MACROECONOMIC

INDICATORS
CIRCULAR FLOW DIAGRAM
 It summarizes the transactions between
households and firms.
 It also captures the role of these agents in an
economy as well as the flow of payments and
receipts between them
 Households
 They are usually portrayed as the owners of different
factors of production like labor, land, and capital
 They also act as the consumers of the goods and

services produced by the firms.

 Firms
 They purchase and use the factors of production in the
production of goods and services.
CIRCULAR FLOW DIAGRAM
MACROECONOMIC INDICATORS
Indicators of a Country’s Aggregate Output
 Gross Domestic Product

Itis used as an indicator of the output

or income of a country. The estimate of
GDP in one period is often compared
with its past values to get an idea of
the direction toward which a country is
headed. This in turn is compared with
the GDP of other countries. This is down
in order to look at the performance of a
country relative to its neighbors.
MACROECONOMIC INDICATORS
 Gross Domestic Product
 It measures the market value of all final
goods and services produced in an
economy for a given period, usually per
quarter of per year. It could also measure
smaller geographical units like for the case
of the Philippines we have estimates of
Gross Regional Domestic Product, which
are essentially GDP estimates for the
different regions of the country.
 Market value
 Market value= PxQ
MACROECONOMIC INDICATORS
 e.g. If the economy produces 100 kilos
of rice and a kilo of rice costs 50
pesos, then the value of rice
production is equal to 5,000 pesos. In
order to compute for the GDP of a
certain country we simply add the
market value of rice production with
the market values of other goods and
services produced in the economy.
MACROECONOMIC INDICATORS
 Why do we use this in the computation of
the GDP? GDP is presented using market
value of production because the
economy produces different types of
goods which cannot be directly added to
each other. Take for example it does not
make sense to add the quantity of
clothes and shoes because this are two
different commodities that is why we use
their market value.
 Calculation of the GDP only includes final
goods.
MACROECONOMIC INDICATORS
Final goods
 These are goods that are purchases not fot the
purpose of resale or producing other goods for
further sale (i.e, intermediate goods) but for
consumption. For example a person buys pork to
cook for dinner then this is considered as a final
good but if he uses this to produce barbecue and
sells this then the pork is considered as intermediate
good.
 In the computation of GDP we do not include the

purchase of intermediate foods this is done in order

to avoid double-counting. In our example the
value of the barbecue already includes the value of
the pork. So there is no need to have a separate
calculation for the value of the pork used in the
production of the barbecue.
MACROECONOMIC INDICATORS
 Measuring GDP
There are three equivalent
approaches for measuring GDP.
These are the following:
Expenditure approach

Income approach and

Value added approach

MACROECONOMIC INDICATORS
 The expenditure approach
It takes the sum of the spending on
different final goods and services. In
principle, we add the total spending
on rice, camote, cellphones, etc.
 The income approach
It takes the sum of the payments too
the different factors of production.
GDP is measured here as the sum of
wages, rents and interest payments,
and profits.
MACROECONOMIC INDICATORS
 The value added approach
It takes the sum of the value
added of each firm or economic
activity.
Value added is computed as the
difference between the sales of
a firm and its spending on
goods produced by other firms.
MACROECONOMIC INDICATORS
 How are these three apprroaches
equivalent?
 The answer is that that each approach
just looks at each transactions in a
diffferent way. It is that the
expenditure of the other is the income
of another. For example Camille
spends 120 pesos for a haircut she
sees this as an expense but the
hairdresser will see this as an income.
MACROECONOMIC INDICATORS
 To further understand the equivalence in the
value of added and income approaches let’s
take for an example the income statement of
this hypothetical firm.

Value of Sales Cost of Production

2,000 Wages 200
Rent 200
Interest 200
Purchases from other 600
firms
Profits 800
Bello et. Al 2009
MACROECONOMIC INDICATORS
 Value added approach:
 Basing from the table that in order to produce sales
of 2000 pesos the firm spends 200 for wages, 200
for rent and 200 for Interest and 600 for purchases
from other firms. Looking at this we could conclude
that profit is equal to 800 but in order to get the
value added of the firm we need to subtract from
the total sales the purchases of the firm from other
firms which gives us a value added of 1,400.
 Value added= Sales-Purchases from other firms
= 2,000-600
= 1,400
MACROECONOMIC INDICATORS
 Now that we will add all the sources of
income, we will get the same value,
Incomes= wages =rents+interests+profits
= 200+200+200+800
= 1,400
 Here we could see that we will get the same
values for the income and value added
approaches. Since the income and
expenditure approaches are equivalent then
it follows that the expenditure and the value
added approaches are also equivalent.
MACROECONOMIC INDICATORS
 The hypothetical example presented was only
used to present the three different approaches
of computing for a country’s GDP. The table
shows that GDP is divided into 6 components
namely:
 Personal Consumption Expenditure
 Captures the spending of households and non-profit
organizations on goods and services.
 This includes their spending on food, clothing, and

entertainment
 Gross Domestic Capital Formation
 Represents investments in physical capital as well as
changes in inventory stocks.
 This component captures expenditures on new machinery

in factories, construction of new houses, and many more.

