Chapter 1: DEBT

Balance of Payment

The balance of payments (BOP) is a record of all international trade and financial transactions made by a
country’s residents. It is used to measure the economic health of a country in relation to the rest of the
world. The current account measures international trade, net income on investments, and direct
payments.

Components of Balance of Payment:

The BOP has three components: the current account, the financial account, and the capital account.

Current Account

The current account measures international trade, net income on investments, and direct payments. It is
further divided into four subcategories: goods, services, income, and current transfers.

Goods: This category includes all physical products that are traded between countries. It is calculated by
subtracting the value of imports from the value of exports.

Services: This category includes all intangible products that are traded between countries, such as
tourism, transportation, and consulting services. It is calculated by subtracting the value of imports from
the value of exports.

Income: This category includes all income earned by residents of a country from foreign investments, as
well as all income earned by foreign residents from investments in the country. It is calculated by
subtracting the value of payments made to foreign investors from the value of payments received from
foreign investors.

Current transfers: This category includes all transfers of money between countries that do not involve
the purchase of goods or services. It is calculated by subtracting the value of payments made to foreign
countries from the value of payments received from foreign countries.

Financial Account

The financial account describes the change in international ownership of assets. It includes all
transactions that involve the purchase or sale of assets between residents of a country and foreign
residents. It is further divided into two subcategories: direct investment and portfolio investment.

Direct investment: This category includes all investments made by residents of a country in foreign
countries, as well as all investments made by foreign residents in the country. It is calculated by
subtracting the value of investments made by foreign residents in the country from the value of
investments made by residents of the country in foreign countries.

Portfolio investment: This category includes all investments made by residents of a country in foreign
financial markets, as well as all investments made by foreign residents in the country’s financial markets.
It is calculated by subtracting the value of investments made by foreign residents in the country’s
financial markets from the value of investments made by residents of the country in foreign financial
markets.

Capital account:

The capital account includes all other financial transactions that do not affect the nation’s economic
output. It includes all transactions that involve the transfer of ownership of fixed assets, such as land and
buildings, between residents of a country and foreign residents.

Accounts of BOP

Current Account

The current account measures international trade, net income on investments, and direct payments. It is
further divided into four subcategories: goods, services, income, and current transfers.

Goods: This category includes all physical products that are traded between countries. It is calculated by
subtracting the value of imports from the value of exports.

Services: This category includes all intangible products that are traded between countries, such as
tourism, transportation, and consulting services. It is calculated by subtracting the value of imports from
the value of exports.

Income: This category includes all income earned by residents of a country from foreign investments, as
well as all income earned by foreign residents from investments in the country. It is calculated by
subtracting the value of payments made to foreign investors from the value of payments received from
foreign investors.

Current transfers: This category includes all transfers of money between countries that do not involve
the purchase of goods or services. It is calculated by subtracting the value of payments made to foreign
countries from the value of payments received from foreign countries.

Capital Account:

The capital account includes all other financial transactions that do not affect the nation’s economic
output. It includes all transactions that involve the transfer of ownership of fixed assets, such as land and
buildings, between residents of a country and foreign residents.

Balancing Item

The balancing item is an accounting entry in the balance of payments that is used to offset any statistical
discrepancies that may arise when compiling the data for the current and capital accounts. It is used to
ensure that the balance of payments is always in equilibrium. The balancing item is calculated as the
difference between the sum of the current and capital accounts and the official reserve transactions.
Balance of deficit and Debt

The terms "deficit" and "debt" are often used in the context of government finances and economics.

1. Budget Deficit:

Definition: A budget deficit occurs when a government's expenditures exceed its revenues within a
specific time limit, typically a fiscal year. In other words, it is the shortfall or negative balance between
what the government spends and what it collects in taxes.

Implications: A persistent budget deficit can lead to the accumulation of debt over time, as the
government needs to borrow money to cover the deficit. On the other hand, a temporary deficit may be
manageable, especially during economic downturns when increased government spending can help
stimulate the economy.

2. National Debt:

Definition: The national debt is the total amount of money that a government owes to external
creditors and domestic lenders. It represents the cumulative effect of past budget deficits and surpluses.
It includes the government's borrowing to cover budget shortfalls over time.

Implications: A high national debt can have various consequences. While some levels of debt are
normal and often necessary for governments to function, excessively high debt levels relative to the
country's economic output (GDP) can be a concern. It may lead to higher interest payments, limit the
government's ability to respond to economic challenges, and, in extreme cases, result in a debt crisis.

Balancing Deficit and Debt:

Fiscal Responsibility: Governments need to strike a balance between running deficits to stimulate the
economy when necessary and maintaining fiscal responsibility to avoid excessive debt accumulation.

Economic Conditions: During economic downturns, governments may deliberately run deficits to boost
spending and support economic activity. In periods of economic growth, efforts may be made to reduce
deficits and pay down debt.

Long-Term Planning: Sustainable fiscal policies involve long-term planning to ensure that deficits are
manageable, and the national debt remains at a sustainable level relative to the country's economic
capacity.

In summary, managing the balance between deficit and debt is a complex task for governments. Prudent
fiscal policies involve considering economic conditions, addressing short-term needs, and planning for
long-term fiscal sustainability.

Public Debt
Public debt is the total amount of money owed by a government to its creditors, including individuals,
corporations, and other governments. It can be raised both externally and internally, where external
debt is the debt owed to lenders outside the country and internal debt represents the government’s
obligations to domestic lenders. Public debt is an important source of resources for a government to
finance public spending and fill holes in the budget.

External debt is created when a country borrows money from other countries or foreigners. It owes it all
to others. When a country borrows money from others, it must pay interest on such debt along with the
principal amount. This payment is to be made in foreign currencies (or in gold). If the debtor nation does
not have sufficient stock of foreign exchange (accumulated in the past), it will be forced to export its
goods to the creditor nation. To be able to export goods, a debtor nation must generate sufficient export
surplus by curtailing its domestic consumption. Thus, an external debt reduces society’s consumption
possibilities since it involves a net subtraction from the resources available to people in the debtor
nation to meet their current consumption needs.

