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National Income Accounting
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WHAT ARE THE MEANING OF THE ACRONYMS?
GDP GNP NI
CPI NFIA
NATIONAL INCOME ACCOUNTING• A system of statistics and accounts that keep
tracks of production, consumption, savings and investment – to track overall economic performance.
• A system to track
the overall
economic
performance of
a country
RELEVANCE OF NIA
Households Business FirmsGovernmentPolicy Makers
Initiate policies toAchieve sustainable
Economic growth
Make better life decisions
For sound business planningand sales forecasting
CIRCULAR FLOW OF GOODS AND SERVICES
Business Firms
Household
GOVERNMENTMarket for Factors
of productionMarket for Finished
Products
INCOME CONSUMPTION
TAX = GOV’T EXPEDITURES
SAVINGS
INVESTMENT
Land, labor, capital
Products, services
Rent, wages, interest
TAX = GOV’T EXPEDITURES
ECONOMIC
INDICATORS
DIFFERENCE OF GNP AND GDP• Gross Domestic Product (GDP) – the total
market value of all final goods and services produced within a country’s national borders in a year
• Gross National Product (GNP) – the total market value of all final goods and services that the country's citizens produced regardless of their location
Definition of Terms• “Market value of all final goods and services
produced
(a)Within a country - GDP or GNP?
(b)By permanent residents of a nation – GDP or GNP?
in a given period of time…”
Definition of Terms• “Market value” - refers to the current market
price of goods and services. It is expressed in money terms.
• “of all” - includes all items produced in the economy and sold legally in markets. It does not include those items sold illegally or those produced and consumed at home.
Definition of Terms• “final goods and services” - includes both
tangible goods and intangible services (doctor visits, house cleaning, etc). Whey you buy a CD, it is a good and its purchasing price is part of the GNP. When you hear a concert and you paid for the ticket, it is also counted in the GNP.
Definition of Terms
• “produced” - as explained in the difference between GNP and GDP, the word will refer to all the productivity of a country’s residents or nations, wherever he may be in the world.
• “In a given time” – usually measured quarterly,
semi-annually or annually.
Definition of Terms
“The total market value
of all
final goods and services produced
in a given period of time…”
NOMINAL AND REAL GNP
• NOMINAL GNP = based on prevailing price in the market
• REAL GNP = based on the price in a given base year (as determined by NEDA)
• Note: Nominal GNP is always higher than Real GNP because prices are always increasing
Previous GNP
Nominal vs Real GNP
Base Year Real GNP
• 2004 P12.5B• 2005• 2006• 2007• 2008
Nominal GNP
P 12.50B
12.95B
13.36B
13.73B
Nominal GNP is the sum value of all produced goods and
services at current prices.
Real GNP is the sum value of all produced goods and
services at constant prices.
APPROCHES TO GNP/GDP MEASUREMENT
1. FACTOR INCOME APPROACH
2. FINAL EXPENDITURE APPROACH
3. INDUSTRIAL ORIGIN APPROACH
FACTOR INCOME APPROACH
• To measure GNP, add nation’s income with nation’s production expenses
GNP = NI + IBT + CCA1. NATIONAL INCOME
All factors of production receives payment (ex. Rent for land, wages for workers, interest for capital, profit for entrepreneurs). All factor incomes combined result to the National Income (NI)
NI= CE + EI + CI + GI
COMPONENTS OF NI
• Compensation of Employees (CE) = salaries, allowances, benefits
• Entrepreneurial Income (EI) = payment received by an owner of a business individual not classified as salaries
• Corporate Income (CI) = income of corporations intended for business expansion
• Government Income (GI) = taxes, income of gov’t owned corporations, interest earned from government loans
Also included in the Income Approach:
• Capital Consumption Allowance (CCA) = fund intended for buying new machineries and facilities
• Indirect Business Taxes (IBT) = indirect taxes imposed on products and services
• Undistributed Corporate Profits
Discussion
In what way can you, students, do now to help in the increase of our GNP, if we
measure it using the income approach?
Discussion
In what way can you do now to help in the increase of our GNP, if we measure it using the income approach, when you
become professionals?
Any Reflections, Insights in relating
what is happening in your own life, or what is currently happening in our
country to the topic of GNP?
EXPENDITURE APPROACH
• Most common approach• Adding all final expenditures on goods and
services, contributions of inventories, value of exports, and deducting the value of imports.
• Exports are included in GDP because they are part of Philippine production. Imports are deducted because they are not part of Philippine production.
