National Income

Accounting
National Income
• It is measured in terms of total earnings of the factors of production or the
total market value of all the final goods and services produced by the
citizens. These are presented in terms of Gross National Product (GNP),
Gross domestic Product (GDP), Per capita Income (PCI) and per capita
GNP. Such as measures of economic performance of the nation.
• The National Economic and Development Authority (NEDA) is the
government agency in-charge of maintaining the national accounting.
 Gross National Product (GNP)
• Gross National Product (GNP) measures the market value of all the final
goods and services produced by a nation’s economic resources during a
specified period of time. It reflects the economic performance of a nation.

Where = price commodity in the given year.

= quantity of production of commodity for a given year.
Example:
Current GNP
• GNP at current prices is the money GNP. It is obtained by multiplying the
quantity of final goods and services by prevailing or current market prices.
• Current GNP progressively increases every year. However, this does not
necessarily indicated an improving economic performance of the nation.
Suppose that the quantity remains the same, the GNP will still increase
because the prices cannot be held constant through the years. Hence, an
increasing current GNP may only manifest that the prices of the goods and
services only increase or there is just an inflation.
Real GNP
• To avoid a misleading interpretation of Current GNP, The Real GNP
must be used in gauging the economic performance of the nation.
x 100%

x 100%
A price index ensures that the comparison of the GNP is based in a
common base year (usually a period of normal economic condition).
Per Capita GNP
• Per capita GNP refers to the GNP share of each person if national
income is divided equally among the population of the nation.
 Current Populatio Per capita
CPI Real GNP Per capita
Year GNP n Current
2000=100 (million) Real GNP
(million) (million) GNP
2000 3,566,059 100.00 3,566,059 77 46,312 46,312

2001 3,876,030 102.26 3,791,030 79 49,071 47,988

2002 4,218,883 106.54 3,960,037 80 52,736 49,500

2003 4,631,479 112.87 4,103,364 82 56,481 50,041

2004 5,248,064 120.67 4,349,277 84 62,477 51,777

2005 5,885,050 127.10 4,630,280 85 69,236 54,474

2006 6,570,310 134.85 4,872,386 87 75,521 56,004

2007 7,274,660 146.36 5,004,613 89 81,738 56,232

Limitations of GNP
1. It does not show the allocation of goods and services among members of
the society. It only shows the number of goods and services produced by
the citizens in a given period. In a nation where there is unequal
distribution of income, an increasing GNP only suggests that the economic
welfare of the few rich people better off. As a whole, there is no real
improvement because the many poor people remain poor.
Limitations of GNP
2. GNP accounting in less developed countries is understated. Many
economic transactions especially in the rural areas are not included in the
GNP accounting. These activities constitute most of our daily activities
like for an instance when we ride a jeepney, buy goods from the nearby
sari-sari store or eat in the school canteen. In all the said transactions, no
official receipts are taken.
Limitations of GNP
3. The evils of economic growth like population, congestion, and dirty
environment are not reflected in the GNP.
4. GNP only measures the number of goods and services but not the quality
of goods and services.
5. Incomes or products from illegal sources are not included in the GNP.
Consumer Price Index
A price index is a device for combining movements of many individual
prices for the purpose of estimating the average movement of some
specified group of prices. It is often used to deflate variables expressed in
money terms to take out the effect of price changes. Also, inflation rate is
reflected in the growth of price index.
CPI is designed to measure changes in prices of the goods and services.
YEAR CPI INFLATION
RATE
2000 100.00 -
2001 102.26 2.26
2002 106.54 4.19
2003 112.87 5.94
2004 120.67 6.91
2005 127.10 5.33
2006 134.85 9.24
2007 145.36 4.69
Inflation
Inflation is the continuous increase in the general level of prices. The
formula for determining inflation is as follows:
x 100%
Where: 2 = present years
1 = base year
Gross Domestic Product (GDP)
GDP is the total value of final goods and services produced within the
territories of a nation in a given year. An increasing GDP suggest an
improving economy. However, it should be noted that in most third world
countries whose economy is dominated by foreigners, GDP is usually
bigger. This does not necessary mean an improving economy. It may only
mean that the value of final goods and services produced by the foreigners
in this third world countries is increasing.
Gross Domestic Product (GDP)
In the computation of GDP, the incomes derived from investments or
wealth in other countries is excluded. Whereas in the GNP, the incomes of
the citizens earned from abroad are included. Hence, for the third world
economy, the GNP is a better indicator of growth than GDP.
Three Approaches in Measuring GNP
1. GNP via Expenditure Approach. It is measured through the flow of
currently produced goods and services by accounting for all the
expenditures of the different sectors in the economy, i.e. the
consumers, business, government and foreign sectors.
The consumers Spend more durable goods, non-durable goods and
services. Altogether this expenditures comprise “Personal Consumption
Expenditures”.
Three Approaches in Measuring GNP
Expenditures of the business sectors are called “Gross Domestic
Investment”. Theses account for residential construction, business fixed
investment, and change in business inventories,
The government spends for national and local outlays. These are
called “Government Consumption Expenditures”.
Net export, that is the value of export less import, reflects the
foreign sector in GNP accounting.
 Item Value

1. Personal consumption expenditures 1,059,466

2. General Government consumption expenditures 86,523

3. Gross domestic capital formation of investment 239, 667

a. Fixed capital formation 232,492
b. Increase in stocks 7,175

4. Exports of goods and non-factor services 648,297

5. Less: Imports of goods and non-factor services 620,328

6. Stationary discrepancy (46,067)

7. Expenditure on Gross Domestic Product 1,370,018

8. Net factor income from the rest of the world 138,000

Expenditure on Gross National product 1,508,618

Three Approaches in Measuring GNP
2. GNP via Income Approach. It measures national income (GNP) through the
below-mentioned factored incomes that are earned by resource owners in
current production.
a. Compensation of employees. It includes all wages and salaries earned by
households, fringe benefits, private pension and welfare funds.
b. Proprietorships’ income. It is the net profits of unincorporated businesses
and self employed professionals.
Three Approaches in Measuring GNP
c. Rental income of persons. It is the income in the form of rent and
royalties received from the ownership of property.
d. Corporate profits. These include the profits of all private corporations.
e. Income from interests. It is the interests received by household and
government from capital.
 Item Value

1. Compensation of employees and entrepreneurial and property and 1,059,466

entrepreneurship
2. General Income from property and entrepreneurship 86,523

3. Corporate income 239, 667

a. Corporate tax 232,492
b. Corporate savings 7,175

National Income 648,297

4. Indirect Taxes 620,328

5. Less: Subsidies (46,067)

7. Expenditure on Gross Domestic Product 1,370,018

8. Net factor income from the rest of the world 138,000

Expenditure on Gross National product 1,508,618