Internal debt is created when a government borrows money from its own citizens by selling bonds or
long-term credit instruments. It is owed by a nation to its own citizens. So, it may seem that an internal
debt does not impose any burden on society because we owe it all to ourselves. But this is the wrong
position. Public debt has both short-term and long-term implications as far as the management of the
economy and its operational efficiency are concerned. Internal debt creates three major problems:

(1) The difficulties of servicing a large external debt,

(2) The efficiency loss from taxation, imposed to pay interest on public debt, and

(3) Slowing down of the rate of growth of the economy which occurs when a large debt reduces the rate
of capital formation in the private sector (by diverting resources to the public sector)

High Debt of developing Countries

Developing countries have been facing elevated levels of debt in recent years. According to the World
Bank, the total external debt of low- and middle-income countries was $8.1 trillion at the end of 2019, of
which a third was owed to private creditors. More than half of IDA countries today are in debt distress or
at considerable risk of it.

The reasons for high debt levels in developing countries are complex and multifaceted. Some of the
factors that contribute to high debt levels include:

Low economic growth: Developing countries often have lower economic growth rates than developed
countries, which can make it difficult to generate the revenue needed to pay off debt.

High interest rates: Developing countries often must pay higher interest rates on their debt than
developed countries, which can make it more difficult to service their debt.

External shocks: External shocks such as natural disasters, commodity price fluctuations, and global
economic downturns can have a significant impact on developing countries’ economies and their ability
to service their debt.
Corruption: Corruption can lead to the mismanagement of public funds and the diversion of resources
away from debt repayment.

Poor governance: Poor governance can lead to inefficient use of resources and a lack of accountability,
which can contribute to high debt levels.

Prominent levels of debt can have significant negative consequences for developing countries. Debt
service payments can consume a substantial portion of a country’s budget, leaving less money available
for essential services such as health care and education. High debt levels can also lead to a loss of
investor confidence, which can make it more difficult for countries to borrow money in the future.

Factors behind high debt

High debt levels can be caused by a variety of factors, including:

Negative shock: Negative shocks such as natural disasters, pandemics, and global economic downturns
can have a significant impact on a country’s economy and its ability to service its debt.

Global oil price: Countries that are heavily dependent on oil exports can be vulnerable to fluctuations in
oil prices, which can impact their ability to service their debt.

Increase import: An increase in imports can lead to a trade deficit, which can make it difficult for
countries to generate the revenue needed to pay off debt.

Capital flight: Capital flight refers to the rapid outflow of US dollar reserves from a country and can
exacerbate sovereign debt distress in some of these countries.

Political instability: Political instability can lead to a loss of investor confidence, which can make it more
difficult for countries to borrow money in the future.

Poor management of financial resources: Poor management of financial resources can lead to
inefficient use of resources and a lack of accountability, which can contribute to high debt levels.

Global fiscal crisis: The global financial crisis of 2008 had a significant impact on many countries’
economies and their ability to service their debt.

These factors can interact with each other in complex ways, making it difficult to address high debt
levels. Elevated levels of debt can have significant negative consequences for countries, including
reduced economic growth, loss of investor confidence, and reduced access to credit markets
 Chapter 2 Economy development stage

Factor driven stage.

In this stage, competitive advantage is based exclusively on endowments of labor and natural resources.
This supports only relatively low wages.

Investment Driven Stage

In this stage, efficiency in producing standard products and services becomes the dominant source of
competitive advantage. Economies at this stage concentrate on manufacturing and on outsourced
service exports. They receive higher wages, but are susceptible to financial crises and external, sector-
specific demand shocks.

Innovation Driven Stage

In this stage, the ability to produce innovative products and services at the global technology frontier
using the most advanced methods becomes the dominant source of competitive advantage. At this
stage, the national business environment is characterized by strengths in all areas of the diamond
together with the presence of deep clusters. Clusters become critical motors, not only in generating
productivity, but also encouraging innovation at the world frontier. Companies compete with unique
strategies that are often global in scope, and invest strongly in advanced skills, the latest technology, and
innovative capacity
Chapter 3: TDA, CSR and Ethical Ways of doing Business

Role of TDAP in promoting exports (role of commercial attaches in promoting

The Trade Development Authority of Pakistan (TDAP) is a premier trade organization of Pakistan that was
established on November 8, 2006, under a Presidential Ordinance. TDAP is mandated to have a holistic
view of global trade development rather than only the ‘export promotion’ perspective of its predecessor,
the Export Promotion Bureau (EPB). TDAP’s mission is to develop and promote exports holistically,
through focus, constructive collaboration, and with collective wisdom and counsel of its stakeholders.

TDAP’s functions include planning and organizing exhibitions, delegations to and from Pakistan, and
local, international, and inter-provincial export promotional conferences, workshops, and seminars.
TDAP also encourages and promotes research in trade and policy-related studies that may facilitate
formulating an effective export policy and plans. TDAP helps improve market access by advising the
Government on matters of trade diplomacy and promoting the “business” image of Pakistan in the key
export markets for Pakistani products and services worldwide.

Commercial attaches are officials from the embassy or consulate of a country who are responsible for
promoting their country’s economic interests in the host country. They perform facilitation and
regulatory functions as well as providing supply-side and marketing assistance to exporters4. Commercial
attaches select buyers, agents, and distributors of the home country’s exports, explore, and identify new
markets for more export opportunities, research and analyze markets for exports from their home
countries, and keep statistics of products such as volumes, packaging sizes, and methods of
manufacturing. They also publish and advertise their country’s exports in business journals and
magazines, assist sales missions from home countries by organizing educational tours for them, and
inform traders in their home countries of standards required for exports.

In summary, TDAP develops and promotes exports holistically, while commercial attaches promote their
country’s economic interests in the host country by identifying and developing business opportunities
for their country’s companies, providing market intelligence, and assisting in resolving trade-related
issues.

Role of TDAP in promoting exports

TDAP’s mission is to develop and promote exports holistically, through focus, constructive collaboration,
and with collective wisdom and counsel of its stakeholders.

TDAP’s functions include planning and organizing exhibitions, delegations to and from Pakistan, and
local, international, and inter-provincial export promotional conferences, workshops, and seminars.
TDAP also encourages and promotes research in trade and policy-related studies that may facilitate
formulating an effective export policy and plans. TDAP helps improve market access by advising the
Government on matters of trade diplomacy and promoting the “business” image of Pakistan in the key
export markets for Pakistani products and services worldwide.
Commercial attaches are officials from the embassy or consulate of a country who are responsible for
promoting their country’s economic interests in the host country. They perform facilitation and
regulatory functions as well as providing supply-side and marketing assistance to exporters. Commercial
attaches select buyers, agents, and distributors of the home country’s exports, explore, and identify new
markets for more export opportunities, research and analyze markets for exports from their home
countries, and keep statistics of products such as volumes, packaging sizes, and methods of
manufacturing. They also publish and advertise their country’s exports in business journals and
magazines, assist sales missions from home countries by organizing educational tours for them, and
inform traders in their home countries of standards required for exports.