• Formula: GDP = C+I+G+X-M (See description of the components above in file National Income Accounting_hand-out.doc)
GDP = C + I + G + NE • C is private consumption in the economy.
(ex. Household expenditures on food, rent, medical expenses and so on but does not include new housing.
• I is defined as business investments in capital. (ex. Investment by a business, purchase of machinery and equipment, spending by households on new houses)
GDP = C + I + G + NE • G is the sum of government expenditures on final
goods and services.
(ex. Salaries, purchase of weapons for the military, and any investment expenditure by a government.
• NE are "net exports" in the economy: gross exports − gross imports. There is a fixed relation: NE = X − M. – X is gross exports. GDP captures the amount a
country produces, including goods and services produced for overseas consumption
– M is gross imports.
GROSS DOMESTIC PRODUCT AND GROSS NATIONAL PRODUCTBY EXPENDITURE SHARES:
IN MILLION PESOSAt Constant 1985 Prices
TYPE OF EXPENDITURE Q2 2006 Q2 2007Growth Rate
(%)
1. Personal Consumption Expenditure 247,830 262,719 6.0
2. Government Consumption 22,488 25,535 13.5
3. Capital Formation 53,233 57,575 8.2
4. Exports 162,595 169,420 4.2
5. Less : Imports 173,684 154,160 -11.2
6. Statistical Discrepancy 893 -24,242
GROSS DOMESTIC PRODUCT 313,355 336,846 7.5
Net factor income from the rest of the world 31,946 37,247
GROSS NATIONAL PRODUCT 345,301 374,093 8.3
Example: Actual Data
Any Reflections, Insights in relating
what is happening in your own life, or what is currently happening in our
country to the topic of GNP?
EXCLUSIONS AND LIMITATIONS OF GDP
Exclusions in GNP measurement
• Doesn't count unpaid labor, especially women's care work
• Doesn't count externalities - costs that are passed on to someone else. (Ex. polluting factory are able to pass on the cost of damage to health and the environment)
Exclusions in GNP measurement
• Does count negative goods (Ex. clean up of a toxic waste dump is counted in GNP)
• Ignores distribution, quality of life, equality, sustainability
• Ignores the depletion of non-renewable resources and environmental damage
GROSS NATIONAL PRODUCT
• The market value of all final goods, services and structures produced in a year by a country’s residents
• Measures the income of all
Filipino
• In a closed economy
(NO foreign sector)
GDP = GNP
CONCLUSION
RELEVANCE OF NIA
Households Business FirmsGovernmentPolicy Makers
Initiate policies toAchieve sustainable
Economic growth
Make better life decisions
For sound business planningand sales forecasting
REVIEW1. What is National Income Accounting?
What is National Income Accounting?
A system
to track
the overall economic performance
of a country
REVIEW1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
DIFFERENCE OF GNP AND GDP• Gross Domestic Product (GDP) – the total
market value of all final goods and services produced within a country’s national borders in a year
• Gross National Product (GNP) – the total market value of all final goods and services that the country's citizens produced regardless of their location
REVIEW1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
What is Real GNP?
Real GNP is the
sum value of all produced
goods and services
at constant prices.
REVIEW1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
What is Nominal GNP?
Nominal GNP is the
sum value of all
produced goods and services
at current prices.
REVIEW1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
5. What are the 2 approaches in measuring GNP?
What are the two approaches in measuring the GNP?
• INCOME APPROACH measures by summing the income from
production and adding production expenses
GNP = NI + IBT + CCA
What are the two approaches in measuring the GNP?
• EXPENDITURE APPROACHmeasures by summing all final expenditures
on goods and services
GNP= G + P + B + (X – M) + NFIA + SD
REVIEW1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
5. What are the 3 approaches in measuring GNP?
What approach is used here?
What approach is used here?
Compensation Income 110 MEntrepreneurial Income 50 MCorporate Income 15 MGovernment Income 22 MNational Income 197 MIndirect Business Taxes 5 MCapital Consumption Allowance 12 MGNP 214 M
THINK!
Does a higher GDP mean
a better standard of living?
REVIEW1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
5. What are the 3 approaches in measuring GNP?
6. What are the exclusions in measuring GNP?
• Intermediate products
• Secondhand sales
• Non-market transactions
• Quality of life
• Composition of output
EXCLUSIONS AND LIMITATIONS OF GDP
What values do we need in order for our country to develop?
ASSIGNMENTCopy and Answer on a whole sheet of paper.
Due next meeting.
Part II: Essay “ What values do we need in
order for our country to develop?” (not less
than 10 sentences)
