NATIONAL INCOME

ACCOUNTING
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 Income and Expenditure
• Gross Domestic Product (GDP) measures
total income of everyone in the economy.
• GDP also measures total expenditure on the
economy’s output of g&s.

For the economy as a whole,

income equals expenditure
because every peso a buyer spends
is a peso of income for the seller.

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The Circular-Flow
Diagram
• a simple depiction of the macroeconomy
• illustrates GDP as spending, revenue,
factor payments, and income

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The Circular-Flow Diagram

Households:
 own the factors of production,
sell/rent them to firms for income
 buy and consume goods & services

Firms Households

Firms:
 buy/hire factors of production,
use them to produce goods and
services
 sell goods & services
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The Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income (=GDP)
profit (=GDP)
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What This Diagram Omits

• The government
• collects taxes, buys g&s
• The financial system
• matches savers’ supply of funds with borrowers’ demand
for loans
• The foreign sector
• trades g&s, financial assets, and currencies with the
country’s residents

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Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.

Goods are valued at their market prices, so:

 All goods measured in the same units
(e.g., peso in the Philippines)
 Things that don’t have a market value are excluded,
e.g., housework you do for yourself.

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 8

Why use the • The example shows that the different

total market commodities have varied units hence;
summing them up is impossible. However, if
they have their corresponding unit prices,

value? they can now be measured in money terms.

• GDP = final value of rice + final value of

eggs + final value of clothing
• = p1q1 + p2q2 + p3q3
Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.

Final goods: intended for the end user

Intermediate goods: used as components
or ingredients in the production of other goods
GDP only includes final goods – they already embody
the value of the intermediate goods
used in their production.
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Why measure only the final goods and services?

To avoid double counting

Final goods: intended for the end user

Intermediate goods: used as components
or ingredients in the production of other goods
GDP only includes final goods – they already embody
the value of the intermediate goods
used in their production.
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Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.

GDP includes tangible goods

(like DVDs, mountain bikes, beer)
and intangible services
(dry cleaning, concerts, cell phone service).

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Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.

GDP includes currently produced goods,

not goods produced in the past.

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Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.

GDP measures the value of production that occurs within

a country’s borders, whether done by its own citizens or
by foreigners located there.

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Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.

Usually a year or a quarter (3 months)

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 The Components of GDP
• Recall: GDP is total spending.
• Four components:
– Consumption (C)
– Investment (I)
– Government Purchases (G)
– Net Exports (NX)
• These components add up to GDP (denoted Y):

Y = C + I + G + NX

Expenditure Approach
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 Expenditure Approach
• A method of computing GDP that measures the
amount spent on all final goods during a given
period.

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Personal Consumption
Expenditure (C)

• is total spending by households on g&s. The largest percentage

of GDP.

• 3 Categories of Consumer Expenditures:

• Durable goods - goods that last a relatively long time. Ex.
Automobiles, furniture, and HH appliances
• Nondurable goods - goods that are used up fairly quickly. Ex.
Food, clothing, gasoline and cigarettes

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Personal Consumption
Expenditure (C)

• 3 Categories of Consumer Expenditures:

• Services – the things we buy that do not involve the production of
physical things. Ex. Expenditures for doctors, lawyers, and
educational institutions
• Note on housing costs:
• For renters,
consumption includes rent payments.
• For homeowners,
consumption includes the imputed rental value of the house, but
not the purchase price or mortgage payments.

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 Gross Private Domestic Investment (I)
• is total spending on goods that will be used in the
future to produce more goods.
• Categories:
 Nonresidential investment - expenditures by firms for
machines, tools, plants and so on.
 Residential investment – expenditures by HHs and firms on
new houses and apartment buildings.
 Changes in business inventories – the amt. by which firms’
inventories change during a period.

Note: “Investment” does not mean

the purchase of financial assets like
stocks and bonds.
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Government Consumption
Expenditure (G)
• is all spending on the g&s purchased by govt
at the national and local levels.
• G excludes transfer payments, such as
Social Security benefits and retirement benefits
e.g. CCT, Philhealth sa Masa, etc.

• They are not purchases of g&s.