In summary, TDAP develops and promotes exports holistically, while commercial attaches promote their
country’s economic interests in the host country by identifying and developing business opportunities
for their country’s companies, providing market intelligence, and assisting in resolving trade-related
issues.

TDAP's vision

TDAP’s vision is to achieve a quantum-leap in Pakistan’s export. To fulfill such a mission, TDAP shall
employ the right skills and competencies, professional management techniques, advanced international
marketing strategy backed by competent market research and trade analysis, supported using the latest
technology.

In summary, TDAP aims to develop and promote exports holistically, while employing the right skills and
competencies, professional management techniques, advanced international marketing strategy backed
by competent market research and trade analysis, supported using the latest technology to achieve a
quantum-leap in Pakistan’s export.

CSR and Ethical ways of doing business values.

Ethics vs social responsibility

Ethical responsibility and social responsibility are two concepts that are often used interchangeably, but
they are not the same. Ethical responsibility is concerned with ensuring an organization operates in a fair
and ethical manner. Organizations that embrace ethical responsibility aim to practice ethical behavior
through fair treatment of all stakeholders, including leadership, investors, employees, suppliers, and
customers.

Social responsibility, on the other hand, is a business’s duty to make ethical decisions that positively
impact society. Social responsibility is concerned with the impact of those behaviors on society and the
environment. Companies that seek to embrace social responsibility can do so in several ways, such as
reducing pollution, conserving energy, and using sustainable materials. Companies can also engage in
philanthropic activities by donating money, time, or resources to charitable causes.
In summary, ethical responsibility is concerned with ensuring an organization is operating in a fair and
ethical manner, while social responsibility is a business’s duty to make ethical decisions that positively
impact society. Ethical responsibility is concerned with ensuring an organization operates in a fair and
ethical manner. Social responsibility is concerned with the impact of those behaviors on society and the
environment. Companies that seek to embrace social responsibility can do so in several ways, such as
reducing pollution, conserving energy, and using sustainable materials. Companies can also engage in
philanthropic activities by donating money, time, or resources to charitable causes.

Corporate Social Responsibility help in the growth of the business/industry

Corporate Social Responsibility (CSR) can help businesses grow by creating a positive image and
reputation for the company, which can lead to increased profits and customer loyalty. CSR can also
attract new talent and investors by putting company initiatives in place.

Research has shown that socially responsible companies have experienced a range of bottom-line
benefits, including increased sales and market share, strengthened brand positioning, enhanced
corporate image and clout, and increased ability to attract, motivate, and retain employees. CSR can also
improve customer engagement and retention by allowing organizations to interact directly with
members and generate direct feedback on what the company is doing right and what it can improve on
moving forward.

In summary, CSR can help businesses grow by creating a positive image and reputation for the company,
which can lead to increased profits and customer loyalty. CSR can also attract new talent and investors by
putting company initiatives in place. Research has shown that socially responsible companies have
experienced a range of bottom-line benefits, including increased sales and market share, strengthened
brand positioning, enhanced corporate image and power, and increased ability to attract, motivate, and
retain employees. CSR can also improve customer engagement and retention by allowing organizations
to interact directly with members and generate direct feedback on what the company is doing right and
what it can improve on moving forward.

4 Types of social responsibility

Corporate Social Responsibility (CSR) is a self-regulating business model that helps a company be socially
accountable—to itself, its stakeholders, and the public. CSR can take many forms, with the result that
society benefits in some way. CSR is traditionally broken into four categories: environmental,
philanthropic, ethical, and economic responsibility.

Environmental Responsibility: This type of CSR is the belief that organizations should behave in as
environmentally friendly a way as possible. Companies that seek to embrace environmental
responsibility can do so in several ways, such as reducing pollution, conserving energy, and using
sustainable materials.

Philanthropic Responsibility: This type of CSR involves giving back to the community. Companies can
engage in philanthropic activities by donating money, time, or resources to charitable causes. Examples
of philanthropic activities include sponsoring local events, supporting disaster relief efforts, and funding
scholarships.

Ethical Responsibility: This type of CSR is concerned with ensuring an organization operates in a fair and
ethical manner. Organizations that embrace ethical responsibility aim to practice ethical behavior
through fair treatment of all stakeholders, including leadership, investors, employees, suppliers, and
customers.

Economic Responsibility: This type of CSR is concerned with maximizing profits while also being socially
responsible. Companies that embrace economic responsibility aim to balance their financial goals with
their social and environmental responsibilities.

In summary, CSR is the onus on a business to act in the interest and for the benefit of the community
whenever possible, while business ethics are moral principles that function as a framework for the way a
company or business conducts itself and its transactions. CSR is a self-regulating business model that
helps a company be socially accountable—to itself, its stakeholders, and the public. By practicing
corporate social responsibility, companies can be conscious of the kind of impact they are having on all
aspects of society, including economic, social, and environmental. Ethical responsibility is concerned with
ensuring an organization operates in a fair and ethical manner. Organizations that embrace ethical
responsibility aim to practice ethical behavior through fair treatment of all stakeholders, including
leadership, investors, employees, suppliers, and customers.

Business ethics for executives

Business ethics for executives are a set of moral principles that function as a framework for the way a
company or business conducts itself and its transactions. The Josephson Institute offers twelve ethical
principles for business executives, which include:

Honesty: Being truthful and transparent in all business dealings.

Integrity: Adhering to a set of core principles that influences decisions and behaviors.

Promise-Keeping & Trustworthiness: Keeping promises and being trustworthy in all business dealings.

Loyalty: Being loyal to the company and its stakeholders.

Fairness: Treating all stakeholders fairly and equitably.

Concern for Others: Being concerned about the well-being of others.

Respect for Others: Respecting the dignity and worth of all stakeholders.

Law Abiding: Abiding by all laws and regulations.

Chapter 4 Financial Institutions

Bretton Woods Conference

The Bretton Woods Conference was a gathering of 730 delegates from all 44 allied nations at the Mount
Washington Hotel, in Bretton Woods, New Hampshire, United States, to regulate the international
monetary and financial order after the conclusion of World War II. The conference was held from July 1
to 22, 1944. The primary goals of the conference were to create an efficient foreign exchange system,
prevent competitive devaluations of currencies, and promote international economic growth.

