other types of passive income

Approaches in income recognition

1. Schedular system
•The schedular system is one where the income tax treatment varies
and is made to depend on the kind or category of taxable income of the
taxpayer.

2. Global system
•The global system is one where the tax treatment views indifferently
the tax base and generally treats in common all categories of taxable
income of the taxpayer.

Schedular system v. global system

1.Under the schedular treatment, there are different tax rates, while
under the global treatment, there is a unitary or single tax rate.
2.Under the schedular treatment, there are different categories of
taxable income, while
under the global treatment, there is no need for classification as all
taxpayers are subjected to a single rate.
3.The schedular treatment is usually used in the income taxation of
individuals while the global treatment is usually applied to
corporations.

Approach used in the Philippines

•Partly schedular and partly global. The schedular approach is used in
the taxation of individuals while the global approach is used in the
taxation of corporations.
Classes of Income Taxpayers
Basis of classification of taxpayers
1.corporations v. individuals
2.nationality
3.residence

Classes of income taxpayers

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

2.Corporations
a.Domestic corporations
b.Resident foreign corporations
c. Non-resident foreign corporations

3.Special
a.Proprietary educational institutions and hospitals that are non-profit
b.Insurance companies
c. General professional partnerships
d.Estates and trusts

Note: Estates and trusts are treated as

individual taxpayers. Who is a non-resident

citizen?
The term “non-resident citizen” means:
1.A citizen of the Philippines who established to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein.
2.A citizen of the Philippines who leaves the Philippines during the
taxable year to reside
abroad, either as an immigrant or for employment on a permanent
basis.
3.A citizen of the Philippines who works and derives income from abroad
and whose employment thereat requires him to be physically present
abroad most of the time during the taxable year.
4. A citizen who has been previously considered as a non-resident
citizen and who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines.

Corporation
•A corporation, as used in income taxation, includes partnerships, no
matter how created or organized, joint stock companies, joint accounts
(cuentas en participacion), and associations or insurance companies.
• However, it does not include:
a.a general professional partnership; and
b.a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium
agreement under a service contract with the government.

Resident foreign corporation - The term applies to a foreign corporation

engaged in trade or business within the Philippines.

Non-resident foreign corporation - The term applies to a foreign

corporation not engaged in trade of business in the Philippines.

General professional partnership v. Ordinary

business partnership General professional

partnerships
•General professional partnerships are
partnerships formed by persons for the sole
purpose
of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business. [Section 22(B), NIRC]
• Persons engaging in business as partners in a general professional
partnership shall be
liable for income tax only in their separate and individual capacities.
[Section 26, NIRC]
•For purposes of computing the distributive share of the partners, the
net income of the partnership shall be computed in the same manner
as a corporation. [Section 26, NIRC]
•Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the partnership.
[Section 26, NIRC]
•Income of a general professional partnership are deemed constructively
received by the partners. [Section 73(D), NIRC]

Ordinary business partnership

•An ordinary business partnership is considered as a corporation and is
thus subject to tax as such.
The essential elements of a partnership are: (1) an agreement to
contribute money, property, or industry to a common fund; and (2) an
intent to divide the profits among the contracting parties.

Unregistered partnership v. co-ownership for tax purposes

•If the activities of co-owners are limited to the preservation of the
property and the collection of the income therefrom, in which case,
each co-owner is taxed individually on his distributive share in the
income of the co-ownership.
• If the co-owners invest the income in business for profit, they
would be constituting
themselves into a partnership taxable as a corporation.

General Principles of Income Taxation in the Philippines

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

Some rules on taxation of the

various taxpayers Who are taxed on

their global income?

7.Resident citizens
8.Domestic
Who are taxedcorporations
based only on their
net income?
Who are taxed only on their income
from sources within the Philippines?
9.Non-resident citizen
10.Overseas contract workers
1.Resident and non-resident citizens
2.Resident alien and non-resident alien engaged in trade or business in
the Philippines
3.Domestic corporation
4.Resident foreign corporation

Who are taxed based on their gross income?

5.Non-resident alien not engaged in trade or business in the Philippines
6.Non-resident foreign corporation

Treatment of some special items

7. Forgiveness of indebtedness
The cancellation and forgiveness of indebtedness may, dependent upon
the circumstances, amount to:
a.a payment of income;
b.a gift; or
c. a capital transaction.
•If, for example, an individual performs services for a creditor who, in
consideration thereof cancels the debt, income to that amount is
realized by the debtor as compensation for his service.
• If, however, a creditor merely desires to benefit a debtor and
without any consideration
thereof cancels the debt, the amount of the debt is a gift from the
creditor to the debtor and need not be included in the latter’s gross
income.
• If a corporation to which a stockholder is indebted forgives the debt,
the transaction has
the effect of payment of a dividend. [Section 50, Revenue Regulations
2]

2. Recovery of amounts previously written off

• Considered as income

Guide Questions in Determining Taxable Income

1.Is there a gain or income?
2.Is the gain or income taxable? Is it excluded or exempt?
3.What type of income is it: income includible in the gross income,
passive income, capital gains, income derived from other source?
4.To what class does the taxpayer belong: individual or corporate,
citizen or not or domestic
taxed
or foreign, resident or not, engaged in trade or business or not?
similarly.
Tax on Individuals
Preliminary points on taxation of
individuals How taxed?
• An individual citizen, both
•A non-resident alien engaged in trade or business shall be subject to
the same income tax rates as a citizen and a resident alien.
• Thus, only a non-resident alien who is not engaged in trade or
business is taxed differently
from the other individual taxpayers.

