MEASURINGNATIONALINCOME

MEASURING NATIONAL INCOME

● Measuring national income involves quantifying the total value of all goods andservicesproduced within a
country's borders over a specific period. It provides an overviewof theeconomic activity and
productivity of a nation. Various methods can be used to measurenational income, but the most widely
used approach is through the calculation of GrossDomestic Product (GDP).

GDP
● Gross Domestic Product (GDP) represents the total market value of all final goodsandservices
produced within a country during a given time, typically a year. It includesthevalue of goods
and services produced by citizens and non-citizens alike, withinthecountry's borders.

GDP: A Measure Of the Nation’s Output

Total market value
Total market value refers to the combined value of all the assets or securities withinaspecific market or
sector. It represents the aggregate worth of all the individual componentswithin that market.

Final goods and services

● Final goods and services refer to products that are produced for direct consumptionor use by end
consumers. These goods and services are the ultimate output of theproduction process and are
intended for final use or consumption, rather than for further processing or resale.
● Final goods can be tangible or intangible. Tangible final goods include items suchasfood, clothing, cars,
and electronics that are physically consumed or used by individuals. Intangible final goods include
services such as healthcare, education, transportation, and entertainment. It's important to distinguish
final goods from intermediategoods. Intermediate goods are goods that are used in the production
process to createother goods or services. They are not meant for final consumption but are used as
inputsinthe production of final goods. For example, raw materials like steel and
woodusedtomanufacture a car would be considered intermediate goods.
● The distinction between final goods and intermediate goods is essential for measuringacountry's gross
domestic product (GDP), which is a measure of the value of all final goods and services produced
within a country's borders during a specific period. Intermediate goods are not included in GDP
calculations to avoid double-countingsincetheir value is already accounted for in the final goods and
services they contributeto.
Capital Good
● Capital goods are physical assets that are used in the production of other goodsor services. They are
durable and have a long life span, unlike consumer goods that areused directly by individuals.
Examples of capital goods include machinery, equipment, vehicles, buildings, and technology
infrastructure. Capital goods contribute to economicgrowth by improving productivity and efficiency in
 the production process.
Produced within the country
● "Produced within the country" refers to goods or services that are manufacturedor created
within the borders of a specific country. This means that the production process, including all
the necessary resources and labor, takes place within that country'sjurisdiction.
During a given period
● GDP is only concerned with new or current production. Old output is not countedintheGDP
of the current calendar year because it was already counted back at the timeit wasproduced.
We would again commit the error of double counting if we are to includethesales of used
goods in the computation of the current GDP. GDP ignores all transactionsin which money
or goods change hands but in which no new goods and serviceswereproduced.

The Expenditure Method in Measuring GDP

● According to the economists, there are 4 categories of economic players that usethegoods
and services that make up the GDP a year. Households, Firms, Governmentsand the
foreign sector ( the users of domestic products who are based inanother country)
● The total value of money that these groups spend on different goods and servicesshould
be equal to their market value.

GDP can measure using either one of two methods:

(1) By adding total market value of all final goods and services produced in a country
(2)By adding up the total value of money spent by households, firms,
governmentsandforeign sector on final goods and services and subtracting the money spent
to purchaseimported goods and services.

Note however, that the GDP values you have computed using the first method
shouldbethesame if and when you try computing the GDP using the second method.

" for what purpose"

It is all about the 4 components of expenditure: Consumption, Investment, government
purchases and net exports*( the income that the economy gets/ loses whenever it
undertakes international trading).

GDP per capital

● is the income per person in a certain country/city. Computed as Total GDPdividedbyTotal
Population.
Consumption Expenditure
● is the spending by household on goods and services such as food, clothing, andentertainment. (This
component constitutes the largest share of the nation's output aswell as the reason why local
consumption is one of the majors drivers of economicdevelopment in terms of GDP measure.
Investment
● spending by firms on final Goods and services, primarily capital goods . Also asumof expenditure on
equipment,structure,and inventories

Government purchases
● are the final goods and services bought by national government and local government units. This is
the sum of expenditures incurred by the government in providingsocial service to the people.

However that there are types of government purchases that are not includedinthiscomponent
called Transfer Payment.

Transfer payment
● are payments made by the government for which no current goods and servicesareproduced or
received.

Examples. Social security benefits, unemployment benefits and pension paid toretiredgovernment
workers.
"Conditional Cash Transfer" is an example in Philippines under the Pantawid PamilyangPilipino Program
by the Department of Social welfare Development.

Net exports
● are simply the difference between exports and imports which computed as Exportsminus Imports.

Exports
● are domestically produced of final goods and services that are sold abroad. Imports

● are purchases by domestic buyers of goods and services that were produced abroad.

If a country's net export is positive, it shows that its domestically produced goodsandservices are
demanded by other countries. However, if a country has negative net export, it
means that the country buys more from other countries instead of profiting fromits domesticproduction.

GDP and the Income of Capital labor

● There is a third way of GDP computation, which is the addition of the total incomeof capital and
labor.
● GDP is also the sum of all the labor income and capital income.

Labor income is the total wages, salaries, and incomes of the employed and self-employed in most
economies and this comprises 2/3 of the total GDP.

Capital labor is the total payments made to owners of physical capital, such as the rent paid, profits of
business owners who sell factories and machines, as well as royalty fees paid for copyrights and patents,
and is equal to 1/3 of the GDP.

Real GDP the GDP is computed using the prices of a base year and not the current year, asit
measures the real physical production of the year.