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 Net Exports (NX)
• NX = exports – imports
• Exports represent foreign spending on the
economy’s g&s.
• Imports are the portions of C, I, and G
that are spent on g&s produced abroad.
• Adding up all the components of GDP gives:
Y = C + I + G + NX
(in theory)
Y = C + I + G + NX + SD
(in practice)
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 GROSS NATIONAL INCOME AND GROSS DOMESTIC PRODUCT
BY TYPE OF EXPENDITURE: Annual 2011 and 2012
AT CURRENT AND CONSTANT 2000 PRICES, IN MILLION PESOS
At Current Prices At Constant Prices
TYPE OF EXPENDITURE Growth Rate Growth Rate
2011 2012 2011 2012
(%) (%)
1. Household Final Consumption
7,132,581 7,837,881 9.9 4,168,910 4,442,523 6.6
Expenditure
2. Government Final Consumption
941,836 1,112,586 18.1 582,099 653,067 12.2
Expenditure

3. Capital Formation 1,985,897 1,950,524 -1.8 1,206,763 1,168,386 -3.2

A. Fixed Capital 1,817,187 2,047,957 12.7 1,159,001 1,280,042 10.4
1. Construction 904,508 1,074,169 18.8 449,385 517,184 15.1
2. Durable Equipment 698,745 751,133 7.5 583,225 630,084 8.0
3. Breeding Stock &
178,640 181,123 1.4 98,678 100,069 1.4
Orchard Dev't
4. Intellectual
35,293 41,531 17.7 27,712 32,705 18.0
Property Products
B. Changes in
168,710 -97,433 47,762 -111,656
Inventories

4. Exports 3,103,018 3,254,460 4.9 2,805,415 3,054,071 8.9

A. Exports of Goods 2,034,503 2,120,180 4.2 2,199,355 2,426,493 10.3
B. Exports of Services 1,068,515 1,134,279 6.2 606,060 627,578 3.6

5. Less: Imports 3,457,065 3,590,563 3.9 2,854,187 3,006,376 5.3

A. Imports of Goods 2,826,136 2,875,855 1.8 2,344,013 2,415,218 3.0
B. Imports of Services 630,928 714,708 13.3 510,175 591,158 15.9

6. Statistical Discrepancy 0 0 0 0

GROSS DOMESTIC PRODUCT 9,706,268 10,564,886 8.8 5,909,000 6,311,671 6.8

Net Primary Income 1,891,937 2,043,843 1,130,948 1,184,875

GROSS NATIONAL INCOME 11,598,205 12,608,730 8.7 7,039,948 7,496,546 6.5

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ACTIVE LEARNING
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends Php200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends Php1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends Php1200 on a computer to use in her
editing business. She got last year’s model on sale for a
great price from a local manufacturer.
D. General Motors builds Php500 million worth of cars,
but consumers only buy Php470 million worth of them.23
ACTIVE LEARNING 1
Answers
A. Debbie spends Php200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by Php200.

B. Sarah spends Php1800 on a new laptop to use in her

publishing business. The laptop was built in China.
Investment rises by Php1800, net exports fall
by Php1800, GDP is unchanged.

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ACTIVE LEARNING 1
Answers
C. Jane spends Php1200 on a computer to use in her
editing business. She got last year’s model on sale for
a great price from a local manufacturer.
Current GDP and investment do not change, because
the computer was built last year.

D. General Motors builds Php500 million worth of cars,

but consumers only buy Php470 million of them.
Consumption rises by Php470 million,
inventory investment rises by Php30 million,
and GDP rises by Php500 million.
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• A method in computing GDP that
measures the income – wages, rents,
interest, and profits – received by all
factors of production in producing
final goods. Income
• National income – the total income
earned by the factors of production
owned by a country’s citizens. It is a
Approach
sum of 8 income items:

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Income Approach

• 8 Income items:
1. Compensation of Employees – the largest of the 8 items
• - includes wages, salaries, and various supplements –
employer contributions to social insurance and pension
funds, for example – paid to HHs by firms and by the
government.
2. Proprietor’s income – the income of unincorporated
businesses.
3. Rental income – the income received by property owners
in the form of rent, a minor item.
4. Corporate profits – the income of corporate businesses.
Income Approach
• 8 Income items:
5. Net Interests – the interest paid by business.
6. Indirect Taxes Minus Subsidies – taxes such as sales taxes,
custom duties, and license fees, less subsidies that the government
pays for which it receives no goods or services in return.
7. Net business transfer payments – net transfer payments by
businesses to others
8. Surplus of government enterprises – income of government
enterprises

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Income Approach
• To Calculate GDP:

• GDP = Compensation of Employees + Net Operating Surplus +

Depreciation + Indirect Taxes Less Subsidies

• Net Operating Surplus – is an item that lumps together all

source of income other than labor.

