The Lesser Evil: Assessment of the 12% VAT Removal on Petroleum products (part 1)

26 Oct

Mikhail Oñate
Academics Research and Development
Ateneo Economics Association

The Philippines is seeing a significant increase in the price of petroleum products especially crude oil. The country faces a recurrent crisis, most notably a double digit inflation rate. The general inflation rate for the month of June to July of 2008 has climbed to an unbelievable 12.2%, from 2.6% of the same month last year. The inflation rate continues to gain momentum as shown by an increase from 12.2% in July to 12.5% last August.

Defining Inflation

Put simply, inflation is the increase in the overall price level of goods. When we say that prices have increased overall, we mean that the prices included in the basket of goods have risen. The items in baskets of goods are fixed and include food, beverages, tobacco, crude materials (excluding fuels), lubricants, chemicals, machinery and transport materials. It is determined by the research on the behavior of consumers in a specific market to ensure constancy in the computation of price indices.

Sustained Inflation is mostly attributed to the expansion of monetary supply, but in our case, it is different. In the present Philippine setting, the apparent surge of prices of basic commodities has fueled the inflation rate to peak at greater lengths.

There are two major factors that give way to inflation, both attributed to the supply of and the demand for a good or service. Demand-pull inflation is caused by an increase in Aggregate Demand for all goods and services available in the market. Aggregate demand increases, while keeping Aggregate Supply constant. What follows is an increase in the general prices of goods and services. On the other hand, rising costs in production which give way to rising prices of marketed goods is called Cost-Push Inflation.

One major factor of the sustained inflation being felt throughout the archipelago is Cost-Push in nature. Oil is more of a capital good than a consumer good, in the sense that we do not consume oil directly to satisfy our needs, but instead use to it power or produce the consumer goods that do. Since oil is a vital resource for the transport of all goods and services available in the market, producers increase their price as a response to an increase in one factor of production (shipment – in this case oil). This is not only apparent in the prices of goods, but also in the purchase of certain services. Transportation fees have risen along with basic goods. Transportation groups have requested for a price increase in the minimum fare matrix implemented by the LTRFB. Public Utility Vehicles (PUV) have increased their minimum fare by as much as 20%. Like producers, PUV operators do not have a choice but to increase prices to cope with rising utility costs.

9 Responses to “The Lesser Evil: Assessment of the 12% VAT Removal on Petroleum products (part 1)”

  1. zurich October 26, 2008 at 1:02 pm #

    Hey.

    Although I agree one some points here, 90% of this “article” is a complete waste of time and energy. Actually, I think that you just pasted a pathetic excuse for a paper onto this site.

    Trim this down and cut the economics bullshit so it can be accessible to the lay reader (the terms, man). And avoid slippery slopes; just because the freakin’ inflation rate went up by 0.3 percent in a month doesn’t mean “it’s gaining momentum”. You’re jumping the gun, boy.

    At nakakatawa ang sources mo. Come on, a bunch of websites and a general economics textbook? What the hell.

    If you want a model of an excellent economics blog, check out http://bigpicture.typepad.com

    Sorry kung harsh. This is a disappointing post.

    For everyone else, if you want the “assessment”, skip the boring regurgitation of economics terms and go to part III.

    :D

  2. ateneoeconomics October 26, 2008 at 3:32 pm #

    I know what you mean man. I’m off to get some work done with a chopping block.

  3. ateneoeconomics October 26, 2008 at 3:56 pm #

    just because the freakin’ inflation rate went up by 0.3 percent in a month doesn’t mean “it’s gaining momentum”. – it is gaining momentum; check the analysis from National Statistics Office. From time to time the inflation rate fluctuates and changes erratically, but the trend is still increasing. Also, is a 10% increase in the inflation rate from last year not a valid sign of momentum? Then what is it? Just a random “ah yes it’s really like that ” change?