The conference led to the establishment of two major international organizations: the International Bank
for Reconstruction and Development (IBRD), later part of the World Bank group, and the International
Monetary Fund (IMF). The Bretton Woods system for international commercial and financial relations
was also established. The IBRD provides loans, credit, and grants, while the IMF provides loans to
countries experiencing balance-of-payments difficulties. The Bretton Woods system was based on the
gold standard, which fixed the value of the US dollar to gold at a rate of $35 per ounce. Other currencies
were then fixed to the US dollar at a fixed exchange rate.

The Bretton Woods system was in place until 1971, when the US government suspended the
convertibility of the US dollar into gold. This led to the collapse of the Bretton Woods system and the
adoption of a floating exchange rate system

Two major institutions

The Bretton Woods Conference led to the establishment of two major international organizations: the
International Bank for Reconstruction and Development (IBRD), later part of the World Bank group, and
the International Monetary Fund (IMF). The IBRD provides loans, credit, and grants, while the IMF
provides loans to countries experiencing balance-of-payments difficulties

World Bank why it came into existence

The World Bank is an international organization that provides financial assistance to developing
countries to enhance their economic development. It was founded in 1944 at the UN Monetary and
Financial Conference, also known as the Bretton Woods Conference, which was convened to establish a
new, post-World War II international economic system. The World Bank officially began operations in
June 1946 and its first loans were geared toward the postwar reconstruction of western Europe. Since
then, it has funded more than 12,000 projects.

The World Bank’s primary goal is to reduce poverty by spurring growth, especially in Africa, and to
improve the standard of living of people in developing countries. It aims to end extreme poverty by 2030
and promote shared prosperity by 2030. To achieve this goal, the Bank focuses on several areas,
including overcoming poverty by spurring growth, helping reconstruct countries emerging from war,
providing customized solutions to help middle-income countries remain out of poverty, spurring
governments to prevent climate change, working with partners to bring an end to AIDS, managing
international financial crises and promoting open trade.
Five organizations of world bank group

The World Bank Group comprises five constituent institutions: the International Bank for Reconstruction
and Development (IBRD), the International Development Association (IDA), the International Finance
Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre
for Settlement of Investment Disputes (ICSID).

The IBRD provides loans, credit, and grants to middle-income and creditworthy low-income countries for
development purposes.

The IDA provides low- or no-interest loans and grants to low-income countries for development
purposes.

The IFC provides investment, advice, and asset management to companies and governments.

The MIGA insures lenders and investors against political risk such as war.

The ICSID settles investment disputes between investors and countries.

The IBRD was established in 1944 to help rebuild Europe after World War II. It provides loans, credit, and
grants to middle-income and creditworthy low-income countries for development purposes. The IDA was
established in 1960 to provide low- or no-interest loans and grants to low-income countries for
development purposes. The IFC was established in 1956 to provide investment, advice, and asset
management to companies and governments. The MIGA was established in 1988 to insure lenders and
investors against political risk such as war. The ICSID was established in 1966 to settle investment
disputes between investors and countries

Objectives

The World Bank has several objectives that are aimed at reducing poverty and promoting economic
development in developing countries. Here are some of the objectives of the World Bank:

Providing long-term capital to member nations for economic development and reconstruction: The
World Bank provides loans, credit, and grants to middle-income and creditworthy low-income countries
for development purposes. The International Development Association (IDA) provides low- or no-interest
loans and grants to low-income countries for development purposes.

Promoting private foreign investments: The World Bank promotes foreign investments to other
organizations by guaranteeing loans.

Providing economic, monetary, and technical advice to member countries for any of their projects: The
World Bank provides economic, monetary, and technical advice to the member countries for any of their
projects.

Encouraging the development of industries in underdeveloped countries by introducing various

economic reforms: The World Bank encourages the development of industries in underdeveloped
countries by introducing various economic reforms.
 Chapter 5: IMF

International monetary policy

The International Monetary Fund (IMF) is an international organization that promotes global economic
growth and financial stability, encourages international trade, and reduces poverty. The IMF has three
main functions: overseeing economic development, lending, and capacity development.

The IMF was established in 1944 at the Bretton Woods Conference, which was convened to establish a
new, post-World War II international economic system. The IMF became operational on December 27,
1945, with 29 member countries that agreed to be bound by its treaty.

The IMF is an independent international organization and a cooperative of 190 member countries,
whose objective is to promote world economic stability and growth. The member countries are the
shareholders of the cooperative, providing the capital of the IMF through quota subscriptions. In return,
the IMF provides its members with macroeconomic policy advice, financing in times of balance-of-
payments need, and technical assistance and training to improve national economic management.

The IMF has three critical missions: furthering international monetary cooperation, encouraging the
expansion of trade and economic growth, and discouraging policies that would harm prosperity. To fulfill
these missions, IMF member countries work collaboratively with each other and with other international
bodies. The IMF fosters international financial stability by offering policy advice, financial assistance, and
capacity development. It provides loans and concessional financial assistance to member countries
experiencing actual or potential balance-of-payments problems. The IMF also provides technical
assistance and training of government officials to help member countries strengthen economic
institutions and statistics, as well as capacities in areas such as taxation and administration, expenditure
management, monetary and exchange rate policies, financial system supervision and regulation, and
legislative frameworks

IMF policies for Pakistan

The International Monetary Fund (IMF) has been working with Pakistan to support its economic
stabilization program. The IMF has approved a 9-month Stand-By Arrangement (SBA) for Pakistan for an
amount of SDR2,250 million (about $3 billion, or 111 percent of quota) to support the authorities’
economic stabilization program. The program will focus on several areas, including implementation of
the FY24 budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt sustainability, while
protecting critical social spending; a return to a market-determined exchange rate and proper FX market
functioning to absorb external shocks and eliminate FX shortages; an appropriately tight monetary policy
aimed at disinflation; and further progress on structural reforms, particularly with regard to energy
sector viability, SOE governance, and climate resilience. The IMF has set six new structural benchmarks
(SBs) for Pakistan, including preparation of draft Personal Income Tax (PIT) legislation till February 2022,
that will be met till June 2022
Chapter 6: Labor exports

Labor exports

Labor export refers to the migration of workers from one country to another for employment purposes.
It is a strategy that some countries use to reduce unemployment and generate foreign exchange. Labor-
exporting countries have developed a range of strategies to influence the scale and composition of labor
out-migration. These policies have been developed to improve the prospects for economic development
and accomplish specific developmental objectives. The governments of labor-exporting countries have
articulated several objectives they seek to achieve by encouraging, facilitating, and endorsing
international migration. One of the most common objectives is the generation of remittances to pay
foreign debts, finance trade deficits, and improve balance of payments.

