CHAPTER 4CHAPTER 4 ““National income National income accounting”accounting”

Actual data are presented to help Actual data are presented to help illustrate how actual results can be illustrate how actual results can be interpreted and trace to some interpreted and trace to some underlying factors which are reader underlying factors which are reader should understand more as the should understand more as the course progresses. course progresses.

A)A) GNP accounting: Meaning, GNP accounting: Meaning, Purpose and Limitations:Purpose and Limitations:

MEANINGMEANING

(GNP) Gross National Product(GNP) Gross National Product- Market value of all final products - Market value of all final products

produced by the resources of the economy produced by the resources of the economy during a specified period of time.during a specified period of time.

Three important limitations to zero in on the Three important limitations to zero in on the identification of final productsidentification of final products

First,First,Excludes products not produced by the Excludes products not produced by the

resources of the economy as imports.resources of the economy as imports.

SecondSecond,,Definition only includes those products Definition only includes those products

that that can no longer be use for higher stages can no longer be use for higher stages of of production and therefore, have reached production and therefore, have reached the the highest level of transformation using the highest level of transformation using the economy’s economy’s resources.resources.

Products can be considered final once Products can be considered final once they flow directly from the producing units to they flow directly from the producing units to consumption, the government and the rest of consumption, the government and the rest of the the world. world.

Third,Third,

Limitation is time and the definition Limitation is time and the definition eliminates from the aforementioned those eliminates from the aforementioned those not produced by the economy within the not produced by the economy within the period of time accounted.period of time accounted.

PURPOSE AND LIMITATIONSPURPOSE AND LIMITATIONS

GNP reflects the value of the economy’s GNP reflects the value of the economy’s production since it also includes the value of production since it also includes the value of products from the lower stages of production.products from the lower stages of production.

GNP camera is a formal tool which GNP camera is a formal tool which cannot picture the informal and hence, cannot picture the informal and hence, undeclared activities in the economy.undeclared activities in the economy.

Economic activities of a cigarette vendor Economic activities of a cigarette vendor is undeclared and unrecorded. “underground is undeclared and unrecorded. “underground economy” economy”

B)B) GNP Accounting: GNP Accounting: Expenditure ApproachExpenditure Approach

1. Framework:1. Framework:

a. Consumptiona. Consumption

b. Governmentb. Government

c. Investment = consist of c. Investment = consist of capital capital goods and goods and inventoriesinventories

d. Rest of the world otherwise d. Rest of the world otherwise known as exportsknown as exports

1.1. Application: (TABLE 6)Application: (TABLE 6)

The government has a share The government has a share in in Gross Domestic FormationGross Domestic Formation which are which are capital goodscapital goods..

- - Government consumption Government consumption expendituresexpenditures are for are for non-capital goodsnon-capital goods used to maintain the operations of the used to maintain the operations of the bureaucracy.bureaucracy.

- Net increase in stock is the difference - Net increase in stock is the difference between the between the aggregate flow of goodsaggregate flow of goods (+) and from (+) and from (-) the (-) the inventory systeminventory system..

- - Net Foreign Factor incomeNet Foreign Factor income is the difference is the difference between the between the aggregate flow of factor paymentaggregate flow of factor payment from from (+) and to (-) the (+) and to (-) the rest of the world.rest of the world.

- The - The inflow (+) is likened to exportsinflow (+) is likened to exports as it as it consists of payments for the use of the economy’s consists of payments for the use of the economy’s resources in the rest of the world like resources in the rest of the world like remittances remittances of Filipinos working in the Middle Eastof Filipinos working in the Middle East, , profit profit remittances of Filipinos investment and the likeremittances of Filipinos investment and the like..

- The outflow (-) is likened to - The outflow (-) is likened to importsimports as as it it consist of payment for economy’s use of consist of payment for economy’s use of foreign resourcesforeign resources like like profit remittances of profit remittances of foreign multinational companies to their foreign multinational companies to their mother countries for their investments in the mother countries for their investments in the Philippines.Philippines.

- - Statistical DiscrepancyStatistical Discrepancy is a theoretical is a theoretical account use to even out of the practical account use to even out of the practical differences between the figures arrived at by differences between the figures arrived at by the two alternative approaches to GNP the two alternative approaches to GNP accounting.accounting.

- In Table 6, the share in GNP of - In Table 6, the share in GNP of Personal Consumption Expenditures Personal Consumption Expenditures decreased from decreased from 65.5% in 200065.5% in 2000 to to 64.4% 64.4% in 2002in 2002 as more money was spent for as more money was spent for Government Consumption Expenditure, Government Consumption Expenditure, Gross Domestic Capital FormationGross Domestic Capital Formation, and , and Exports.Exports. The potential of the economy to The potential of the economy to produce and support consumption produce and support consumption through investment and imports as through investment and imports as sourced from exports gradually sourced from exports gradually increased.increased.

2000 2001 20022000 2001 2002

1.1. Personal Consumption Expenditure 2335535 2565022 2750853 Personal Consumption Expenditure 2335535 2565022 2750853

2.2. Government Consumption Expenditure 438853 444834 488740 Government Consumption Expenditure 438853 444834 488740

3.3. Gross Domestic Capital Formation 710073 758460 776191Gross Domestic Capital Formation 710073 758460 776191

A. Fixed Capital Formation 710489 720702 774078 A. Fixed Capital Formation 710489 720702 774078

B. Increase in Stock -416 37758 2113 B. Increase in Stock -416 37758 2113

4.4. Exports of Goods and Services 1858576 1785232 1963534 Exports of Goods and Services 1858576 1785232 1963534

5.5. Less: Imports of Good & Non-Factor 1794717 1899385 19891046 Less: Imports of Good & Non-Factor 1794717 1899385 19891046

6.6. Statistical Discrepancy -93598 19524 27480 Statistical Discrepancy -93598 19524 27480

Expenditures on Gross Domestic Product 3354727 3673687 Expenditures on Gross Domestic Product 3354727 3673687 4022694 4022694

Net factor Income from Abroad 211332 244992 Net factor Income from Abroad 211332 244992 267505 267505

Expenditures on Gross national Product 3566059 3918679 4290199 Expenditures on Gross national Product 3566059 3918679 4290199

Gross National Product (Million U.S Dollars) 80691 76848 Gross National Product (Million U.S Dollars) 80691 76848 83138 83138

Table 6Table 6GROSS NATIONAL PRODUCT (GNP) BY GROSS NATIONAL PRODUCT (GNP) BY

EXPENDITURE for periods indicated (in million EXPENDITURE for periods indicated (in million pesos, at current prices)pesos, at current prices)

C)C) GNP Accounting: GNP Accounting: Income Approach Income Approach

1.1. Framework:Framework:

GNP is equal to the additive GNP is equal to the additive values of factors contributions in the values of factors contributions in the process of transforming products into process of transforming products into their final forms.their final forms.

3 Essential Features which are the pillars 3 Essential Features which are the pillars of the approach:of the approach:1. Direct payment of the producing units to the 1. Direct payment of the producing units to the

resource owners represent the latter’s direct resource owners represent the latter’s direct contributions to production otherwise known as contributions to production otherwise known as factor contributions.factor contributions.

2. Additives values of the products in the whole 2. Additives values of the products in the whole production process.production process.

3. Built in mechanism to excludes imports and 3. Built in mechanism to excludes imports and previously produced inventories but include previously produced inventories but include currently produced inventories.currently produced inventories.

Factor contributions result from the use of land, Factor contributions result from the use of land, labor, capital and entrepreneurship with rent, labor, capital and entrepreneurship with rent, wages and salaries, interest and profit as their wages and salaries, interest and profit as their respective payments.respective payments.

2. Applications:2. Applications:GNP figures can be presented using GNP figures can be presented using

the income approach.the income approach.

• • Statistical DiscrepancyStatistical Discrepancy - Any practical difference is evened - Any practical difference is evened

out by the theoretical account of in the out by the theoretical account of in the expenditure approach.expenditure approach.

• • Capital Consumption AllowancesCapital Consumption Allowances- - Depreciation represent payments to Depreciation represent payments to

the resources owners for the consumption of the resources owners for the consumption of capital goods in the production process and capital goods in the production process and likewise considered as factor contribution.likewise considered as factor contribution.

The approach also includes Government Income from Property and Entrepreneurship since the government enterprises concerned are part of the production system and produces private goods and services.

On the other hand, Subsidies, are excluded since they only bloat profits and product values and do not entail production and factor contributions

3. Factor Contributions by Sector (Industrial Origin)

The Table 7 shows that the manufacturing and commercial sectors are among the heavy contributors to the economy’s production.

The share of the manufacturing sector alone, as outstripping that of agriculture, Fishing, and Forestry combines, indicated the leanings of the economy toward industrialization

Gross National Product (GNP) by Industrial Origin for periods indicated (in million pesos, at current prices

1.

D)D) Other concepts of National Other concepts of National Income Accounting Income Accounting

1.1. Net National Product and National Net National Product and National Income:Income:

• • Net National Product (NNP)Net National Product (NNP)

- value foe a more accurate - value foe a more accurate accounting of the economy’s final products accounting of the economy’s final products which is equal to GNP les Depreciation.which is equal to GNP les Depreciation.

• • National Income (NI)National Income (NI)

- Income earned by the factor - Income earned by the factor owners and equal to NNP, less indirect taxes, owners and equal to NNP, less indirect taxes, levied on production and not on income.levied on production and not on income.

2. Personal Income:2. Personal Income:• • Personal Income (PI)Personal Income (PI)

- Income earned by persons or - Income earned by persons or households. households.a. corporate taxesa. corporate taxesb. undistributed profitb. undistributed profitc. government entrepreneurial c. government entrepreneurial

incomeincome- Transfer payments from the - Transfer payments from the

government and the rest of the world like government and the rest of the world like pensions from the Philippines pensions from the Philippines Government, money sent by relatives Government, money sent by relatives from U.S and the like.from U.S and the like.

PI = NI – (S + T + GI) + TPPI = NI – (S + T + GI) + TP

Where:Where:

PI = Personal IncomePI = Personal Income

NI = National IncomeNI = National Income

S = Undistributed Profits or S = Undistributed Profits or

Corporate SavingsCorporate Savings

T = Corporate TaxesT = Corporate Taxes

GI = Government Entrepreneurial GI = Government Entrepreneurial IncomeIncome

TP = Transfer PaymentsTP = Transfer Payments

Personal Income is alternatively Personal Income is alternatively expressed according to source, as expressed according to source, as follows:follows:

PI = W + D + E + TPPI = W + D + E + TP

Where additionally:Where additionally:

W = Wages and SalariesW = Wages and Salaries

D = Dividends of Distributed D = Dividends of Distributed Profits Profits

E = Entrepreneurial and E = Entrepreneurial and Property Property Income of PersonsIncome of Persons

3. Disposable Income and Consumption:3. Disposable Income and Consumption:• • Disposable Income (DI)Disposable Income (DI)

-- Personal income available for Personal income available for consumption as it excludes consumption as it excludes Personal taxes.Personal taxes.- Consumption is equal to - Consumption is equal to disposable income (DI) less disposable income (DI) less savings (S).savings (S).

DI = PI – PTDI = PI – PTC = DI – PSC = DI – PS

therefore:therefore:C = PI - PT - PSC = PI - PT - PS

Where:Where:

DI = Disposal IncomeDI = Disposal Income

C = ConsumptionC = Consumption

PI = Personal IncomePI = Personal Income

PT = Personal TaxesPT = Personal Taxes

PS = Personal SavingsPS = Personal Savings