MACROECONOMIC INDICATORS
 Government Consumption Expenditure
 Includes the spending of the government on the
salaries of its workforce and its day to day operations.
 Exports
 Represent the earnings on Philippine-made goods
which are sold overseas.
 Imports
 Represents the spending of the Philippines on the
goods produced in other countries.
 It is subtracted from the national accounts because

GDP should only represent only the value of goods and

services that were produced in the Philippines.
MACROECONOMIC INDICATORS
 Statistical Discrepancy
 Captures reporting and recording errors that arise in
the estimation process
 It is included in the calculation to ensure that GDP that

is computed using the expenditure approach matches

those of the income and value added approaches.
MACROECONOMIC INDICATORS
The national accounts of the Philippines
2007
Item
Expenditure Approach
In billion pesos
 
As a percentage of GDP
 
Personal Consumption 4,611.9 69.4
Expenditure
Government Consumption 646.7 9.7
Expenditure
Gross Domestic Capital 1,013.9 15.3
Formation
Exports of Goods and 2,833.6 42.6
Services
Less: Imports of Goods and (2,802.7) (42.2)
Services
Statistical Discrepancy 344.8 5.2
GDP 6,648.2 100.0
     
Value added approach    
Agriculture, Fishery, and 936.4 14.1
Forestry
Industry 2,107.3 31.7
Services 3,604.5 54.2
GDP 6,648.2 100.0
     
Income Approach    
Compensation of employees 1,857.0 27.9
Net Operating Surplus 3,462.1 52.1
Depreciation 766.6 11.5
Indirect Taxes 587.9 8.8
Less: Subsidies (25.4) (0.4)
GDP 6,648.2 100.0
MACROECONOMIC INDICATORS
 The value added (or Industrial Origin)
approach classifies the GDP estimates
according to various activities. It is presented
in the most aggregated version. It is
represents the value added of the three main
sectors or activities in the Philippine economy.
 Agriculture and Fisheries and Forestry
 Represents the value added of activities

associated with the production of

agricultural crops , ornamental plants,
livestock, fishing, harvesting of marine
products, acquaculture, logging, an the
harvesting of forestry products.
MACROECONOMIC INDICATORS
 Industry
 Includesmining and quarrying manufacturing
construction, and utilities.
 Services
 Includes activities related to transportation,
communication and storage, wholesale and retail
trade, real estate, and private and government
services.
The income approach provides a breakdown of the
sources of income and two adjustment items.
 Compensation of employees
 Represents wage payments
 Net operating surplus
 Is a composite of profits, rents, and interest.
MACROECONOMIC INDICATORS
Adjustment items
 Depreciation
 Represents the wear and tear of existing capital
 It is added because it is treated as a business
expense, so it is not included in the calculation of
profits.
 It is inserted in the income side because
investment spending, in the expenditure side of
the national accounts, includes depreciation.
MACROECONOMIC INDICATORS
 Indirect Taxes less subsidies
 Account for items like taxes on the use and
purchase of goods and services and grants from
the government.
 Firms do not incorporate indirect taxes in their
profits because the proceeds go to the
government. The opposite is true for subsidies
 But taxes eventually find their way to market
prices for example, value added tax that is why
indirect taxes need to be reinserted in the
income side of the accounts.
MACROECONOMIC INDICATORS
 Gross National Product (GNP) or Gross
National Income (GNI)
 This is another indicator of output, this is different
from GDP because GNP is calculated as the sum
of GDP and Net Factor Income from Abroad
(NFIA). NFIA, as applied to the Philippines,
represents the difference between the earnings of
Filipinos from activities overseas and the earnings
of foreigners in the Philippines.
 Earnings of the overseas Filipino workers (OFWs)
and investments of Filipinos abroad raise the
country NFIA. While the earnings of Foreign
investors in the Philippines reduce the NFIA .
GNP= GDP + NFIA
USING GDP OR GNP TO GAUGE A
NATION’S ECONOMIC HEALTH
The Gross National Product has two types
according to the prices that were used in
computing it.
 GNP at current prices or nominal GNP
 It is calculated using the prices that exist
for the year it is computed.
 It is not an effective indicator to track the
overall production of a country over time.
The reason is that changes in nominal GNP
also capture the changes in prices.
USING GDP OR GNP TO GAUGE A
NATION’S ECONOMIC HEALTH
 Real GNP or GNP at constant prices
Overcomes the weakness of nominal
GNP by removing the impacts of
price changes. It is calculated by
dividing nominal GNP by the GNP
deflator and multiplying it by 100 .
 GNP Deflator
Measures the cost of a given bundle
of goods in one year relative to the
cost of the same bundle of goods in
the base year.
USING GDP OR GNP TO GAUGE A
NATION’S ECONOMIC HEALTH
 If
   we divide Real GNP by the population of the
country, we arrive at a measure called per capita
GNP at constant prices or Real GNP per capita
 Real GNP per capita = Real GNP/
Population of the country.
 When comparing GNP across countries, it makes
sense to convert the GNP of each country into a
common currency. The most common practice is
converting the country’s GNP into US dollars.
Which is:

 This could also be divided by the country’s

population in order to get the per capita GNP
USING GDP OR GNP TO GAUGE A
NATION’S ECONOMIC HEALTH
 To adjust for price differences across
countries , GNP measured at domestic
currency is divided by the so called
purchasing power parity exchange rate
the result is called PPP adjusted GNP.
Dividing the outcome by the population
generates an estimate of PPP adjusted per
capita GNP.
LIMITATIONS OF GNP
 High GNP does not mean
improved standards of living,
because it does not say about the
distribution of income and
poverty. In addition it also does
not directly present the costs of
achieving higher output e.g.
stress, environmental
degradation etc.
LIMITATIONS OF GNP
 It is also an imperfect measure of output
because it excludes the transactions that
were not made through organized or formal
markets. E.g. household chores and helping
friends and relatives. These activities have
no formal markets that is why it is not
recorded. The related issue here is the
practice of imputing values in the national
accounts.
 Imputing
 Refers to the process of approximating the values of
certain activities thus it results to measurement errors.
LIMITATIONS OF GNP
 There are also activities where a market
exists but the transactions are not recorded
examples for this kind of activities are drug
trafficking and prostitution these are illegal
activities but there are also legal transactions
that are not reported because they are
unlicensed or unreported small-scale
activities like peddling and trading.