National Income Accounting

National income accounting (NIA)

is the measurement of indicators of national output/income; .e.g. GDP, GNP

Circular flow diagram

summarizes the transactions between the different economic agents

agents: households, firms (business), government, and foreigners (rest of the world)

Circular flow diagram 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

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.

factor payments

(wages, interest, rent, profit)

factor services

goods and services

payments for goods and services

HOUSEHOLDSFIRMS

MARKETS FOR FACTORS OF PRODUCTION

MARKETS FOR GOODS AND SERVICES

FIRMS HOUSEHOLDS

Good and services bought

Good and services sold

Revenue (=GDP)

Spending (=GDP)

Inputs for Production

Land, labor and capital

Wages, rent, interest and profit (=GDP)

Flow of goods & services

Flow of money: pesos

Income (=GDP)

THE CIRCULAR FLOW DIAGRAM

Circular flow diagram

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

Circular flow diagram

Upper loop of the circular flow diagram: transactions in the goods and services markets

Lower loop: transactions in the factor markets

With government and foreign agents

Need to account for :a. Government purchases of goods and services.b. Government payments for factor services (wages, rent,

interest). c. Transfer payments between different agents.d. Firms and households pay taxes to government. e. Taxes paid on income, property, goods and services.f. Transactions with the foreign sector.

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.

Transactions with foreign sector

Includes sales of goods and services, assets, and transfers

Exports - sales of domestically produced goods to other countries

Imports - goods bought from other countries

Measurement of economy’s output:The Gross Domestic Product (GDP)

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 (Vi) is equal to PiQi

GDP = sum of the market values of all final goods and services produced within the year.

n n

i i ii 1 i 1

GDP V P Q

GDP includes final goods and services only

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”.

3 Approaches for measuring GDP

1. Expenditure Approach (upper loop) – measures GDP as the sum of expenditures on final goods and services.

2. Income Approach (lower loop) – measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit.

3. Value-added Approach – measures GDP as the sum of value added at each stage of production (from initial to final stage)

Expenditure Approach Uses the upper loop

of the circular flow diagram.

Example: Suppose the economy has only one product, namely, rice.Good Price per

unitQ sold Expenditure

Rice 20 1000 20,000

GDP 20,000

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:

Sales P 20,000Expenses: Wages 8000 Rent 4000 Interest 2000 Total 14,000 Profit 6,000GDP=Sum of Payments to factors

20,000 P 20,000

Value Added Approach

Suppose that rice is the only final product of an economy: It goes through several (3) stages of production.

Stage of Prod’nValue of

intermediate good

Value of Sales

Value-added

Farmer - Palay 12,000 12,000Rice Miller -Milled Rice

12,000 15,000 3,000

Retailers - Rice 15,000 20,000 5,000GDP= Total Value Added

20,000

Notes of the 3 approaches The expenditure approach, income approach, and the value-added

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

GDP vs GNP Real vs current GDP Inter-country comparisons of GDP

Convert to international currency like US dollars Convert to per capita measures

THE NATIONAL ACCOUNTS OF THE PHILIPPINES

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

Table. Expenditures on GDP, 2002 in million pesos.

Item Symbol ValuePersonal Consumption Expenditure

C 2,750,9000

Government Consumption Expenditure

G 488,700

Gross Domestic Capital Formation I 776,200Exports of Goods and Services X 1,968,500Less: Imports of Goods and Services

M 1,989,100

Statistical Discrepancy SD 27,500Gross Domestic Product GDP 4,022,700

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 - government’s payments for the salaries of its workforce as well as purchases of goods and services used for the government’s 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

M - the country’s 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 SYMBOLS VALUE

Compensation of Employees

COE 1,093,800

Net Operating Surplus NOS 2,215,100

Depreciation D 357,200Indirect Business Taxes less

SubsidiesIBTS 356,600

Gross Domestic Product GDP 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

Value added or Industrial Origin approach

GDP = value added of different activities (sectors)

ITEM VALUE

Agriculture, Fishery and Forestry 519,400

Industry 1,307,400

Services 2,123,900

Gross Domestic Product 4,022,700

The distinction between GDP and GNP

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

The distinction between GDP and GNP

Gross Domestic Product GDP 4,022,700

Net Factor Income from the Rest of the World

NFIRW 267,500

Gross National Product GNP 4,290,200

Nominal and Real GDP 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 YEAR 2