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Value Added (Industrial Origin)
Approach

• A method of computing GDP that measures the total value-

added originating from the various industries or sectors in
the economy.

• Value added = sales – purchases from other firms

31 Value Added (Industrial Origin)
Approach
• 3 Different Sectors in the Economy

1. Agriculture, Fishery, and Forestry

• Agricultural products; aquaculture – fishponds and
sea cages; logging

2. Industry – value added from firms engage in mining,

quarrying, manufacturing, construction and utilities
32 • 3 Different Sectors in the Economy
3. Service Sector
• Subsectors:
• Transportation, communication
and storage
Value Added • Trade
• Finance
(Industrial • Dwellings and real estate
• Private services
Origin) • Government services

Approach GDP = sum of all gross value added of

all sectors
 GROSS NATIONAL INCOME AND GROSS DOMESTIC PRODUCT
BY INDUSTRY: Annual 2011 and 2012
AT CURRENT AND CONSTANT 2000 PRICES, IN MILLION PESOS

At Current Prices At Constant Prices

INDUSTRY/INDUSTRY GROUP Growth Growth
2011 2012 Rate 2011 2012 Rate
(%) (%)

Agriculture, Hunting, Forestry and Fishing 1,235,013 1,250,616 1.3 679,835 698,937 2.8

Industry Sector 3,042,060 3,284,508 8.0 1,893,256 2,022,623 6.8

Service Sector 5,429,196 6,029,762 11.1 3,335,909 3,590,111 7.6

GROSS DOMESTIC PRODUCT 9,706,268 10,564,886 8.8 5,909,000 6,311,671 6.8

Net Primary Income 1,891,937 2,043,843 1,130,948 1,184,875

GROSS NATIONAL INCOME 11,598,205 12,608,730 8.7 7,039,948 7,496,546 6.5

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34 Gross National Product
(GNP)
• Gross National Product (GNP)
• - the total market value of all final goods and services
produced within a given period by factors of production
owned by a country’s citizens, regardless of where the
output is produced.

• GNP = GDP + NFIRM

• NFIRW (Net Factor Income form the Rest of the World)

• – measures the difference between the earnings of
Phil. residents in other countries and the earnings of
foreigners in the Phils.
Gross National Product (GNP)

• NFIRW is

• Positive: if earnings of Phil. residents are greater than

earnings of foreigners in the Phils.
• GNP > GDP because NFIRW is positive.

• Negative: if earnings of foreigners in the Phils. are greater

than earnings of Phil. residents in foreign countries.
• GDP > GNP because NFIRW is negative.
GDP Per Capita
GDP per capita – measures how much output on income was produced or received on the
average by an individual in an economy.

GDP per capita = __GDP________

Population

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37
Real versus Nominal GDP
• Inflation can distort economic variables like GDP, so we have
two versions of GDP:
One is corrected for inflation, the other is not.
• Nominal GDP values output using current prices. It is not
corrected for inflation.
• Real GDP values output using the prices of
a base year. Real GDP is corrected for inflation.
EXAMPLE:
Pizza Latte
year P Q P Q
2005 Php10 400 Php2.00 1000
2006 Php11 500 Php2.50 1100
2007 Php12 600 Php3.00 1200

Compute nominal GDP in each year:

Increase:
2005: Php10 x 400 + Php2 x 1000 = Php6,000
37.5%
2006: Php11 x 500 + Php2.50 x 1100 = Php8,250
2007: Php12 x 600 + Php3 x 1200 = Php10,800 30.9%

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EXAMPLE:
Pizza Latte
year P Q P Q
2005 $10
Php10 400 $2.00
Php2.00 1000
2006 Php11 500 Php2.50 1100
2007 Php12 600 Php3.00 1200

Compute real GDP in each year,

using 2005 as the base year:
Increase:
2005:Php10 x 400 + Php2 x 1000 = Php6,000
20.0%
2006:Php10 x 500 + Php2 x 1100 = Php7,200
16.7%
2007:Php10 x 600 + Php2 x 1200 = Php8,400
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 • In each year,
• nominal GDP is measured using the (then)
EXAMPLE: current prices.
• real GDP is measured using constant prices
from the base year (2005 in this example).