On what income taxed?

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

Types of income taxed

1.Items of income included in the gross income
2.Passive income
3.Capital gains from sale of shares of stock not traded in the stock
exchange
4.Capital gains from the sale or exchange of real property

Tax on Individual Citizen (Resident and Non-Resident) and

Individual Resident Alien Items of income included in the gross

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

Rates of tax on certain passive income

1.Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements – 20%
2.Royalties, except on books, as well as other literary works and musical
compositions – 20%
3.Royalties on books, literary works and musical
compositions – 10% 4. Prizes over ₱10,000.00 – 20%
Note: Prizes less than ₱10,000.00 are included in the income tax of the
individual subject to the schedular rate of 5% up to ₱125,000 + 32% of
7.Interest income from long-term deposit or investment evidenced by
certificates prescribed by BSP
a.Exempt if investment is held for more than five years
b.If investment is pre-terminated, interest income on such investment
shall be subject to the following rates:
20% - if pre-terminated in less than 3 years
12% - if pre-terminated after 3 years to less
than 4 years 5% - if pre-terminated
after 4 years to less than 5 years
8.Cash and/or property dividends
Ten percent (10%) final tax by 01 January
2000 on the following:
a.Cash and or property dividend actually
or constructively received from a
domestic
corporation or from a joint stock company, insurance or mutual fund
companies and regional operating headquarters of multinational
companies
b.Share of an individual in the distributable net income after tax of a
partnership except a
general professional partnership of which he is a partner
c.Share of an individual in the net income after tax of an association,
joint account, or a joint venture or consortium taxable as a corporation
of which he is a member or a co- venturer

Capital gains from the sale of shares of stock not traded in

the stock exchange 1. Not over ₱100,000– 5%

LESSON 13: AGRARIAN

REFORM
Agrarian Reform

The Comprehensive Agrarian Reform Program (CARP) was a land reform

law mandated by Republic Act No. 6657, signed by President Corazon
Aquino on June 10, 1988. It was the fifth land reform law in fifty years,
following the land reform laws of Presidents Manuel Quezon, Ramon
Magsaysay, Diosdado Macapagal and Ferdinand Marcos.

Overview

The existing agrarian reform law implemented nationwide is Republic

Act No.6675, otherwise known as “the Comprehensive Agrarian Reform
Law” or CARL, signed into law by then president Corazon Aquino, and
implementing to that effect the government program known as
“Comprehensive Agrarian Reform Program” or CARP
It is the policy of the state to implement such a program pursuant to the
mandate of the 1987 Constitution which states that: “….the state shall
promote comprehensive rural development and agrarian reform...” (Art.
II Sec. 21 of the 1987 Constitution)

Brief History of Land

Reform Spanish
Period

For loyalty and faithful service to the Spanish crown, lands

(enconmiendas) were granted to special persons who were allowed to
exact tributes from peasants. Big tracts of lands were owned by
religious orders. The rest of the farmers possessed lands under the so
called share tenancy.

American Period

Church lands were subdivided as a measure of land reform and sold to

farmers basically to resolve peasants’ unrest. This set-up enabled a
number of Filipino farmers to amass big tract of lands which later on
became the haciendas.

Diosdado Macapagal’s Land Reform

A land Reform Code was passed in 1963 during the term of Pres.
Diosdado Macapagal, ensuring a more definite transition from tenancy
to owner- operated farms. The said land reform, however, applied only
to rice lands.

Marcos Land Reform

In 1972, President Marcos issued a decree declaring the whole country

as a land reform area. It was a seemingly ambiguous term: thus,
another law explaining the former enacted (P.D. No. 27). This later Law
was enacted to remove the ambiguity brought about by the old law.

Under this Agrarian Law, tenants were allowed to own five (5) hectares
through amortization covering lands planted to rice and corn.

Existing Land Reform

The 1987 Land reform Act is comprehensive in its coverage as

compared to the previous land reforms the government had
implemented. It covers almost all crops planted on agricultural lands,
and includes in its coverage lands of public and private domain.
pegged at five (five hectares), and another three hectares for every
child aged fifteen and above.