QUANTITY

Ice Cream 100 100 Buko Pie 100 100PRICE

Ice Cream 50 100 Buko Pie 100 200VALUE

Ice Cream 5,000 10,000 Buko Pie 10,000 20,000NOMINAL GDP 15,000 30,000

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 GDPReal GDP 100.GDP deflator

Calculation of Real GDP

Item 1990 1998 2002GDP at current

prices (million PhP)

1,072,000 2,665,100 4,022,700

GDP deflator (base year 1985) 149.5 300.1 384.6

GDP at constant prices (million PhP)

720,700 888,000 1,046,100

GDP Deflator, (1985=100), Philippines

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Inflation Rate, Philippines

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

perc

ent p

er y

ear

Item Weight(In percent)

Food, Beverages and tobacco 55.1

Clothing 3.7

Housing and Repairs 14.7

Fuel, Light and Water 5.7

Services 12.3

Miscellaneous items 8.5

All Items 100.0

Source: National Statistics Office

TABLE A8.4. Weights used In the CPI, base year, 1994.

Inflation Rate

1

1

Inflation Rate t t

t

CPI CPICPI

Year Consumer Price index(CPI)

Inflation rate(in percent)

1990 62.7 --1991 75.6 20.61992 83.8 10.81993 91.6 9.31994 100.0 9,21995 108.2 8.21996 117.3 8.41997 125.1 6.61998 137.9 10.2

Table A8.5 Estimates of the CPI and Inflation Rate, 1990-98

GDP (at 1985 Prices), Philippines

400.0

500.0

600.0

700.0

800.0

900.0

1000.0

1100.0

1200.0

1300.0

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Year

Bill

ions

Real GDP at 1985 prices

GDP per capita 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 country’s performance relative to its neighbors

GDPGDP per capitapopulation

Total population, Philippines, in million

0.0

10.0

20.0

30.0

40.050.0

60.0

70.0

80.0

90.0

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Year

mill

ion

Population growth is quite high, about about 3% per year in 1980s and 2.3% per year nowadays.

Per capita GDP

Item 1990 1998 2002

GDP at constant (million pesos) 720,700 888,000 1,046,100

Population (millions)62.0 75.2 81.8

Per capita GDP at constant prices 11,624.20 11,808.5 12,788.5

Per Capita GDP, Philippines, (at constant 1985 prices)

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05Year

Thou

sand

Pes

os

Modest and erratic growth in GDP plus high population growth means the per capita GDP growth is low.

Item 1984 1985 1995 1996 1997

(1) GDP at current prices (million pesos)

524,481 571,883 608,887 2,171,922 2.423.640

(2) GDP deflator (base year -1985) 85.01 100.00 102.95 255.78 271.40

(3) GDP at constant prices (million pesos)

616,964 571,883 591,440 849,137 893,014

(4) Per capita GDP at current prices (pesos)

9,890 10,524 10,935 30,208 32,961

(5) Per capita GOP at constant prices (pesos)

11,634 10,524 10,662 11,810 12,145

(6) Population (million persons) 53.03 54.34 55.68 71.90 73.53

TABLE 8.7. Selected output Indicators for the Philippines, selected years

Source: NSCB (1998), Philippine Statistical Yearbook.

GNP for cross country comparisons

Convert a country’s GNP to US dollars, or some common currency, by using the country’s 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 Adjusted GNP 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

Exchange Rate (P/US$), Philippines, 1988-2005

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Peso

s pe

r dol

lar

Exchange Rate 1988-2002

Per Capita GNI Per Capita GNI Poverty rateMyanmar b 217 26.6

Nepal 250 30.9

Cambodia 350 34.7

Lao PDR 390 33.5

Bangladesh 440 49.8

Viet Nam 540 19.5

Pakistan 600 32.6

India 620 26.1

Sri Lanka 1010 22.7

Indonesia 1140 18.2

Philippines 1170 30.0

China 1500 3.1

Thailand 2490 9.8

Malaysia 4520 7.5

Korea, Rep. of 14000 3.6

Taiwan 14770 0.8

Singapore 24760 0.0

PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)

GNP Per Capita (in US$), 1998 and 2003

0

500

1000

1500

2000

2500

3000

3500

4000

4500

China Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam

1998

2003

GDP Per Capita PPP$, 2000 prices

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Philipp

ines

Indon

esia

Malays

ia

Thaila

nd

Korea,

Rep.

Vietnam

China

1980

2005

Annual Growth GDP, 1980-2005 (% per year)

0.63

3.7 3.65

4.59

5.534.87

8.49

0

1

2

3

4

5

6

7

8

9

Philippines Indonesia Malaysia Thailand Korea, Rep. Vietnam China

Perc

ent

Annual Growth GDP, 2000-2005 (% per year)

2.53.3 3.0

4.14.6

6.1

8.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Philippines Indonesia Malaysia Thailand Korea,Rep.