  4. ateneoeconomics October 26, 2008 at 4:08 pm #

    The paper was made this way to accommodate both the economics-literate /illiterate. A large chunk of the first part was constructed as a foundation for the second and third parts.

    If you look at the three parts, the first is composed of raw data gathered from the sources cited below. The second part is the analysis of these facts, and the third is the synthesis of the issue as a whole.

    As for the sources, the most recent data are posted by the National Statistics Coordinating Board and the National Statistics Office quarterly. I don’t think you’ll be able to find them in books or in other literature besides the internet. ( Unless of course you have a permit to search their archives)

    The general economics book you mentioned was used to give a beginner-level of difficulty in defining the terms used in the first part. I think using more advanced literature would contribute to more “economics bullshit”.

  5. ateneoeconomics October 26, 2008 at 4:36 pm #

    “At nakakatawa ang sources mo. Come on, a bunch of websites and a general economics textbook? What the hell.”
    “If you want a model of an excellent economics blog, check out http://bigpicture.typepad.com

    What are you talking about? This blog cites online sources all the same. Online sources are just as credible as print if you know how to look for them . Jeez.

    “Sorry kung harsh. This is a disappointing post.”

    You are free to formulate your own interpretations and hypotheses regarding the issue . The role of this paper is to present, and possibly point out a definitive perspective that may apply to the issue. If you are not satisfied, then , by all means make your own research work :D

  6. zurich October 30, 2008 at 9:50 am #

    “check the analysis from National Statistics Office.”

    >exactly my point. the paper should provide this; i shouldn’t run over to the NSO to get the info i need.

    “From time to time the inflation rate fluctuates and changes erratically, but the trend is still increasing. Also, is a 10% increase in the inflation rate from last year not a valid sign of momentum? Then what is it? Just a random ‘ah yes it’s really like that’ change?”

    >i’m not presuming it’s random. what i’m saying is that the inflation rate is not an independent variable, which this post seemingly assumes. the paper should provide the reader the factors that contribute to the inflation rate and the actors that tweak it, which i don’t see in the paper. and hello, if you studied efficient market theory, market movements CAN be random, or in your language: “ahh yess it’s really like that”.

    “What are you talking about? This blog cites online sources all the same. Online sources are just as credible as print if you know how to look for them . Jeez.”

    >Okaaay. Then why did you remove it?

    You are free to formulate your own interpretations and hypotheses regarding the issue . The role of this paper is to present, and possibly point out a definitive perspective that may apply to the issue. If you are not satisfied, then , by all means make your own research work :D

    >Hey, be happy that I commented. :) At least may fun na sa blog niyo. hahahaha if you scroll down in the front page, walang ka comment comment. :))

    pero we really shouldn’t argue. chill lang. chill. :))

    btw, when will you guys release oikonomos?

  7. ateneoeconomics November 1, 2008 at 12:30 am #

    >Okaaay. Then why did you remove it?

    I have no idea. I just cloned the moderator’s name. Haha =P

    —>if you studied efficient market theory, market movements CAN be random, or in your language: “ahh yess it’s really like that”.

    http://www.census.gov.ph/data/pressrelease/2008/cp0809tx.html

    I still don’t think this is random. It was only last month that the trend stabilized and “declined” . Aside from that , in an 11-month period, it’s a steady climb from 2.5 to 12.xxxx

    >Hey, be happy that I commented. :) At least may fun na sa blog niyo. hahahaha if you scroll down in the front page, walang ka comment comment. :))

    You’re right. Thank You. At least someone’s still interested . Zzzzz. I need to get another job. @_@

  8. zurich November 2, 2008 at 8:16 am #

    hahaha ayos lang yan.

    goodluck :P

  9. Francesca May 4, 2009 at 7:14 am #

    This is a good piece of literature. I’m sure this is useful to the people concerned (a lot of people, for sure). Thanks for writing something so informative. Contrary to the post above, I would say this is perfectly understandable even to the economics-illiterate such as myself. =)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: