national income accounting

NATIONAL INCOME ACCOUNTING

WHAT ARE THE MEANING OF THE ACRONYMS?

GDP GNP NI

CPI NFIA

NATIONAL INCOME ACCOUNTING• A system of statistics and accounts that keep

tracks of production, consumption, savings and investment – to track overall economic performance.

• A system to track

the overall

economic

performance of

a country

RELEVANCE OF NIA

Households Business FirmsGovernmentPolicy Makers

Initiate policies toAchieve sustainable

Economic growth

Make better life decisions

For sound business planningand sales forecasting

CIRCULAR FLOW OF GOODS AND SERVICES

Business Firms

Household

GOVERNMENTMarket for Factors

of productionMarket for Finished

Products

INCOME CONSUMPTION

TAX = GOV’T EXPEDITURES

SAVINGS

INVESTMENT

Land, labor, capital

Products, services

Rent, wages, interest

TAX = GOV’T EXPEDITURES

ECONOMIC

INDICATORS

DIFFERENCE OF GNP AND GDP• Gross Domestic Product (GDP) – the total

market value of all final goods and services produced within a country’s national borders in a year

• Gross National Product (GNP) – the total market value of all final goods and services that the country's citizens produced regardless of their location

Definition of Terms• “Market value of all final goods and services

produced

(a)Within a country - GDP or GNP?

(b)By permanent residents of a nation – GDP or GNP?

in a given period of time…”

Definition of Terms• “Market value” - refers to the current market

price of goods and services. It is expressed in money terms.

• “of all” - includes all items produced in the economy and sold legally in markets. It does not include those items sold illegally or those produced and consumed at home.

Definition of Terms• “final goods and services” - includes both

tangible goods and intangible services (doctor visits, house cleaning, etc). Whey you buy a CD, it is a good and its purchasing price is part of the GNP. When you hear a concert and you paid for the ticket, it is also counted in the GNP.

Definition of Terms

• “produced” - as explained in the difference between GNP and GDP, the word will refer to all the productivity of a country’s residents or nations, wherever he may be in the world.

• “In a given time” – usually measured quarterly,

semi-annually or annually.

Definition of Terms

“The total market value

of all

final goods and services produced

in a given period of time…”

NOMINAL AND REAL GNP

• NOMINAL GNP = based on prevailing price in the market

• REAL GNP = based on the price in a given base year (as determined by NEDA)

• Note: Nominal GNP is always higher than Real GNP because prices are always increasing

Previous GNP

Nominal vs Real GNP

Base Year Real GNP

• 2004 P12.5B• 2005• 2006• 2007• 2008

Nominal GNP

P 12.50B

12.95B

13.36B

13.73B

Nominal GNP is the sum value of all produced goods and

services at current prices.

Real GNP is the sum value of all produced goods and

services at constant prices.

APPROCHES TO GNP/GDP MEASUREMENT

1. FACTOR INCOME APPROACH

2. FINAL EXPENDITURE APPROACH

3. INDUSTRIAL ORIGIN APPROACH

FACTOR INCOME APPROACH

• To measure GNP, add nation’s income with nation’s production expenses

GNP = NI + IBT + CCA1. NATIONAL INCOME

All factors of production receives payment (ex. Rent for land, wages for workers, interest for capital, profit for entrepreneurs). All factor incomes combined result to the National Income (NI)

NI= CE + EI + CI + GI

COMPONENTS OF NI

• Compensation of Employees (CE) = salaries, allowances, benefits

• Entrepreneurial Income (EI) = payment received by an owner of a business individual not classified as salaries

• Corporate Income (CI) = income of corporations intended for business expansion

• Government Income (GI) = taxes, income of gov’t owned corporations, interest earned from government loans

Also included in the Income Approach:

• Capital Consumption Allowance (CCA) = fund intended for buying new machineries and facilities

• Indirect Business Taxes (IBT) = indirect taxes imposed on products and services

• Undistributed Corporate Profits

Discussion

In what way can you, students, do now to help in the increase of our GNP, if we

measure it using the income approach?

Discussion

In what way can you do now to help in the increase of our GNP, if we measure it using the income approach, when you

become professionals?

Any Reflections, Insights in relating

what is happening in your own life, or what is currently happening in our

country to the topic of GNP?

EXPENDITURE APPROACH

• Most common approach• Adding all final expenditures on goods and

services, contributions of inventories, value of exports, and deducting the value of imports.

• Exports are included in GDP because they are part of Philippine production. Imports are deducted because they are not part of Philippine production.

• Formula: GDP = C+I+G+X-M (See description of the components above in file National Income Accounting_hand-out.doc)

GDP = C + I + G + NE • C is private consumption in the economy.

(ex. Household expenditures on food, rent, medical expenses and so on but does not include new housing.

• I is defined as business investments in capital. (ex. Investment by a business, purchase of machinery and equipment, spending by households on new houses)

GDP = C + I + G + NE • G is the sum of government expenditures on final

goods and services.