Vietnam China

Perc

ent

TABLE 8.8. Economic indicators for selected countries, 1998.

Country Population(in millions)

GNP1

(in billions)Per capita GNP1

In US DollarsPPP adjusted per capita

GNP*

France 59 1,466.2 24,940 22,320

Germany 82 2,122.7 25.850 20,810

Indonesia 204 138.5 680 2,790

Japan 126 4,089.9 32,380 23,180

Malaysia 22 79.8 3,600 6,990

Philippines 75 78.9 1,050 3,540

Singapore 3 95.1 30,060 28,620

Thailand 61 134.4 2.200 5,840

United Kingdom 59 1,263.8 21.400 20.640

United States 270 7,921.3 29.340 29.340

PHILIPPINES: Key Economic Indicators, 2003

RegionPer Capita

GRDP IndexPhil=100

Composition of GRDP(%) GRDP Growth Rates,

(1985- -2003 (%)

Agriculture Industry Services

Philippines 100.0 15.0 31.8 53.2 3.1

NCR 275.8 - 37.1 62.9 3.4

CAR 129.9 11.0 56.5 32.5 6.4

Ilocos 53.7 36.0 8.9 55.1 2.5

Cagayan Valley 52.3 45.8 7.5 46.7 2.8

C. Luzon 75.2 20.5 32.7 46.8 3.0

S. Tagalog 85.7 20.2 37.5 42.3 3.5

Bicol 43.3 22.7 16.1 61.2 2 2

W. Visayas 83.5 22.6 25.7 51.7 2.9

C. Visayas 93.4 10.4 27.9 61.7 3.7

E. Visayas 50.5 29.9 25.7 44.4 2.0

W. Mindanao 62.1 40.2 14.8 45.0 2.4

N. Mindanao 101.8 28.6 30.2 41.2 2.7

S. Mindanao 92.4 25.2 25.2 49.6 1.7

C. Mindanao 76.6 40.2 28.0 31.8 3.4

ARMM 23.2 48.6 10.3 41.1 2.5

Caraga 47.8 38.0 18.0 44.0 2.1

REGION 1975-85 1985-95 1995-2003 1975-2003Philippines 2.5 2.5 3.9 3.2Luzon 2.6 2.8 4.0 3.4 NCR 2.4 2.8 4.3 3.4 Central Luzon & S. Tagalog

2.6 3.1 3.6 3.4

Other Luzon 3.0 2.3 4.3 3.4Visayas 2.4 2.1 4.0 3.2 Central

Visavas2.7 2.6 4.8 3.7

Other Visayas 2.3 1.7 3.4 2.8Mindanao 2.2 1.7 3.6 2.6

PHILIPPINES: Average growth of regional GDP (in 1985 prices)

REGION 1975-85 1985-95 1995-2003

1975-2003

Philippines 100 100 100 100Luzon 62.6 64.8 66.4 64.5 NCR 28.8 31.6 34.4 31.5 Central Luzon & S.Tagalog

23.3 23.2 21.9 22.8

Other Luzon 10.5 10.0 10.1 10.2Visayas 16.7 16.3 15.8 16.2 Central

Visavas6.4 6.5 6.7 6.5

Other Visayas 10.3 9.8 9.1 9.7Mindanao 20.8 19.0 17.2 19.1

PHILIPPINES: Share of National GDP

Personal Disposable Income

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.

Item Number Item Amount

1 Net operating surplus of households and unincorporated business 1,062,091

2 Compensation of employees, net 910,259

3 Total (Items 1 and 2) 1,972,350

4 Interest on public debt from the general government 73,957

5 Other property Income 188,699

6 Social security benefits 138,846

7 Casualty insurance claims 1,304

8 Current transfers 68.396

9 Total (Items 4 to 8) 371,202

10 Interest payments on consumer debt 7,984

11 Other payments 22,634

12 Direct taxes 90.268

13 Compulsory fees, fines and penalties 29,181

14 Net casualty insurance premiums 1304

15 Social security contributions 53,629

16 Other current transfers 11,797

17 Total (Items 10 to 15) 216,797

18 Disposable Income (Item 3 +Item - Item 17) 2,126,755

Table 8.9 Personal Disposable Income, Philippines, 1998 (in million pesos

Some Limitations of GDP or GNP as measures of growth

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