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Ch08 - National Income Accounting
Ch08 - National Income Accounting
summarizes the transactions between the different economic agents agents: households, firms (business), government, and foreigners (rest of the world)
Assumption: The economy composed of households and firms only Households: own factors of production, consume goods and service Firms: hire factors of production to produce goods and services
FIRMS
HOUSEHOLDS
FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between firms and households in a simple economy. In the upper loop, the arrow emanating from firms to households represents the sale by firms of goods and services to households. On the other hand, the arrow from households to firms represents the payments. n the lower loop, the arrow originating from the households to the firms shows that firms hire labor and capital from households in order to produce goods and services. The arrow emanating from the firms indicates their payments for the use of the factors of production.
Spending (=GDP)
FIRMS
HOUSEHOLDS
Income (=GDP)
Assumption: The economy composed of households and firms only Households: own factors of production, consume goods and service Firms: hire factors of production to produce goods and services
Upper loop of the circular flow diagram: transactions in the goods and services markets Lower loop: transactions in the factor markets
Transfer payments
Transfer payments are transactions wherein one party is not obliged to deliver a good or service in return for the payment. Examples: retirement benefits, unemployment benefits, scholarships, and donations.
Includes sales of goods and services, assets, and transfers Exports - sales of domestically produced goods to other countries Imports - goods bought from other countries
The GDP measures the market value of all final goods and services produced within an economy in a given period. GDP only measures current production. Transfer payments and transactions involving goods produced in other periods are not included in the calculation of GDP. GDP is usually expressed in the currency of a particular country, e.g., Philippine peso.indicates the market value of the goods and services
Definition of GDP
The market value of good i (V i ) is equal to P i Q i GDP = sum of the market values of all final goods and services produced within the year.
GDP =
V = P
i=1 i i =1 i
Qi
Final goods - goods and services that are not purchased for the purpose of producing other goods and services or for resale
Eg. Rice (final) and palay or unhusked rice (intermediate product)
Including intermediate goods and final goods will result in double counting.
Expenditure Approach
Uses the upper loop of the circular flow diagram. Example: Suppose the economy has only one product, namely, rice.
Good Price per unit 20 Q sold 1000 GDP Expenditure 20,000 20,000
Rice
Income Approach
Uses the lower loop of the circular flow diagram: sum of payments to the various factors of production. Suppose that in the production of rice the sales and expenses are as follows: P 20,000 8000 4000 2000 Total Profit 14,000 6,000 20,000 P 20,000
Suppose that rice is the only final product of an economy: It goes through several (3) stages of production.
Value of intermediate good 12,000 15,000
Stage of Prodn Farmer - Palay Rice Miller -Milled Rice Retailers - Rice GDP= Total Value Added
The expenditure approach, income approach, and the valueadded approach all come up with the same estimate of the GDP. They are equivalent approaches. In the income approach, profit is also considered a payment to the entrepreneur. So the incomes are (1) wages, (2) rent, (3) interest, and (4) profit. Profit adjusts to make the sum equal to the final value of the good. In the value added approach, only the value added in each stage of production are included. If we add the value of intermediate product with the value of the final product, we commit the sin of double-counting. At each stage of production, the value-added is equal to wages, interest, rent, and profit. Therefore the value of the final product is likewise the same of all payments to the factors of production.
Additional Topics
same principles as above but need to make adjustments in order to accommodate the realities in modern economies Expenditure approach
GDP = C + G + I + X M+ SD
Expenditure Approach
C - spending of households and private non-profit institutions on goods and services Non-durables - goods and services that are consumed rapidly Durable goods - that last for a longer period of time I - investment spending of domestic agents. Its major components are changes in Fixed Capital and Changes in Stocks G - governments payments for the salaries of its workforce as well as purchases of goods and services used for the governments day to day operations and projects. X - the spending of the rest of the world on goods and non-factor services produced in the country Mthe countrys purchases of goods and non-factor services from the rest of the world. SD - accounts for accounting and reporting errors in the accounts. Needed to ensure that GDP value from all approaches are the same
Income Approach
ITEMS Compensation of Employees Net Operating Surplus Depreciation Indirect Business Taxes less Subsidies Gross Domestic Product SYMBOLS COE NOS D IBTS GDP VALUE 1,093,800 2,215,100 357,200 356,600 4,022,700
Income Approach
GDP = COE + NOS + D + IBTS In a simple world, GDP = COE + NOS. In practice, require two adjustments (D and IBTS) D - accounts for the wear and tear of physical capital D is treated as a business cost not included in NOS. However, D is part of I in the expenditure side of the national accounts IBTS - includes taxes on the use or purchase goods and services and grants from government to firms. E. g sales taxes, value added tax Not included in NOS but is part of the market prices, of which the items in the expenditure accounts are quoted
ITEM Agriculture, Fishery and Forestry Industry Services Gross Domestic Product
GNP = GDP + Net Factor Income from the Rest of the World (NFIRW) NFIRW - measures the difference between the earnings of Philippine residents in other countries and foreign residents in the Philippines
GDP at current prices or nominal GDP - GDP measured using the prices of the year for which it is calculated Nominal GDP can be a misleading indicator of changes in output or income because it also embodies changes in the prices of goods and services. Real GDP or GDP at constant prices measures the total value of output using the prices of a selected year (the base year). Real GDP better for analysis overtime because it eliminates the effects of price changes
Table 8.5
YEAR 1 QUANTITY Ice Cream Buko Pie PRICE Ice Cream Buko Pie VALUE Ice Cream Buko Pie NOMINAL GDP 5,000 10,000 15,000 10,000 20,000 30,000 50 100 100 200 100 100 100 100 YEAR 2
GDPyear 1 = (100) (50) + (100) (100) = 15,000 GDPyear 2 = (100) (50) + (100) (100) = 15,000 In practice, calculating real GDP using the previous approach is a tedious process because there are so many goods and services are produced in an economy. Can simplify the calculation process by using the GDP deflator. GDP deflator - a price index that allows us to convert nominal GDP into real GDP. (note: price index to be defined later)
Real GDP
Nominal GDP Real GDP = 100. GDP deflator
149.5 720,700
300.1 888,000
384.6 1,046,100
Item
Weight (In percent) 55.1 3.7 14.7 5.7 12.3 8.5 100.0
Food, Beverages and tobacco Clothing Housing and Repairs Fuel, Light and Water Services Miscellaneous items All Items
Inflation Rate
Table A8.5 Estimates of the CPI and Inflation Rate, 1990-98 Year Consumer Price index (CPI) 62.7 75.6 83.8 91.6 100.0 108.2 117.3 125.1 137.9 Inflation rate (in percent) -20.6 10.8 9.3 9,2 8.2 8.4 6.6 10.2
Measures how much output or income was produced or received, on the average, by an individual in an economy Useful for comparing the performance of a country overtime and a countrys performance relative to its neighbors
Population growth is quite high, about about 3% per year in 1980s and 2.3% per year nowadays.
