gdp and national income accounting

MacroeconomicsWeek 5

NATIONAL INCOME ACCOUNTING

CIRCULAR FLOW DIAGRAM REVISTEDis a visual model of the economy that shows how money flows through markets among households and firms.


CIRCULAR FLOW DIAGRAM REVISTEDTOTAL PRODUCTION = TOTAL INCOME = TOTAL EXPENDITURE

The primary economic activity of the economy is production or the process of creating a good or service that can be used to satisfy human wants.

AGGREGATESAggregate Demand is the

total amount of goods and services demanded in the economy at a given overall price level and in a given time period.

Aggregate Supply is the total supply of goods and services produced within an economy at a given overall price level in a given time period.


NATIONAL INCOME ACCOUNTINGmeasures the economy’s overall performance. This accounting enables economists, policy makers, and statisticians to:

Assess the health of the economy by comparing levels of production at regular intervals.

Track the long-run course of the economy to see whether it has grown, been constant, or declined.

Formulate policies that will safeguard and improve the economy’s health.


GROSS DOMESTIC PRODUCT (GDP)is the primary measure of the economy’s performance.

In detail…It is the total market value of a country’s output.It is the market value of all final goods andservices produced within a given period of timeby factors of production located within acountry (whether the factors of production usedbelongs to a Filipino national or foreigner).


MEASURING GDP

Monetary Measure. GDP is the monetary value of the total output of goodsand services produced by an economy within a given period of time (quarterly orannual).

No Double or Multiple Counting. GDP includes only the market value ofFINAL GOODS (goods and services that are purchased for final use by consumer, notfor resale, or further processing) and ignores INTERMEDIATE GOODS (goods andservices that are purchased for resale or for further processing) altogether.


MEASURING GDP

Exclusion of Used Goods and Paper Transactions or Non Production Transactions.

GDP is concerned only with new, or current, production. Old output is not counted in current GDP as it was already counted back at the time it was produced.

GDP ignores all transactions which money or goods change hands but in which no new goods and services are produced.

Non production transactions including financial transactions (such as public and private transfer payments, and stock market transactions), and second hand sales do not form part of GDP computation.


MEASURING GDP

Exclusion of Output Produced Abroad by Domestically Owned Factors of Production.

GDP is the value of output produced by factors of production located within a country.


GROSS NATIONAL PRODUCT (GNP)is 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.

It takes into account the market price of a final good or service that has been produced by a country’s factors of production within the country and the returns to investments and other income from abroad derived by its nationals.

Thus: GNP = GDP + Net Factor Income from Abroad (NFIA)NFIA is the difference between the factor income received from the rest of the world and the payments to factors of production abroad for their investments in the Philippines.


APPROACHES TO MEASURING THE ECONOMY

TOTAL PRODUCTION = TOTAL INCOME = TOTAL EXPENDITURE

There are three (3) approaches to measuring GDP/GNP:

By ExpenditureBy ProductionBy Income


EXPENDITURE APPROACHis a method of computing GDP/GNP that measures the amount spent on all final goods during a given period.

Expenditure Categories:

Personal consumption expenditure (C)Gross private domestic investment (I)Government consumption and gross investment (G)Net Exports (X-M)

Thus: Y = C + I + G + (X-M)


PERSONAL CONSUMPTION EXPENDITURE (C)is spending by households on current needs. These are expenditures on food, beverages, tobacco, clothing and footwear, fuel, light, and water, household furnishings, household operations, transportation/communications, and miscellaneous expenses.

Three (3) main categories:Durable goods are goods that last a relatively long time (automobiles, furniture, and household appliances)Non durable goods are goods consumed immediately or for a short time (food, clothing, gasoline, and cigarette)Payment for services are things that people buy that do not involve the production of physical items (services of doctors, lawyers, and educational institutions)


GROSS PRIVATE DOMESTIC INVESTMENT (I)is the total investment in capital such as the purchase of new housing, plants, equipment, and inventory by the private (or non government) sector.