Labor export in economics

In economics, labor export refers to the migration of workers from one country to another for
employment purposes. It is a strategy that some countries use to reduce unemployment and generate
foreign exchange. Labor-exporting countries have developed a range of strategies to influence the scale
and composition of labor out-migration. These policies have been developed to improve the prospects
for economic development and accomplish specific developmental objectives. The governments of
labor-exporting countries have articulated a number of objectives they seek to achieve by encouraging,
facilitating, and endorsing international migration. One of the most common objectives is the generation
of remittances to pay foreign debts, finance trade deficits, and improve balance of payments.

Types of labor in economics

Labor is one of the three factors of production, along with land and capital. Labor is often defined as the
physical or mental effort exerted by human beings in the production of goods and services. In
neoclassical economics, labor is a broader concept that incorporates all human activity that adds value
to a product or service. This includes not only physical and mental effort but also the use of tools,
machines, and other equipment. It also surrounds the time spent on planning, organizing, and
supervising production.

There are different types of labor in economics, and they can be classified based on various criteria. Here
are some of the most common types of labor:

Skilled labor: Skilled labor refers to workers who have specialized knowledge, training, or education in a
particular field. They possess advanced skills and expertise that are not easily acquired and are often in
high demand. Examples of skilled labor include doctors, engineers, and lawyers.

Unskilled labor: Unskilled labor refers to workers who do not require specialized knowledge, training, or
education to perform their jobs. They typically perform manual or routine tasks that require little or no
training. Examples of unskilled labor include farm workers, janitors, and construction workers.
Semi-skilled labor: Semi-skilled labor refers to workers who have some training or education but do not
possess advanced skills or expertise. They perform tasks that require some level of training or experience
but are not highly specialized. Examples of semi-skilled labor include factory workers, machine
operators, and truck drivers.

Professional labor: Professional labor refers to workers who have specialized knowledge, training, or
education in a particular field and are licensed or certified to practice their profession. They possess
advanced skills and expertise that are not easily acquired and are often in high demand. Examples of
professional labor include doctors, lawyers, and accountants.

Labor market in economics

The labor market refers to the supply of and demand for labor, for which employees provide the supply
and employers provide the demand. It is a major component of any economy and is intricately linked to
markets for capital, goods, and services.

The labor market can be viewed at both macroeconomic and microeconomic levels, each offering
valuable insight into employment and the economy. At the macroeconomic level, supply and demand
are influenced by domestic and international market dynamics, as well as factors such as immigration,
the age of the population, and education levels. Relevant measures include unemployment, productivity,
participation rates, total income, and gross domestic product (GDP). At the microeconomic level,
individual firms interact with employees, hiring them, firing them, and raising or cutting wages and
hours. The relationship between supply and demand influences the number of hours employees work
and the compensation they receive in wages, salary, and benefits.

Unemployment rates and labor productivity rates are two important macroeconomic gauges. Individual
wages and the number of hours worked are two important microeconomic gauges. In the United States,
the Bureau of Labor Statistics compiles detailed reports on national and local labor markets.

Advantages of labor export

Labor export is a strategy that some countries use to reduce unemployment and generate foreign
exchange. The benefits of labor export policies are well known, including high foreign exchange reserves,
positive balance of payments, education and small-scale enterprises by families receiving remittances,
and improved knowledge and skills by OFWs returning home. Earnings from overseas employment have
also encouraged investments in the housing industry and enlivened domestic tourism.

However, there are also some downsides to labor export policies. These include abuse of OFWs, family
breakdowns from long separations, and critical labor shortages in key industries and services. The desire
to work abroad has negatively influenced educational aspirations, with some Filipino doctors taking up
nursing to get overseas jobs. The most serious negative effect of labor export policies has been the
neglect of domestic production and poor investments in infrastructure, agriculture, mining, export
promotion, and social development because of the easy availability of funds from remittances
Disadvantages of labor exports

Labor export is a strategy that some countries use to reduce unemployment and generate foreign
exchange. While there are benefits to labor export policies, there are also some downsides to consider.

One of the most significant disadvantages of labor export policies is the neglect of domestic production
and poor investments in infrastructure, agriculture, mining, export promotion, and social development
because of the easy availability of funds from remittances. This can lead to a lack of investment in key
industries and services, which can have long-term negative effects on the economy.

Another disadvantage of labor export policies is the abuse of overseas Filipino workers (OFWs). OFWs
are often subjected to poor working conditions, low wages, and exploitation by their employers. This can
lead to physical and emotional harm to the workers and their families.

Family breakdowns from long separations are also a common problem associated with labor export
policies. Many OFWs are forced to leave their families behind for extended periods, which can lead to
emotional stress and other problems.

Finally, the desire to work abroad has negatively influenced educational aspirations, with some Filipino
doctors taking up nursing to get overseas jobs.
Chapter 7: Balance of payment

A country must deal with other countries in respect of the following

A country must deal with other countries in respect of the following:

Visible items which include all types of physical goods exported and imported.

Invisible items which include all those services whose export and import are not visible, such as
transport services, medical services, etc.

Capital transfers which are concerned with capital receipts and capital payment.

These three categories are part of a country’s balance of payments (BOP), which is a systematic record of
all economic transactions between the residents of the reporting country and residents of foreign
countries during a given period. The BOP is a double-entry system of record of all economic transactions
between the residents of the country and the rest of the world carried out in a specific period. It has two
sides: credit side and debit side. Receipts are recorded on the credit side and payments on the debit
side.

Balance of payment by kindle Berger

Kindleberger defines balance of payments (BOP) as “a systematic record of all economic transactions
between the residents of the reporting country and residents of foreign countries during a given period
of time”. It is a double-entry system that records all economic transactions between the residents of the
reporting country and residents of foreign countries. The BOP includes all transactions, visible as well as
invisible, and capital transfers.

Features

The Balance of Payments (BOP) is a systematic record of all economic transactions between one country
and certain other countries of the world.

It is prepared for a period of three months or twelve months, i.e., usually 12 months. It contains all
receipts and payments both visible and invisible.

The statement comprises all the international transactions that encompass individual, corporate and
government transactions.

Balance of trade

The balance of trade (BOT) is the difference between the value of a country’s imports and its exports,
and is the largest component of a country’s balance of payments. The BOT is calculated by subtracting
the value of imports from the value of exports. If the value of exports is greater than the value of
imports, then the BOT is favorable, and if the value of imports is greater than the value of exports, then
the BOT is unfavorable.