If the GDP is computed using the current prices is referred to as Nominal GDP.

GDP as a Country’s Report Card: A Measure of Economic Well-being

GDP use as a measure of economic well-being of a country that affects and influencespoints for
decision-making as regards formulation of sociot-economic policies, businessinvestments, and the level
of consumption.

The best way to further explain these connections is through a somewhat complicated illustration that
shows how GDP and its improvements are used to assess if the different sectors of the economy are
doing just fine and are improving at the same time.
We have been clear that the GDP is the total market value of the final goods and services produced
within a country during a given period Based on the diagram presented in this section, it shows that
GDP can only increase if there is an increase in the production of
goods and services produced by factors of production, specifically from the labor component
or increase in employment that will be caused by the desire of the firms to invest and put up
businesses in the country
Investments of both local and foreign businesses will not flourish and create additional
employment if and when an economy's infrastructure is inefficient and inadequate.
Asidefrom the labor factor, businesses need, roads, air and sea ports, affordable
andenoughsupply of utilities like power and energy, among others, to have an efficient flowof
businesstransactions. Without these variables, an economy would not be able to attract
additional investments that will eventually lead to stagnant level of employment, production,
andGDP. Moreover, there is a direct relationship between increase in infrastructure
projectsandincrease in businesses and employment. The more businesses and employment
establishedand created in an economy, the more sources of funds in the form of taxes the
government could use for infrastructure projects.
Infrastructure projects are both inputs and outputs in the economy. As discussedearlier,
infrastructure projects are inputs of an economy being considered by investors to
evaluatethe profitability of putting businesses in a country. Moreover, with new infrastructure
projects, additional employment is guaranteed during the construction, operation, and
maintenanceof such projects. At the same time, these are also outputs produced by the
economy. Recall that in the Expenditure Method of GDP computation, together with Table
7.1, infrastructureprojects are those under Government Purchases, like public roads,
bridges, terminals/ports, power/energy plants, and the like, and are thus included in the total
GDP for a particular period

GDP Does Not Capture it All

GDP does not really capture the entire story of the economic situation of a country for
thereare sociolect-economic factors that sometimes do not complement or support
GDPasthemeasure of its economic well- being. Reports on the GDP of a country do
givereadersupdates regarding the different sector of the economy. For example, the
Philippineshasbeen reported to be one of the fastest-growing economies in Southeast Asia.
Thiswasattributed to the increase in foreign direct investments, growth in expenditurefor
infrastructure projects, increasing employment rate, production growth of themajor
industries, and the like. However, we cannot ignore some socio-economic factsthat
somewhat do not translate and support the reported economic growth of thecountry.
According to 2018 Philippine records, 16.7% or 17.7 million Filipinos were living inpoverty.
(Philippine Statistics Authority, 2020). The international poverty line is at $1.90/
day(approximately Php 100/day) and over 22 million Filipinos still live below the
povertyRine(Ladrido, 2018). Moreover, as of 2015 alone, there are 20,785 persons living
ineverykilometer of land in the National Capital Region (Philippine Statistics Authority, 2016).
Thismeans that the region is increasingly becoming more congested, as a result of
theincreasing number of illegal settlers who usually hail from the provinces with the hopesof
abetter life and employment in the city. Finally, according to the Bureau of the Treasury
(2019) as of end-August 2019, the country's outstanding debt reached Php 7,939.08 billion,
whichmeans that each Filipino has a debt of around Php 73,442, which is very difficult
toimagineas there are more than 22 million Filipinos who even live in less than Php 100 per
day, let alone have thousands of pesos for a debt. We cannot see or even assume any of
thesedatajust by looking at the GDP without further research. This information does not
complement any of the reported growth about the economic standing of the country. One
might evenbecome confused and ask, "If the GDP is improving, then why do we still have a
highlevel of poverty incidence?" Therefore, it would be misleading to just depend on the
GDPas asoleinformation to evaluate and measure the economic well-being of a country.
Gross National Product: it's the owner, not the location
● Gross national product is the total market value of all final goods and services producedwithin a given
period by factors of production owned by a country's citizens, regardlessof where the output is
produced.
● the difference between GDP and GNP is that GNP includes the market valueof theproducts and
services produced by the country's citizens anywhere in the world.

Given this definition, a student of Economics, especially in the Philippines

1. The significant and increasing number of Overseas Filipino Workers or OFWs, together with the
astounding value of their remittances over the years; and

2. Local companies that are becoming globally competitive by establishing satellite factories, and
branches in foreign countries.

The salary and profits earned by these two local factors of production, because theyareeither citizens of
the Philippines or a Philippine company, both contribute to the PhilippineGNP.

C. Formula/Equation

Total Market Value:

(Shares or units x price) + (Shares or units x price)= total market value Ex. 15 AquaFlask

₱1000 per pc, 18 Mirror ₱30 per pc

(15x1000) + (18x30)=
15000+540= 15540

The relationship between GDP and Expenditures on goods and servicescanbeexpressed in

the following equation:
Y=C+I+G+NX
Y= gross domestic product
C= consumption expenditure
I= investments
G= government purchases
NX= net exports

Calculating the Real GDP

Ex.
2013 Real GDP = (2013 quantity of apples x 2010 price of apples) + (2013 quantityof oranges x 2010
price of oranges)
= (200 x Php 10) + (300 x Php 15)
= Php 6,500

References:
Jimenez, C.E. (2023). Managerial Ecoomics in the 21 Century, Quezon City; Rex BookStore, Inc.