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National Income Accounting

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Title: National Income Accounting


1
National Income Accounting
  • Economics 11- UPLB
  • Department of Economics, CEM

2
National income accounting (NIA)
  • is the measurement of indicators of national
    output/income .e.g. GDP, GNP

3
Circular flow diagram
  • summarizes the transactions between the different
    economic agents
  • agents households, firms (business), government,
    and foreigners (rest of the world)

4
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

5
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Revenue (GDP)
Spending (GDP)
MARKETS FOR GOODS AND SERVICES
Good and services sold
Good and services bought
HOUSEHOLDS
FIRMS
Land, labor and capital
Inputs for Production
MARKETS FOR FACTORS OF PRODUCTION
Income (GDP)
Wages, rent, interest and profit (GDP)
Flow of goods services
Flow of money pesos
THE CIRCULAR FLOW DIAGRAM
7
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

8
Circular flow diagram
  • Upper loop of the circular flow diagram
    transactions in the goods and services markets
  • Lower loop transactions in the factor markets

9
With government and foreign agents
  • Need to account for
  • Government purchases of goods and services.
  • Government payments for factor services (wages,
    rent, interest).
  • Transfer payments between different agents.
  • Firms and households pay taxes to government.
  • Taxes paid on income, property, goods and
    services.
  • Transactions with the foreign sector.

10
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.

11
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

12
Measurement of economys outputThe 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

13
Definition of GDP
  • The market value of good i (Vi) is equal to Pi?Qi
  • GDP sum of the market values of all final goods
    and services produced within the year.

14
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.

15
3 Approaches for measuring GDP
  • Expenditure Approach (upper loop) measures GDP
    as the sum of expenditures on final goods and
    services.
  • Income Approach (lower loop) measures GDP as
    the sum of incomes of factors of production
    (wages, rent, interest and profit.
  • Value-added Approach measures GDP as the sum of
    value added at each stage of production (from
    initial to final stage)

16
Expenditure Approach
  • Uses the upper loop of the circular flow diagram.
  • Example Suppose the economy has only one
    product, namely, rice.

17
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

18
Value Added Approach
  • Suppose that rice is the only final product of an
    economy It goes through several (3) stages of
    production.

19
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.

20
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

21
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

22
Table. Expenditures on GDP, 2002 in million pesos.
23
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
  • M - the 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

24
Income Approach
25
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

26
Value added or Industrial Origin approach
  • GDP value added of different activities
    (sectors)

27
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

28
The distinction between GDP and GNP
29
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

30
Table 8.5
31
  • 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)

32
Real GDP
33
Calculation of Real GDP
34
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35
TABLE A8.4. Weights used In the CPI, base year,
1994.
Source National Statistics Office
36
Inflation Rate
37
Table A8.5 Estimates of the CPI and Inflation
Rate, 1990-98
38
Real GDP at 1985 prices
39
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 countrys performance relative to
    its neighbors

40
Population growth is quite high, about about 3
per year in 1980s and 2.3 per year nowadays.
41
Per capita GDP
42
Modest and erratic growth in GDP plus high
population growth means the per capita GDP growth
is low.
43
TABLE 8.7. Selected output Indicators for the
Philippines, selected years
Source NSCB (1998), Philippine Statistical
Yearbook.
44
GNP for cross country comparisons
  • 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)

45
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

46
Exchange Rate 1988-2002
47
PER CAPITA GROSS NATIONAL INCOME, 2004 (US)
48
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TABLE 8.8. Economic indicators for selected
countries, 1998.
Source World Bank (1999), World Development
Report.
53
PHILIPPINES Key Economic Indicators, 2003
54
PHILIPPINES Average growth of regional GDP (in
1985 prices)
55
PHILIPPINES Share of National GDP
56
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.

57
Table 8.9 Personal Disposable Income,
Philippines, 1998 (in million pesos
58
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
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