The Philippine national accounts classify this into two general types:

Fixed capital equipment consists of spending on construction, durable equipment, and breeding stock and orchards.

Residential investments are expenditures by households and firms on new houses and apartment buildings.Non residential investments are expenditures by firms for machine, tools, plants, and so on.

Change in inventories is the amount by which firms’ inventories change during a period. Inventories are the goods that firm produce now but intend to sell later.


GROSS PRIVATE DOMESTIC INVESTMENT (I)is the total investment in capital such as the purchase of new housing, plants, equipment, and inventory by the private (or non government) sector.

Thus: GDP/GNP = Final sales + change in business inventories

Gross Investment vs Net Investment

Gross investment is the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period.

Net Investment is gross investment less depreciation.


GOVERNMENT CONSUMPTION (G)is expenditures by the government for final goods and services. These are spending on salaries and wages of public school teachers, police, and other public servants.

The unique feature of the Philippine national income accounting is consumption is separated from the private sector’s while government investments are classified as part of Investments (I).


NET EXPORTS (X-M)is the difference between the exports (X) and imports (M). Either positive (X>M) or negative (M>X).

The unique feature of the Philippine national income accounting is consumption is separated from the private sector’s while government investments are classified as part of Investments (I).


PRODUCTION OR VALUE-ADDED APPROACHis a method of computing GDP/GNP that measures the economy based on the contribution of industries and sectors to the value of the final goods.

Traditionally, the industries are classified into three (3) sectors:

Agriculture, Fishery, and Forestry (AFF)Industry (I)Services (S)


PRODUCTION OR VALUE-ADDED APPROACHis a method of computing GDP/GNP that measures the economy based on the contribution of industries and sectors to the value of the final goods.

Agriculture, Fishery, and Forestry (AFF) comprises produce such as palay, corn, coconut, copra, sugarcane, livestock, poultry, agricultural services, fishery, and forestry.

Industry (I) comprises main sectors mining and quarrying, manufacturing, construction, and electric, gas, and water.

Services (S) comprises the following sectors: transportation, communications, and storage, trade, finance, ownership dwellings and real estate, private services, and government services.


INCOME APPROACHlooks at GDP in terms of who receives the income, not who purchases it. It corresponds to the sum of the rewards to the owners of the factors of production in national income.

It breaks down GDP into four (4) components:

National IncomeDepreciationIndirect taxes less subsidiesNet factor payments to the rest of the world



National Income is the total income earned by factors of production owned by a country’s citizen (compensation of employees, proprietors’ income, corporate profits, net interest, and rental income).

Depreciation is part of GDP in the income approach. It is added in the computation of GDP because it has been subtracted from the amount that corporations actually receive. This is necessary to balance the income and expenditures sides.



Indirect Taxes Minus Subsidies.

Indirect taxes are sales taxes, custom duties, and license fees.

Subsidies are payments made by the government for which it receives no goods or services in return.

Net Factor Payments to the Rest of the World are payments of factor income to the rest of the world minus the receipt of factor income from the rest of the world.


LIMITATIONS OF NATIONAL INCOME ACCOUNTSThere are certain market transactions that give rise to payments and transfers of goods and services but are excluded from GNP accounting.

Those that do not arise to useful economic activities or ILLEGAL (drug traffic, prostitution, smuggling)

Goods and services produced but do not appear in the market (housewives, home activities)

There are problems of valuation of goods and services that do enter into the national income accounts(assignment of value for unpurchased (non market) goods like crops consumed by farmers themselves, rent of owner-occupied houses)


LIMITATIONS OF NATIONAL INCOME ACCOUNTSThere are certain market transactions that give rise to payments and transfers of goods and services but are excluded from GNP accounting.

Equal treatment given to a peso of good/service, whether it is given to a doctor or cockpit owner.

Losses are not taken into account in the national income accounts (repair and rehabilitation after typhoon)

Per capita measurements maybe misleading if the actual reality is that there is a great disparity between actual individual incomes and the average income per person.

gdp and national income accounting

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