The BOT is an important economic indicator that reflects the competitiveness of a country’s economy in
the global market. A country that exports more goods and services than it imports has a trade surplus,
while a country that imports more goods and services than it exports has a trade deficit.

Balance of trade vs Balance of Payment

The balance of trade (BOT) is the difference between the value of a country’s imports and its exports and
is the largest component of a country’s balance of payments.

The BOT is a narrow term that includes only visible items. If the value of exports is greater than the value
of imports, then the BOT is favorable, and if the value of imports is greater than the value of exports,
then the BOT is unfavorable.

On the other hand, the balance of payments (BOP) is a systematic record of all economic transactions
between the residents of a country and residents of foreign countries during a given period.

It has three components: the current account, the financial account, and the capital account.

The BOP is a broad term that includes all transactions related to visible, invisible, and capital transfers.

The BOP is reported for a quarter or a year.

The main difference between BOT and BOP is that BOT is a narrow term that includes only visible items,
while BOP is a broad term that includes all transactions related to visible, invisible, and capital transfers.
The BOT is a component of the current account of the BOP. The BOP is a more comprehensive measure
of a country’s economic transactions with the rest of the world than the BOT

Various components of a BOP statement

The balance of payments (BOP) is a systematic record of all economic transactions between the residents
of a country and residents of foreign countries during a given period of time. It has three components:
the current account, the financial account, and the capital account.

The current account measures international trade, net income on investments, and direct payments. It
includes the following sub-components:

Trade balance: The difference between the value of exports and imports of goods and services.

Net income: The difference between income earned by residents of a country from foreign sources and
income earned by foreign residents from domestic sources.

Net unilateral transfers: The difference between gifts, grants, and remittances received from foreign
countries and those sent to foreign countries.

The financial account describes the change in international ownership of assets. It includes the following
sub-components:
Direct investment: Investment in which a resident of one country acquires a lasting interest in an
enterprise in another country.

Portfolio investment: Investment in which a resident of one country acquires an equity or debt
instrument issued by an enterprise in another country.

Other investment: Investment that does not fall under direct or portfolio investment, such as loans,
currency deposits, and trade credits.

Reserve assets: Assets held by the central bank of a country to support its currency and to provide a
means of settling international transactions.

The capital account includes any other financial transactions that don’t affect the nation’s economic
output. It includes the following sub-components:

Capital transfers: Transfers of ownership of fixed assets and the transfer of funds linked to them.

Transactions in non-produced, non-financial assets: Transactions in items such as patents, copyrights,

and trademarks.

The errors and omissions item are a balancing item that reflects the statistical discrepancy between the
current, capital, and financial accounts. It is included in the BOP statement to ensure that the sum of all
transactions in the BOP is zero

Types of balances

There are three types of balances: trade balance, income balance, and net unilateral transfer.

The trade balance is the difference between the value of a country’s exports and imports of goods and
services. If the value of exports is greater than the value of imports, then the trade balance is favorable,
and if the value of imports is greater than the value of exports, then the trade balance is unfavorable.
The trade balance is a component of the current account of the BOP.

The income balance is the difference between income earned by residents of a country from foreign
sources and income earned by foreign residents from domestic sources. It is also a component of the
current account of the BOP.

The net unilateral transfer is the difference between gifts, grants, and remittances received from foreign
countries and those sent to foreign countries. It is also a component of the current account of the BOP

Disequilibrium in the balance of payment

disequilibrium refers to a situation where a country’s total payments differ from its total receipts leading
to an overall deficit or surplus. Disequilibrium may take place either in the form of deficit or in the form
of surplus.
The BOP is a systematic record of all economic transactions between the residents of a country and
residents of foreign countries during a given period of time. It has three components: the current
account, the financial account, and the capital account.

A deficit in the BOP occurs when a country’s total payments exceed its total receipts. This means that the
country is spending more on imports, foreign aid, and domestic spending abroad than it is earning from
exports, foreign spending in the domestic economy, and foreign investments in the domestic economy. A
deficit on the current account of the BOP is generally referred to as disequilibrium. A large current
account deficit may be an indication that the economy is too much geared towards spending (e.g.
spending on imports) and too little on exports. A current account deficit may also be a sign of underlying
inflationary pressures.

A surplus in the BOP occurs when a country’s total receipts exceed its total payments. This means that
the country is earning more from exports, foreign spending in the domestic economy, and foreign
investments in the domestic economy than it is spending on imports, foreign aid, and domestic spending
abroad. A large surplus on the current account would also be seen as a disequilibrium. A surplus on the
current account may be an indication that the country is too much geared towards exports and too little
on imports

Causes of disequilibrium

Disequilibrium in the balance of payments (BOP) may arise due to a large number of factors operating
simultaneously. Here are some of the causes of disequilibrium in the BOP:

Imbalance between exports and imports: This is the main cause of disequilibrium in the BOP. If a
country imports more goods and services than it exports, then it will have a deficit in the current account
of the BOP. This can happen due to various reasons such as high domestic prices, cyclical fluctuations in
general business activity, new sources of supply and new substitutes, etc.

Large scale development expenditure: This causes large imports and can lead to a deficit in the BOP.

Cyclical fluctuations: Business or cyclical fluctuations induced by the operations of the trade cycle, their
phases, and amplitudes differ in different countries, which generally produce cyclical disequilibrium in a
country’s BOP. For example, if there occurs a business recession in foreign countries, it may easily cause a
fall in the exports and exchange earnings of the country concerned resulting in disequilibrium in the BOP.

Burden of payment of foreign debt: A country may tend to have an adverse balance when it borrows
heavily from another country, while the lending country will tend to have a favorable balance and a
deficit balance when the loan is rapid.

Changing export demand: Changes in the demand for exports can lead to disequilibrium in the BOP.

Political instability and disturbances: These can cause large capital outflows and hinder inflows of
foreign capital.

Changes in fashions, tastes, and preferences of the people: These can bring disequilibrium in the BOP
by influencing imports and exports.
High population growth in poor countries: This adversely affects their BOP because it increases the
needs of the countries for imports and decreases their capacity to export

measures to correct disequilibrium

To correct disequilibrium in the balance of payments (BOP), various remedial measures are
recommended. Here are some of the measures:

Export promotion: Exports should be encouraged by granting various bounties to manufacturers and
exporters. At the same time, imports should be discouraged by undertaking import substitution and
imposing reasonable tariffs.

Import restrictions: Imports may be reduced by imposing or raising tariffs (i.e., import duties) on imports
of goods. Imports may also be restricted through imposing import quotas, introducing licenses for
imports. Imports of some inessential items may be totally prohibited.