Nominal Real
year GDP GDP
2005 Php6,000 Php6,000
2006 Php8,250 Php7,200
2007 Php10,800 Php8,400

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EXAMPLE:
Nominal Real
year GDP GDP
2005 Php6000 Php6000
37.5% 20.0%
2006 Php8250 Php7200
30.9% Php8400 16.7%
2007 Php10,800

• The change in nominal GDP reflects both prices and

quantities.
 The change in real GDP is the amount that
GDP would change if prices were constant
(i.e., if zero inflation).
Hence, real GDP is corrected for inflation.
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 The GDP Deflator

• The GDP deflator is a measure of the overall

level of prices.
• Definition:

nominal GDP
GDP deflator = 100 x
real GDP

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EXAMPLE:
Nominal Real GDP
year GDP GDP Deflator
2005 Php6000 Php6000 100.0
14.6%
2006 Php8250 Php7200 114.6
2007 Php10,800 Php8400 128.6
12.2%

Compute the GDP deflator in each year:

2005: 100 x (6000/6000) = 100.0

2006: 100 x (8250/7200) = 114.6

2007: 100 x (10,800/8400) = 128.6

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ACTIVE LEARNING
Computing GDP
2007
2008 2009
(base yr)
P Q P Q P Q
Good
Php30 900 Php31 1,000 Php36 1050
A
Good
Php100 192 Php102 200 Php100 205
B
Use the above data to solve these problems:
A. Compute nominal GDP in 2007.
B. Compute real GDP in 2008.
C. Compute the GDP deflator in 2009.
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 ACTIVE LEARNING
Answers
2007
2008 2009
(base yr)
P Q P Q P Q
Good
Php30 900 Php31 1,000 Php36 1050
A
Good
Php100 192 Php102 200 Php100 205
B
A. Compute nominal GDP in 2007.
Php30 x 900 + Php100 x 192 = Php46,200

B. Compute real GDP in 2008.

Php30 x 1000 + Php100 x 200 = Php50,000
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ACTIVE LEARNING
Answers
2007
2008 2009
(base yr)
P Q P Q P Q
Good
Php30 900 Php31 1,000 Php36 1050
A
Good
Php100 192 Php102 200 Php100 205
B
C. Compute the GDP deflator in 2009.
Nom GDP = Php36 x 1050 + Php100 x 205 = Php58,300
Real GDP = Php30 x 1050 + Php100 x 205 = Php52,000
GDP deflator = 100 x (Nom GDP)/(Real GDP)
= 100 x (Php58,300)/(Php52,000) = 112.1 46
GDP and Economic Well-Being

• Real GDP per capita is the main indicator of the average

person’s standard of living.
• But GDP is not a perfect measure of
well-being.
• Robert Kennedy issued a very eloquent
yet harsh criticism of GDP:

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Gross Domestic Product…
“… does not allow for the health of our
children, the quality of their education,
or the joy of their play.
It does not
include the beauty of our poetry or
the strength of our marriages, the
intelligence of our public debate or
the integrity of our public officials.
It measures neither our courage, nor our wisdom,
nor our devotion to our country. It measures everything,
in short, except that which makes life worthwhile, and it
can tell us everything about America except why we are
proud that we are Americans.”
- Senator Robert Kennedy, 1968 48
GDP Does Not Value:

• the quality of the environment

• leisure time
• non-market activity, such as the childcare
a parent provides his or her child at home
• an equitable distribution of income

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Then Why Do We
Care About GDP?
• Having a large GDP enables a country to afford
better schools, a cleaner environment,
health care, etc.
• Many indicators of the quality of life are positively
correlated with GDP. For example…

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 GDP and Life Expectancy in 12 countries

Indonesia
Japan
China
U.S.
Life expectancy (years)

Mexico Germany
Brazil
Pakistan
Russia
India
Bangladesh

Nigeria

Real GDP per capita 51

 GDP and Literacy in 12 countries
China Russia U.S.
Germany Japan
Mexico
Brazil
(% of population)
Adult Literacy

Indonesia

Nigeria

India

Pakistan

Bangladesh

Real GDP per capita 52

 GDP and Internet Usage in 12 countries

Japan
U.S.
(% of population)
Internet Usage

Germany

Brazil
Indonesia
Mexico
Pakistan
Russia
China
Nigeria India

Bangladesh Real GDP per capita 53