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Midterm Lesson 4 PDF

This document discusses key concepts in national income accounting including: - Measures of national income such as GDP, GNP, and per capita income which are used to measure economic performance. - GDP is the market value of all final goods and services produced domestically in a given year. - GNP includes the market value of domestic output plus income earned by domestic residents from foreign countries, minus income earned in the domestic economy by foreign residents. - Inflation can be measured using the GDP deflator, which is the ratio of nominal GDP to real GDP adjusted for price changes over time.

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76 views28 pages

Midterm Lesson 4 PDF

This document discusses key concepts in national income accounting including: - Measures of national income such as GDP, GNP, and per capita income which are used to measure economic performance. - GDP is the market value of all final goods and services produced domestically in a given year. - GNP includes the market value of domestic output plus income earned by domestic residents from foreign countries, minus income earned in the domestic economy by foreign residents. - Inflation can be measured using the GDP deflator, which is the ratio of nominal GDP to real GDP adjusted for price changes over time.

Uploaded by

Joshua Cabinas
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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National Income

Accounting
ECON 3A. MACROECONOMICS
 Measures of National Income: all of which
measure economic performance of a nation

1. Gross National Product (GNP)


2. Gross Domestic Product (GDP)
3. Per Capita GNP
 Gross National Product

 Used by the National Economic and Development


Authority (NEDA); previously Gross National Product
(GNP)
 “… the market value…”
 Market prices – reflect the value of the goods

 “… of all…”
 All items produced in the economy
 And sold legally in markets
 Excludes most items
 Produced and consumed at home
 “… final…”
 Value of intermediate goods is already included in
the prices of the final goods
 “… goods and services…”
 Tangible goods & intangible services
 “… produced…”
 Goods and services currently produced
 Y = C + I + G + NX
Y = GNI
C = consumption
I = investment
G = government purchases
 NX = net exports (export - import)
 Consumption, C
 Spending by households on goods and services
 Exception: purchases of new housing
 Investment, I
 Spending on capital equipment, inventories, and
structures
 Household purchases of new housing
 Inventory accumulation
 Government purchases, G
 Government consumption expenditure and gross
investment
 Spending goods and services
 By local and national governments
 Does not include transfer payments
 Net Exports, NX = Exports – Imports
 Exports

 Spending on domestically produced goods by


foreigners
 Imports

 Spending on foreign goods by domestic residents


 Limitations of GNP

1. Excludes imports
2. Excludes intermediate goods
3. Excludes products not produced within the period of
time accounted
 Approaches:

1. Expenditure approach
2. Income approach
3. By Industrial Origin
Gross Domestic Product

 Refers to the market value of all final goods


and services produced within a country

 Often not used by developing nations


because many firms are foreign-owned
Per Capita Income

 Also known as income per person


 Mean income of people
 GNP or GDP / population

Per Capita GNP

 GNP / population
Example:
Coffee Pandesal
Year Price Quantity Price Quantity
2012 Php 10 400 Php 2.00 1,000
2013 11 500 2.50 1,100
2014 12 600 3.00 1,200

Compute nominal GDP in each year: Increase:


2005: 10 x 400 + 2 x 1000 = 6,000
2006: 11 x 500 + 2.50 x 1100 = 8,250
} 37.5%
2007: 12 x 600 + 3 x 1200 = 10,800 } 30.9%
Example:
Coffee Pandesal
Year Price Quantity Price Quantity
2012 Php 10 400 Php 2.00 1,000
2013 11 500 2.50 1,100
2014 12 600 3.00 1,200

Compute real GDP in each year:


using 2012 as the base year: Increase:
2005: 10 x 400 + 2 x 1000 = 6,000
2006: 10 x 500 + 2 x 1100 = 7,200
} 20.0%
2007: 10 x 600 + 2 x 1200 = 8,400 } 16.7%
B. Inflation

 Refers to the increase in the overall level of


prices

 Can be measured using the GDP deflator

 GDP deflator – measure of the overall level of


prices
 Definition:
GDP deflator = nominal GDP X 100
real GDP

 One way to measure the economy’s inflation rate is to


compute the percentage increase in the GDP
deflator from one year to the next.
Real versus Nominal GDP