Reducing inflation: Inflation (continuous rise in prices) discourages exports and encourages imports.
Therefore, the government should check inflation and lower the prices in the country.

Exchange control: The government should control foreign exchange by ordering all exporters to
surrender their foreign exchange to the central bank and then rate out among licensed importers.

Devaluation of domestic currency: It means a fall in the external (exchange) value of domestic currency
in terms of a unit of foreign exchange which makes domestic goods cheaper for the foreigners.
Devaluation is done by a government order when a country has adopted a fixed exchange rate system.
Care should be taken that devaluation should not cause a rise in the internal price level.

Depreciation: Like devaluation, depreciation leads to a fall in external purchasing power of home
currency.

Expenditure-reducing policies: The important way to reduce imports and thereby reduce the deficit in
the balance of payments is to adopt monetary and fiscal policies that aim at reducing aggregate
expenditure in the economy. The fall in aggregate expenditure or aggregate demand in the economy
works to reduce imports and help in solving the balance of payments problem.

Expenditure-switching policies: These policies aim to switch domestic demand from imports to
domestically produced goods and services. This can be achieved by devaluation, import substitution, and
export promotion
Chapter 8: Fiscal Policy

Fiscal Policy

Fiscal policy refers to the spending programs and tax policies that the government uses to guide the
economy. Governments frequently use fiscal measures along with monetary policy to achieve economic
policy goals, including: Full employment, a high rate of economic growth, and stable prices and wages.
The government’s taxation and spending are the primary tools used to conduct fiscal policy. If the
government lowers taxes, for example, it can lead to an increase in consumer spending and business
investment. These factors can stimulate the economy. Government spending on public works can also
help boost economic growth. If the government increases taxation (to generate more revenue) or
reduces its spending, both can slow economic growth, possibly leading to a contraction or recession

Types of fiscal policy

Fiscal policy can be broadly classified into three types: neutral policy, expansionary policy, and
contractionary policy.

Neutral policy is a type of fiscal policy that aims to maintain the status quo in the economy. It is
implemented when the economy is already stable, and there is no need for any intervention. In this
policy, the government’s spending and taxation remain unchanged.

Expansionary policy is a type of fiscal policy that aims to stimulate economic growth by increasing
government spending and/or reducing taxes. This policy is implemented during a recession or when the
economy is experiencing slow growth. The increase in government spending and/or reduction in taxes
leads to an increase in disposable income, which in turn leads to an increase in consumer spending and
business investment.

Contractionary policy is a type of fiscal policy that aims to reduce inflation by decreasing government
spending and/or increasing taxes. This policy is implemented when the economy is overheating, and
inflation is rising. The decrease in government spending and/or increase in taxes leads to a decrease in
disposable income, which in turn leads to a decrease in consumer spending and business investment.

Objectives

Fiscal policy refers to the government’s spending programs and tax policies that are used to guide the
economy. The objectives of fiscal policy are to maintain the condition of full employment, economic
stability, and to stabilize the rate of growth. In addition, fiscal policy can also be used to achieve other
goals such as price stability, optimum allocation of resources, equitable distribution of income and
wealth, capital formation and growth, and encouraging investment.

For a developing economy, the main purpose of fiscal policy is to accelerate the rate of capital formation
and investment. The government’s spending and taxation are the primary tools used to conduct fiscal
policy. If the government lowers taxes, it can lead to an increase in consumer spending and business
investment. These factors can stimulate the economy. Government spending on public works can also
help boost economic growth. If the government increases taxation (to generate more revenue) or
reduces its spending, both can slow economic growth, possibly leading to a contraction or recession

Tools of fiscal policy

Fiscal policy refers to the government’s spending programs and tax policies that are used to guide the
economy. The objectives of fiscal policy are to maintain the condition of full employment, economic
stability, and to stabilize the rate of growth. In addition, fiscal policy can also be used to achieve other
goals such as price stability, optimum allocation of resources, equitable distribution of income and
wealth, capital formation and growth, and encouraging investment.

The government has two tools at its disposal under fiscal policy: taxation and public spending.

Taxation includes taxes on income, property, sales, and investments. The government can increase or
decrease taxes to influence the economy. For example, if the government lowers taxes, it can lead to an
increase in consumer spending and business investment. These factors can stimulate the economy. On
the other hand, if the government increases taxation (to generate more revenue) or reduces its
spending, both can slow economic growth, possibly leading to a contraction or recession.

Public spending includes subsidies, transfer payments, and public works projects. The government can
increase or decrease public spending to influence the economy. For example, if the government
increases public spending on infrastructure projects, it can create jobs and stimulate economic growth.
Similarly, if the government reduces public spending, it can slow economic growth

Importance of fiscal policy

Fiscal policy refers to the use of government spending programs and tax policies to influence economic
conditions, especially macroeconomic conditions. These include aggregate demand for goods and
services, employment, inflation, and economic growth. The importance of fiscal policy lies in its ability to
stabilize the economy and promote economic growth. Fiscal policy can be used to achieve several
objectives, including:

Full employment: Fiscal policy can be used to create jobs and reduce unemployment by increasing
government spending on public works projects and social welfare programs.

Economic stability: Fiscal policy can be used to stabilize the economy by reducing the volatility of
business cycles. During a recession, the government may lower tax rates or increase spending to
encourage demand and spur economic activity. Conversely, to combat inflation, it may raise rates or cut
spending to cool down the economy.

Price stability: Fiscal policy can be used to control inflation by reducing government spending or
increasing taxes. By reducing demand for goods and services, the government can reduce the overall
inflation rate.
Optimum allocation of resources: Fiscal policy can be used to ensure that resources are allocated
efficiently. For example, the government can provide subsidies to industries that are important for
economic growth.

Equitable distribution of income and wealth: Fiscal policy can be used to promote social justice by
redistributing income and wealth. For example, the government can provide tax breaks to low-income
families or increase taxes on the wealthy.

Capital formation and growth: Fiscal policy can be used to promote capital formation and growth by
providing incentives for investment. For example, the government can provide tax credits for research
and development or for investment in new technologies.

Encouraging investment: Fiscal policy can be used to encourage investment by providing tax incentives
for businesses. For example, the government can provide tax credits for businesses that invest in new
equipment or hire new employees

Budget process and process of preparing budget

The budget process is a series of steps that organizations follow to create a budget. The process typically
involves the following stages:

Initial planning: This stage involves communication within executive management, establishing
objectives and targets, and developing a detailed budget model.

Budget development: This stage involves compiling and revising the budget model, budget committee
review, and approval.