(ex. Salaries, purchase of weapons for the military, and any investment expenditure by a government.

• NE are "net exports" in the economy: gross exports − gross imports. There is a fixed relation: NE = X − M. – X is gross exports. GDP captures the amount a

country produces, including goods and services produced for overseas consumption

– M is gross imports.

GROSS DOMESTIC PRODUCT AND GROSS NATIONAL PRODUCTBY EXPENDITURE SHARES:

IN MILLION PESOSAt Constant 1985 Prices

TYPE OF EXPENDITURE Q2 2006 Q2 2007Growth Rate

(%)

1. Personal Consumption Expenditure 247,830 262,719 6.0

2. Government Consumption 22,488 25,535 13.5

3. Capital Formation 53,233 57,575 8.2

4. Exports 162,595 169,420 4.2

5. Less : Imports 173,684 154,160 -11.2

6. Statistical Discrepancy 893 -24,242  

GROSS DOMESTIC PRODUCT 313,355 336,846 7.5

Net factor income from the rest of the world 31,946 37,247  

GROSS NATIONAL PRODUCT 345,301 374,093 8.3

Example: Actual Data

Any Reflections, Insights in relating

what is happening in your own life, or what is currently happening in our

country to the topic of GNP?

EXCLUSIONS AND LIMITATIONS OF GDP

Exclusions in GNP measurement

• Doesn't count unpaid labor, especially women's care work

• Doesn't count externalities - costs that are passed on to someone else. (Ex. polluting factory are able to pass on the cost of damage to health and the environment)

Exclusions in GNP measurement

• Does count negative goods (Ex. clean up of a toxic waste dump is counted in GNP)

• Ignores distribution, quality of life, equality, sustainability

• Ignores the depletion of non-renewable resources and environmental damage

GROSS NATIONAL PRODUCT

• The market value of all final goods, services and structures produced in a year by a country’s residents

• Measures the income of all

Filipino

• In a closed economy

(NO foreign sector)

GDP = GNP

CONCLUSION

RELEVANCE OF NIA

Households Business FirmsGovernmentPolicy Makers

Initiate policies toAchieve sustainable

Economic growth

Make better life decisions

For sound business planningand sales forecasting

REVIEW1. What is National Income Accounting?

What is National Income Accounting?

A system

to track

the overall economic performance

of a country

REVIEW1. What is National Income Accounting?

2. What is the difference of GNP from GDP?

DIFFERENCE OF GNP AND GDP• Gross Domestic Product (GDP) – the total

market value of all final goods and services produced within a country’s national borders in a year

• Gross National Product (GNP) – the total market value of all final goods and services that the country's citizens produced regardless of their location

REVIEW1. What is National Income Accounting?

2. What is the difference of GNP from GDP?

3. What is GNP computed at Real value?

What is Real GNP?

Real GNP is the

sum value of all produced

goods and services

at constant prices.

REVIEW1. What is National Income Accounting?

2. What is the difference of GNP from GDP?

3. What is GNP computed at Real value?

4. What is GNP computed at Nominal value?

What is Nominal GNP?

Nominal GNP is the

sum value of all

produced goods and services

at current prices.

REVIEW1. What is National Income Accounting?

2. What is the difference of GNP from GDP?

3. What is GNP computed at Real value?

4. What is GNP computed at Nominal value?

5. What are the 2 approaches in measuring GNP?

What are the two approaches in measuring the GNP?

• INCOME APPROACH measures by summing the income from

production and adding production expenses

GNP = NI + IBT + CCA

What are the two approaches in measuring the GNP?

• EXPENDITURE APPROACHmeasures by summing all final expenditures

on goods and services

GNP= G + P + B + (X – M) + NFIA + SD

REVIEW1. What is National Income Accounting?

2. What is the difference of GNP from GDP?

3. What is GNP computed at Real value?

4. What is GNP computed at Nominal value?

5. What are the 3 approaches in measuring GNP?

What approach is used here?

What approach is used here?

Compensation Income 110 MEntrepreneurial Income 50 MCorporate Income 15 MGovernment Income 22 MNational Income 197 MIndirect Business Taxes 5 MCapital Consumption Allowance 12 MGNP 214 M

THINK!

Does a higher GDP mean

a better standard of living?

REVIEW1. What is National Income Accounting?

2. What is the difference of GNP from GDP?

3. What is GNP computed at Real value?

4. What is GNP computed at Nominal value?

5. What are the 3 approaches in measuring GNP?

6. What are the exclusions in measuring GNP?

• Intermediate products

• Secondhand sales

• Non-market transactions

• Quality of life

• Composition of output

EXCLUSIONS AND LIMITATIONS OF GDP

What values do we need in order for our country to develop?

ASSIGNMENTCopy and Answer on a whole sheet of paper.

Due next meeting.

Part II: Essay “ What values do we need in

order for our country to develop?” (not less

than 10 sentences)