 The GDP deflator


 Ratio of nominal GDP to real GDP times 100
 Is 100 for the base year
 Measures the current level of prices relative to the
level of prices in the base year
 Can be used to take inflation out of nominal GDP
(“deflate” nominal GDP)
Real versus Nominal GDP

 Inflation
 Economy’s overall price level is rising
 Inflation rate
 Percentage change in some measure of the price
level form one period to the next

Inflation in year 2
= GDP deflator in year 2 – GDP deflator in year 1 X 100
GDP deflator in year 1
Example:
Year Nominal Real GDP GDP Deflator
GDP
2005 6,000 6,000 100.0
} 14.6%
2006 8,250 7,200 114.6
} 12.2%
2007 10,800 8,400 128.6
Compute real GDP in each year:
2005: 100 x (6,000/6,000) = 100.0
2006: 100 x (8,250/7,200) = 114.6
2007: 100 x (10,800/8,400) = 128.6
Expenditure Approach

1. Personal Expenditures (C) P XXXXX


2. Gross Domestic Capital Formation or Investment (I) XXXXX
3. Government Expenditures (G) XXXXX
4. Net Exports (X – M) XXXXX
5. Statistical Discrepancy (SD) P XXXXX
Gross Domestic Product (GDP) XXXXX
6. Net Factor Income (NFY) XXXXX
Gross National Product (GNP) P XXXXX

For easy recall:


C + I + G + (X - M) ± NFY = GNP
Notes: Expenditure Approach

 The government has a share in domestic capital formation

 Government consumption expenditures are for non-capital goods

 Net increase in stocks – differences in inventory systems


1. Inflows may not entirely consist of final goods. Deducting
inventory outflows cancels out the portion that should be
excluded.
2. Some goods sold initially as final are attributed to the production
of previous goods, and should not form part of the present GNP
Notes: Expenditure Approach

 Net Foreign Factor Income – difference between the aggregate


flow of factor payments from and to the rest of the world

 Statistical Discrepancy – account to even out the practical


differences between the figures arrived at by the two alternative
approaches
Income Approach

1. Income of Persons (PY) P XXXXX


2. Corporate Income (CY) XXXXX
3. Government Income from Capital (GY) XXXXX
National Income (NI) XXXXX
4. Indirect Tax (IT) P XXXXX
Less: Subsidies XXXXX XXXXX
5. Capital Consumption Allowance or
Depreciation Allowance (DA) XXXXX
Gross National Product (GNP) P XXXXX

For easy recall:


PY + CY + GY = NI + (IT - S) + DA = GNP
Notes: Income Approach

 Essential features:
1. Direct payments to resource owners factors
2. Resource owners contribute to transform products into higher
forms
3. Excludes imports and previously produced inventories
Other Concepts of NI Accounting

 National Product – market value of final products equal to GNP less


depreciation

 National Income – income earned by factor owners and equal to


NNP less indirect taxes, taxes on production

 Personal Income vs. national income


 Personal income – earned by persons or households
 national income – non-personal accounts such as corporate taxes,
undistributed profits, and government entrepreneurial income
Other Concepts of NI Accounting

 Personal income = NI – (S + T + GI) + TP


 Where: PI = personal income; NI = net income; S = undistributed profits or
corporate savings; T = corporate taxes; GI = government entrepreneurial
income; TP = transfer payments

 According to source: PI = W + D + E + TP
 Where W = wages; D = dividends or distributed profits; E =
entrepreneurial and property income of persons
 W + D + E all represent production or economic income of persons
Industrial Origin Approach

1. Agriculture (A) P XXXXX


2. Industry (I) XXXXX
3. Services (S) XXXXX
Gross Domestic Product (GDP) XXXXX
4. Net Factor Income (NFY) P XXXXX
Gross National Product XXXXX

For easy recall:


A + I + S = GDP + NFY = GNP

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