Lecture 2 - National Income Accounts

8/12/2019 Lecture 2 - National Income Accounts

1/49

NATIONAL INCOME ACCOUNTS

Macroeconomics


2/49

THE ECONOMY AS A SYSTEM

System

A group of interrelated parts that work to achieve aparticular objective

Economy as a System Tackles the activities of the members of the society

in the production and distribution of wealth

Systematic Action

Orderly flow of components of a system toward the

attainment of an objective


3/49

THE ECONOMY AS A SYSTEM

Six Elements of Systematic Action

Needs

Objective

Limitations

Alternative Choices

Decision-making framework

Feedback mechanism


4/49

ECONOMICS

NEEDOBJECTIVE

LIMITATIONS

ALTERNATIVECHOICES

DECISIONMAKINGFRAMEWORK

FEEDBACKMECHANISM

EXAMPLE

How to feed its members

to increase its domestic production of food grains

inadequacy of wealth, social status, and lack of skills

and education of its human resources

use rain-fed system, farmer-intensive technique and

traditional seeds, use of modern technoloy, and

hybrid seed alternative

Optimization: what alternative will be the best choice

to address the need

Has the choice answered the need?


5/49

COMPONENTS OF AN ECONOMY

Actors, institutions, sectors who addresseconomic goals

Human Resources: Consumers, workers,

managers, capitalists, and leaders of thedifferent agencies in the government

Institutional: households, business and other

organizations, factories and industrial plants,government agencies, banks and financialinstitutions and union of workers


6/49

PRIMARY ECONOMIC GOAL: MATERIAL SURVIVAL

2 Important Tasks

Production Activities: arrangements of humans and

other resources, institutions, and sectors in

creating goods, services and resources from theutilization of the wealth of the conomy

Distribution Activities: illustrate how the allocation

and division of the goods, services, and resources

to the members of society are carried our for these

members to live and prosper materially


7/49

TASK OF PRODUCTION

What to produce?

Who will produce?

How will it be produced?

How much will be produced?

- Answering these production-related questions may

vary according to the limitations of the wealth of asociety, value system or the political system that asociety pursues


8/49

TASK OF DISTRIBUTION

For whom are the finished products going to be

allocated?

How will the finished products be divided

among the members of a society?

- Answering these distribution-related questions

may vary according to the limitations of

economic systems


9/49

SIMPLE CIRCULAR FLOW OF PRODUCTS, SERVICES AND MONEY

FIRMS

Market for FinancialGoods and Services

Households

Market for FactorInputs

rent, wages, interest, profit

land, labor, and capital Final goods and

services

Receipts on sale of final goods

and services

consumer goods

Payment for purchases of

final goods and services

Income from factor inputs

Factor inputs

SAVINGS

capital

goods

invest-

ment


10/49

CIRCULAR FLOW ANALYSIS ASSUMPTIONS

The economy is stationary or is not growing

Constant flow of money

Constant flow of products and services

Aggregate Demand, Aggregate Supply and Income

are constant


11/49


Expenditures of one sector is the income of

another sector


12/49


Total Income = Total Expenditures to attain

stability

Rent, Wage, Interest and Profits = Value of Final

Goods and Services

Equilibrium Scenario:

Value of Final Goods and Services (Total Expenditures) = Php

2500 (i.e. 500 units @ Php 5 each)

Rent, Wages, Interest and Profits (Total Income) = Php 2500 (i.e.5 workers @ Php 250 each)

Php 2500 = Php 2500


13/49



stability

What happens if theres disequilibrium?

Total Expenditures > Total Income

Assumption: Economy is not growing (constant)

Expected Demand: 1000 units (from 500 units) @ Php 5 each =

Php 5000

Expected Additional Demand: 500 units @ Php 5 each (EXCESS

DEMAND) = Php 2500

To get rid of the excess demand because the economy is assumed

to be constant, prices of the goods/services should increase.

However, in normal conditions, to address the excess demand, the

production of goods and services can be increased but factor

inputs (i.e. labor) should also increase. (creates employment)


14/49



stability

What happens if theres disequilibrium?

Total Expenditures < Total Income

Assumption: Economy is not growing (constant)

Expected Demand: 250 units (from 500 units) @ Php 5 each = Php

1250

Expected Decrease in Demand: 250 units @ Php 5 each (LACK OF

DEMAND) = Php 1250

To boost demand because the economy is assumed to be

constant, prices of the goods/services should decrease.