Modest and erratic growth in GDP plus high population growth means the per capita GDP growth is low.
TABLE 8.7. Selected output Indicators for the Philippines, selected years
Item (1) GDP at current prices (million pesos) (2) GDP deflator (base year -1985) (3) GDP at constant prices (million pesos) (4) Per capita GDP at current prices (pesos) (5) Per capita GOP at constant prices (pesos) (6) Population (million persons) 1984 524,481 1985 571,883 1995 608,887 1996 2,171,922 1997 2.423.640
85.01 616,964
100.00 571,883
102.95 591,440
255.78 849,137
271.40 893,014
9,890
10,524
10,935
30,208
32,961
11,634
10,524
10,662
11,810
12,145
53.03
54.34
55.68
71.90
73.53
Convert a countrys GNP to US dollars, or some common currency, by using the countrys exchange rate When comparing income across countries, it also makes sense to use per capita estimates eliminates differences in population size. E.g. (data is for 1998)
PPP purchasing power parity GNP is adjusted to account for the fact that 1 USD when spent in one country does not buy the same quantity of goods when spent in another country
E.g. Philippines, 1998 per capita GNP (in USD) = 1050 per capita GNP (PPP adjusted, in USD) = 3,540
Poverty rate
217 250 350 390 440 540 600 620 1010 1140 1170 1500 2490 4520 14000 14770 24760 26.6 30.9 34.7 33.5 49.8 19.5 32.6 26.1 22.7 18.2 30.0 3.1 9.8 7.5 3.6 0.8 0.0
1980 2005
Vi
TABLE 8.8.
Country
France Germany Indonesia Japan Malaysia Philippines Singapore Thailand United Kingdom United States
1,466.2 2,122.7 138.5 4,089.9 79.8 78.9 95.1 134.4 1,263.8 7,921.3
24,940 25.850 680 32,380 3,600 1,050 30,060 2.200 21.400 29.340
22,320 20,810 2,790 23,180 6,990 3,540 28,620 5,840 20.640 29.340
Philippines NCR CAR Ilocos Cagayan Valley C. Luzon S. Tagalog Bicol W. Visayas C. Visayas E. Visayas W. Mindanao N. Mindanao S. Mindanao C. Mindanao ARMM Caraga
15.0 11.0 36.0 45.8 20.5 20.2 22.7 22.6 10.4 29.9 40.2 28.6 25.2 40.2 48.6 38.0
31.8 37.1 56.5 8.9 7.5 32.7 37.5 16.1 25.7 27.9 25.7 14.8 30.2 25.2 28.0 10.3 18.0
53.2 62.9 32.5 55.1 46.7 46.8 42.3 61.2 51.7 61.7 44.4 45.0 41.2 49.6 31.8 41.1 44.0
REGION
Philippines Luzon NCR
Central Luzon & S.Tagalog Other Luzon
1975-85 1985-95
100 62.6 28.8 23.3 10.5 16.7 6.4 10.3 20.8 100 64.8 31.6 23.2 10.0 16.3 6.5 9.8 19.0
19952003
100 66.4 34.4 21.9 10.1 15.8 6.7 9.1 17.2
19752003
100 64.5 31.5 22.8 10.2 16.2 6.5 9.7 19.1
Personal disposable income represents the income that households are free to spend or save. It excludes the components of national income that do not accrue directly to households. It also includes a few items that are not part of national income but nonetheless influence the amount of income that households can spend.
Table 8.9 Personal Disposable Income, Philippines, 1998 (in million pesos
Item Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Item Net operating surplus of households and unincorporated business Compensation of employees, net Total (Items 1 and 2) Interest on public debt from the general government Other property Income Social security benefits Casualty insurance claims Current transfers Total (Items 4 to 8) Interest payments on consumer debt Other payments Direct taxes Compulsory fees, fines and penalties Net casualty insurance premiums Social security contributions Other current transfers Total (Items 10 to 15) Disposable Income (Item 3 +Item - Item 17) Amount 1,062,091 910,259 1,972,350 73,957 188,699 138,846 1,304 68.396 371,202 7,984 22,634 90.268 29,181 1304 53,629 11,797 216,797 2,126,755
Ignores income distribution Ignores environmental degradation Does not include activities that do not go through the formal markets sectors Does not include illegal activities like drug trafficking, prostitution, moonlighting