INCOMENational

• Measured by the total earnings of the factors of production owned by its citizens or by the total market value of all final goods and service produced by its citizens.

Definition

The Circular Flow of Goods, Service and Money

• These productive factors are land, labor, capital and entrepreneurship.

• The sum of all these factor payment is known as

the national income..

• Gross national product (GNP)- the total market value of all final

goods and services produced by citizens in one year.

• Per capita income (PCI) - is income per head.

Definition

• PCI = National Income Population

• Per capita GNP = Gross national product

Population

Definition

• Gross domestic product – is the total market value of all final goods and service produced within the territories of all country.

• Money GNP – value of GNP at current price or market price.

Definition

• Real GNP – value of GNP in terms of the number of goods and services produced.

• Disposable Income – personal income

less personal taxes.

Definition

Income approach Wages+ Rents

+ Interest+ Profits

= National Income + Indirect taxes less subsides

+ Depreciation

= GNP

Ways of Calculating National Income

Ways of CalculatingNational Income

Product/Expenditure Approach

Industrial Origin Approach

Depreciation and Indirect Business Taxes

• Depreciation - an allowance for capital goods like machines which have been “consumed” in the process of production.

• Machine - depreciates not only because of prolonged use but also as a result of obscolescence or calamities. It then loses its value and must be replaced

Taxes• Indirect Business Tax– tax imposed by the government on

products sold by businessmen– businessmen pass on the consumers the

tax imposed on them by the government

• Tax - used to finance the programs and projects of the government

Let’s talk aboutG N P

• IncludedOnly the final goods and

services• Excluded

-intermediate goods-non productive transaction-resale transaction

To avoid Double Counting

•Real GNP = actual economic

performance

Real GNP

• GNP = P * Q

Real GNP

Year Quantity Price GNP

1 100 ₱ 10 ₱ 10002 100 ₱ 20 ₱ 20003 100 ₱ 30 ₱ 30004 100 ₱ 40 ₱ 40005 100 ₱ 50 ₱ 5000

Real GNP

Real GNP = Money GNP X

100

Price Index

Year Quantity Price Price Index GNP Real GNP

1 100 ₱ 10 20 ₱ 1000 ₱ 5000

2 100 ₱ 20 50 ₱ 2500 ₱ 5000

3 100 ₱ 30 100 ₱ 5000 ₱ 5000

4 100 ₱ 40 150 ₱ 7500 ₱ 5000

5 100 ₱ 50 200 ₱ 10000 ₱ 5000

Price Index

= Price in any given year X

100

Price in base year

LIMITATION ofG N P

• Measurement of national economic performance• Tool in both government and

business planning• Yardstick of economic growth

of the different countries

Functions of GNP

1. It does not show the allocation of goods and services among the members of society.

2. GNP accounting in less developed countries is understated.

Limitations of GNP

3. The evils of economic growth are not reflected in the GNP.

4. GNP only measures the number of goods and services but not the quality of goods and services.

Limitations of GNP

5. Incomes or products from illegal sources are not included in the GNP.

Limitations of GNP

amount of money spent on goods and services which yield direct satisfaction.

CONSUMPTION

Income = Consumption plus saving

Y = C + S

S = Y – C

1.Distribution of National income.

2.Rate of interest. 3.The desire to hold cash. 4.Price level.

Factors Influencing Consumption

5. Population6. Income7. Taxes8. Attitudes and values

Factors Influencing Consumption

CONSUMPTIONFUNCTION

• The functional relationship between

income and consumption.

Consumption Function

• Average propensity to consume(APC)

• Marginal propensity to consume(MPC)

Y= C + S

Analyzed in two ways:

• Expenditure on new capital goods.

Capital Goods – produced goods w/c are used to produce other goods.

INVESTMENT

Remember !

TAX (incentives)

is always a concern for INVESTORS !!!

• Marginal efficiency of investment• Interest Rate – highest

interest rates discourage investments.

Determinants of INVESTMENT

• Population – more people more demand/ consumption.• Price Level – more supply for

higher prices.• Technology – improves

quality

Other Factors:

• Peace and order – encourages investments• Government policies –

fair policies and monetary laws.

Other Factors: (continued…)

SAVING

• Income which is not spent• Banks and other financial institutions• Funds for investment.

SAVING

• Investment exceeds saving

- more employment production income and consumption.

SAVING (continued...)

• Saving exceeds investment

- less employment production income and consumption.

SAVING (continued...)

•Multiplier - Effects of investment on income

• Accelarator- Effect of consumption on investment

SAVING (continued...)

- John Maynard Keynes- Attempt of consumers to save more will reduce saving

Paradox of Thrift

M u n o z , R a n z N i k k o

B a r c e l o n a , A n g e l y n

C a t a c u t a n , M a y A n n

L u c i d o s , A n a m a r i e

B u a l o y , R u b y R o s e

Q u i z o n , M a r i e l l e