However, in normal conditions, to address the lack of demand, the

production of goods and services can be decreased but factor

inputs (i.e. labor) should also decrease. (creates unemployment)


15/49


Savings and Investments are equial in

equilibrium

Y = Z

C + S = C + IS = I

Y = Total Income

Z = Total Expenditures

C = Consumption ExpendituresS = Savings

I = Investment Expenditures


16/49

EXPANDED CIRCULAR FLOW OF PRODUCTS, SERVICES AND MONEY

FIRMS

Market for FinancialGoods and Services

Households

Market for FactorInputs

rent, wages, interest, profit

land, labor, and

capital

Final goods and

services

Receipts on sale of final goods

and services

consumer goods

Payment for purchases of

final goods and services

Income from factor inputs

Factor inputs

SAVINGS

capital

goods

invest-

ment

Government

Business taxes

Transfer payments

land, labor, and

capital

rent, wages,

interest, profit

govt

expenditures

public goods

and services


17/49

NATIONAL INCOME ACCOUNTING

primary means of measuring production and

distribution activities in an economy

Gross Domestic Product (GDP)

Gross National Product (GNP)


18/49


Circular Flow and Measuring National Income

Measure of national production: summation of

value of all final goods and services in the final

goods market

VALUE OF THE FINAL GOODS and SERVICES =

MONETARY VALUE OF COSTS OF PRODUCTON


19/49


Concept of Value Added

FINAL GOODS and SERVICES commodities have

undergone their final processing and

transformation within the economy and have endedup with buyers that use them for final demand or

disposition like consumption demand by

households and investment demand by firms


20/49



VALUE ADDED increase in value in a finished

product after undergoing processing and

transformation using various factor inputs

Can be measured as the total value of the product

in the value of raw materials used


21/49




22/49



Value of Bibingka = Value added of palay

+ Value added of polished rice

+ Value added of galapong

+ Value added of bibingka

ABJI = ABCD + DCFE + EFHG + GHJI

* if value of final goods is combined with the value of intermediate inputs,

there will be an overestimation


23/49



Total Value of a final product = Production Costs

Production Costs Value of raw materials and the

payments for factor inputs

Value of final goods = sum of the total salary paid

to the workers, rent paid to the owners of the land,

interest paid to the owners of capital and profits forentrepreneurs and owners in producing the

finished products.


24/49


Components of Final Demand and Total

Expenditures

Economic activities level of demand of different

sectors

Consumption expenditures

Investment expenditures

Government expenditures

Net Exports


25/49


Alternative Methods of National Income

Accounting

Industrial Origin Approach

Factor Income Approach

Final Expenditures Approach


26/49



Accounting


Adding the value added of all industries and economic

sectors of the country in a particular period

Payments by all industries to the owners of factor inputs

that were used in the production process (wages, rent,

interest and profit)

Sum of all factor payments = NATIONAL INCOME OR NET

DOMESTIC PRODUCT AT FACTOR PRICES = Sum of all

income of owners of production in the entire economy


27/49



Accounting


Industries Agricultural (agriculture, fishing and forestry)

Industrial (mining, manufacturing, construction, electricity, gas

and water)

Service (transportation, communication, finance, commerce and

other services

GDP at market prices sum of final goods and services producedwithin the economy in a particula year valued when they were

disposed at the market and does not account for the loss of other

wealth or capital in the process of production


28/49


Industry 2005a

I. AGRICULTURE, FISHERY AND FORESTRY 777,064

A. Agriculture and Fishery 774,514

B. Forestry 2,551

II. INDUSTRY SECTOR 1,747,495

A. Mining and Quarrying 63,639

B. Manufacturing 1,262,073

C. Construction 225,116

D. Electricity, Gas, and Water 196,668

III. SERVICE SECTOR 2,894,280

A. Transportation, Communication and Storage 413,317

B. Trade 776,949

C. Finance 263,724

D. Ownership of Dwellings and Real Estate 320,544

E. Private Services 721,468

F. Government Services 398,277

GROSS DOMESTIC PRODUCT 5,418,839

Net Factor Income From Abroad 457,459

GROSS NATIONAL PRODUCT 5,876,298


29/49



Accounting


NFIA

Income earned by Filipino National who own factor inputs

abroad Income earned by Foreigners from their factor inputs

in the Philippines

GNP: value of total production contributed by the citizens

of the country produced both domestically and abroad


30/49



Accounting

Factor Income Approach

Estimation of national income based on the income

received by various owners of productive inputs

regardless of which productive sector they were earned.