Budget execution: This stage involves implementing the budget, monitoring performance, and taking
corrective action if necessary.

Budget evaluation: This stage involves evaluating the budget’s effectiveness and making changes to the
budget model as needed.

The budget process typically begins four to six months before the start of the financial year, while some
may take an entire fiscal year to complete. Most organizations set budgets and undertake variance
analysis on a monthly basis.

Public expenditure

Public expenditure refers to the expenses incurred by the public authorities, such as central, state, and
local governments, either in protecting the citizens or in promoting their social and economic welfare.
Public expenditure can be classified into two categories: revenue expenditure and capital expenditure.

Revenue expenditure refers to the expenses incurred by the government on a regular basis, such as
salaries, pensions, interest payments, subsidies, and grants. These expenses are recurring in nature and
do not result in the creation of any assets.
Capital expenditure refers to the expenses incurred by the government for the creation of assets such as
roads, bridges, schools, hospitals, and other infrastructure. These expenses are non-recurring in nature
and result in the creation of assets that can be used for a long period of time.

Public expenditure is an important tool for governments to achieve their economic and social objectives.
It can be used to promote economic growth, reduce poverty, and improve the standard of living of the
citizens. Public expenditure can also be used to provide public goods and services such as education,
healthcare, and infrastructure, which are essential for the development of the economy

Development expenditure

Development expenditure refers to the expenditure of the government which helps in economic
development by increasing production and real income of the country. Developmental expenditure on
revenue is divided into developmental expenditure on revenue account and developmental expenditure
on capital account.

Developmental expenditure on revenue account refers to the expenditure incurred by the government
on the day-to-day functioning of various departments and services, such as salaries, pensions, subsidies,
and grants. These expenses are recurring in nature and do not result in the creation of any assets.

Developmental expenditure on capital account refers to the expenditure incurred by the government for
the creation of assets such as roads, bridges, schools, hospitals, and other infrastructure. These expenses
are non-recurring in nature and result in the creation of assets that can be used for a long period of time.

Development expenditure is an important tool for governments to achieve their economic and social
objectives. It can be used to promote economic growth, reduce poverty, and improve the standard of
living of the citizens. Public expenditure can also be used to provide public goods and services such as
education, healthcare, and infrastructure, which are essential for the development of the economy

Sources of government expenditure

Government spending refers to money spent by the public sector on the acquisition of goods and
provision of services such as education, healthcare, social protection, and defense. In national income
accounting, when the government acquires goods and services for current use to directly satisfy the
individual or collective needs and requirements of the community, it is classified as government final
consumption spending. When the government acquires goods and services for future use, it is classified
as government investment. This includes public consumption and public investment, and transfer
payments consisting of income transfers.

Government spending is financed primarily through two sources:

Tax collections by the government: Direct taxes and Indirect taxes.

Government borrowing: Borrowing money from its own citizens and borrowing money from foreigners.

Public spending enables governments to produce goods and services or purchase goods and services
that are needed to fulfill the government’s social and economic objectives. Over the years, we’ve seen
significant changes in the role and size of governments around the world. Public spending increased
remarkably in the 20th century, when governments all over the world started spending more funds on
education, healthcare, and social protection. At present, the governments of developed countries spend
more as a percentage of Gross Domestic Product (GDP) than the governments of developing countries.
Also, governments around the world rely upon the private sector to produce and manage a country’s
goods and services and utilize public-private partnerships to finance, design, build, and operate
infrastructure projects. In the 2005-10 period alone, the total value of public-private partnerships,
designed to increase the spending on public infrastructure projects in low and middle-income countries,
more than doubled.

Direct taxes

Direct taxes are taxes that are filed and paid by an individual directly to the government, such as income
tax, poll tax, land tax, and personal property tax. Such direct taxes are computed based on the ability of
the taxpayer to pay, which means that the higher their capability of paying is, the higher their taxes are.
For example, in the case of income taxation, an individual who earns more pays higher taxes. It is
computed as a percentage of the total income. Additionally, direct taxes are the responsibility of the
individual and should be fulfilled by no one else but him.

Direct taxes are different from indirect taxes, which are taxes that can be transferred to another entity.
Therefore, the burden of paying them can be put on another person’s shoulders.

There are several types of direct taxes, including:

Income tax: It is based on one’s income. A certain percentage is taken from a worker’s salary, depending
on how much he or she earns. The good thing is that the government is also keen on listing credits and
deductions that help lower one’s tax liabilities.

Transfer taxes: The most common form of transfer taxes is the estate tax. Such a tax is levied on the
taxable portion of the property of a deceased individual, including trusts and financial accounts. A gift
tax is also another form wherein a certain amount is collected from people who are transferring
properties to another individual.

Entitlement tax: This type of direct tax is the reason why people enjoy social programs like Medicare,
Medicaid, and Social Security. The entitlement tax is collected through payroll deductions and is
collectively grouped as the Federal Insurance Contributions Act.

Property tax: Property tax is charged on properties such as land and buildings and is used for
maintaining public services such as the police and fire departments, schools, and libraries, as well as
roads.

Capital gains tax: This tax is charged when an individual sells asset such as stocks, real estate, or a
business. The tax is computed by determining the difference between the acquisition amount and the
selling amount

Indirect taxes
Indirect taxes are taxes that are collected by one entity in the supply chain, such as a manufacturer or
retailer, and paid to the government. However, the tax is passed onto the consumer by the manufacturer
or retailer as part of the purchase price of a good or service. The consumer is ultimately paying the tax
by paying more for the product.

Indirect taxes are different from direct taxes, which are taxes that are filed and paid by an individual
directly to the government, such as income tax, poll tax, land tax, and personal property tax. Such direct
taxes are computed based on the ability of the taxpayer to pay, which means that the higher their
capability of paying is, the higher their taxes are. For example, in the case of income taxation, an
individual who earns more pays higher taxes. It is computed as a percentage of the total income.
Additionally, direct taxes are the responsibility of the individual and should be fulfilled by no one else but
him.

There are several types of indirect taxes, including:

Sales tax: This is a tax that is levied on the sale of goods and services. The tax is usually a percentage of
the sale price of the item.

Excise tax: This is a tax that is levied on specific goods such as tobacco, alcohol, and gasoline. The tax is
usually included in the price of the item.

Value-added tax (VAT): This is a tax that is levied on the value added at each stage of production. The tax
is usually included in the price of the item.

Customs duty: This is a tax that is levied on goods that are imported into a country. The tax is usually a
percentage of the value of the goods