Lands Covered by CARP

The lands covered by CARP are the following:
1 All alienable and disposable lands of
domain
. devoted to or suitable forthe public
2.
agriculture. All lands of the public domain in
specific limits as determined by excess of the
Congress 3. All lands owned by the government
suitable for agriculture devoted to or
4. All private lands devoted to or
agriculture regardless of the agricultural products raised and can be
suitable for
raised (R.A 6657, Sec. 4)

Lands Exempted from CARP

The following lands are exempted from CARP namely:
1. Lands actually, directly and
exclusively used for parks, wildlife, forest reserves, reforestation, fish
2.
sanctuaries and breeding grounds, Private lands and
watersheds actually, directly and
mangroves.
used for prawn farms and exclusively
fishponds 3. Lands actually, directly and exclusively
to be necessary for national and found
defense, school sites and campuses,
experimental farm stations, church sites, mosques, cemeteries and
penal colonies
Retention Limit
The retention limit of the area pf the land left to the land owner after the
taking of the property by the government pursuant to the mandate of
the Carp shall not exceed five (5) hectares. Another three (3) hectares
may be awarded to each child of the land owner; provided, he is at
least fifteen (15) years of age, and would actually till or cultivate the
land

Ancestral Lands

The right of the indigenous cultural community to their ancestral lands

shall be protected to ensure their economic, social and cultural well
being.
1 The description and area of the
.Registration by Land Owners property
least
Withinthree
2 (3)days upon implementation
(180) The average gross
of the income
CARP, from theshall
landowners
years
.file a sworn statement in theproperty
proper for at
assessor’s office, stating the
following information:
3. The names of all tenants and farm
4. workers therein The crops planted
5. therein
contracts The terms of mortgages, leases, and
subsisting 6. management
the latest declared market value of
determined by the city or provincial
the assessor
land as

Registration of the Beneficiaries

The DAR in coordination with the BARC shall register all lessees, tenants
and farm workers who are qualified as beneficiaries of the CARP and
•
shall provide the following data: Names and members of their
househ immediate farm
old Location and area of the land
• they till Crops planted
• Their share in the harvest or
• amount of rental paid
or
Procedure
wages for Acquisition of Private lands:
The procedure to acquire private lands
receive
1. as follows:
are
d The DAR shall send notice to the
furnished to the landowner, copy
tenants 2. Within (30) days from receipt of said
landowner shall inform the DAR of his acceptance
notice, the or
rejection of the offer
3 If the landowner accepts the offer of
LBP
. shall pay the land owner thethe purchase
DAR, price
the
4
within (30) days. In case of rejection or failure to
shall
. conduct summary administrativereply, proceeding
the DAR (determining the just
compensation)
5.Upon receipt by the land owner of the payment, the DAR shall take
immediate possession of the land and shall request the RD to issue TCT
in the name of the Republic of the Philippines
6.The DAR shall thereafter proceed to the redistribution of the land to
the beneficiaries, three (3) hectares for every tenant.

Determinants of Just Compensation

1
The factors to be considered in determining
Cost the just compensation are:
. acquisition
2 The current
. Value
5
3 Thenature,
Its assessment
actualof theand
use
. government
income The sworn
4 valuation of the owner
.
Modes of Compensation
The LBP shall compensate the owner under the
•
following modes: 50 hectares and above- 25% cash,
be paid by negotiable the balance to
instrument
• 24 hectares to 50 - 30% cash, the
be paid by negotiable
instrument balance to 24 hectares and below-
•
Payment
be paid inmay be made also in the
negotiable form
35% of shares
cash, of stockstoin
the balance
instrument owned or controlled corporation.
government

Definition of Terms
Agrarian Reform - means the redistribution of lands regardless of crops
or fruits produced to farmers and farm workers

Agriculture - the activity and/ or cultivation of the soil, planting crops or

growing of fruit trees and other farm activities

Agricultural lands - the lands devoted to agricultural activity

Agricultural dispute - any controversy relating to tenurial arrangements,

whether leasehold, tenancy, stewardship or otherwise.

Idle or Abandoned Land - any agricultural land not activated, tilled or

developed

Farmer - a natural person whose primary livelihood is cultivation of land

or the production of agricultural crops

Farm Workers - a natural person who renders services for value as an

employee or laborer

Regular Farm Worker - A natural person who is employed on a

permanent basis by an agricultural enterprise or farm

Season Farm Worker - A natural person who is employed on a recurrent,

periodic or intermitted basis by an agricultural enterprise or farm

Cooperatives - refer to organizations composed primarily of small

agricultural producers, farmers, farm workers, or other agrarian reform
beneficiaries
Conclusion:

The Comprehensive Agrarian Reform Program (CARP) was a land reform

law mandated by Republic Act No. 6657 was the fifth land reform law in
fifty years CARP aims “for a more equitable distribution and ownership
of land” and meant to distribute lands to farmers in a span of 10 years

SOURCE:
Department ofAgrarian Reform
website,
http://www.dar.gov.ph