Composed of the total income earned by the owners of

land, capital, labor and other resources

This method is not anymore used in the Philippines


31/49



Accounting


Adds up all the expenditures on the final goods and

services made by various major categories of demand

Sectors that dispose the final goods and services

Households, businesses, government, external


32/49



Accounting


CONSUMPTION (C)

an activity pursued by individuals in disposing the final goods

and services produced by the economy to provide enjoyment

the sum of all consumers spending

Durable: vehicles, appliances Non-Durable: food


33/49



Accounting


CONSUMPTION (C)

Factors Affecting Consumption

TASTE preference of individuals for present goods against

future goods

SOCIOECONOMIC STATUS number of household members, agegroup, educational attainment and the employment status of

the head of the family


34/49



Accounting


CONSUMPTION (C)


INTEREST RATE can be viewed as the price of present goods

relative to future goods

WEALTH income TAXES decisions are based on disposable income

Disposable Income = Personal Income Less Income Taxes


35/49



Accounting


CONSUMPTION (C)


POPULATION the number of people in the economy

INCOME DISTRIBUTION

INFLATION RATE rapid increase in the prices of goods andservices

EXPECTATIONS

INCOME current income, future income, permanent income


36/49



Accounting


INVESTMENT (I)

capital accumulation

expenditures that increase the capital stock of an individual,

firm and economy

dependent on interest rates (r) If r is high, I is low

If r is low, I is high


37/49



Accounting


Government Expenditures (G)

Two (2) Categories

Expenditures on Current Consumption

Expenditures on Investments


38/49



Accounting



Two (2) Categories

Expenditures on Current Consumption

Expenditures for the Operations of Various Government Agencies

Transfer Payments (i.e. Pension, Subsidies) Debt Payments


39/49



Accounting



Two (2) Categories

Expenditures on Investments

Increase the capital stock of the society

Constructions of school buildings, hospitals, public markets, roadsand bridges, airports and other physical infrastructures


40/49



Accounting



are financed by Taxes (T)

Tax a mandatory contribution enforced on citizens by the

government


41/49



Accounting




Classification:

According to the subjects to be taxed:

a. Personal Tax imposed on people living in a specific territory(i.e. residence tax)

b. Property Tax based on the physical wealth owned by persons

that may be personal of real

c. Excise Tax receipt of inheritance (i.e. estate tax, donors tax)


42/49



Accounting




Classification:

According to the objective:

a. General Tax revenues to finance its operations b. Specific Tax - to control or discourage an activity


43/49



Accounting




Classification:

According to the scope:

a. National Tax national level (i.e. Income tax) b. Local Tax - city, municipality and barangay level (i.e. Community

tax)


44/49



Accounting


Government Expenditures (G) are financed by Taxes (T)

Classification:

According to the value:

a. Specific Tax based on the number or weight of a commodity b. Ad Valorem Tax - percentage of the value of goods and services

that is taxable


45/49



Accounting



Classification:

According to the tax burden:

a. Direct Tax the person who is supposed to pay the tax will bearthe tax burden

b. Indirect Tax - the person who is supposed to pay the tax can

transfer the tax burden to others (i.e. VAT)


46/49



Accounting



Classification:

According to the rate of increase of taxation:

a. Progressive Tax tax rate increases with an increase in thetaxable amount

b. Regressive Tax- taxes whose tax rate decreases as the income

of the taxpayer increases

c. Proportional Tax has a fixed rate based on the value of the

taxable commodity


47/49



Accounting



Goal: G = T Balanced BudgetG > T Budget DeficitG < T Budget Surplus


48/49



Accounting


NET EXPORTS (X-M) External sector

The amount by which foreign spending on a home country's

goods and services exceeds the home country's spending on

foreign goods and services.

International Trade


49/49



Accounting


NET EXPORTS (X-M) Goal: X = M Balanced Trade

X < M Trade Deficit

X > M Trade Surplus

Documents

Lecture 2 - National Income Accounts