Ch08 - National Income Accounting (1)

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National Income Accounting Greece:

National Income Accounting Greece Economics 11- UPLB Department of Economics, CEM

National income accounting (NIA) :

National income accounting (NIA) is the measurement of indicators of national output/income; .e.g. GDP, GNP

Circular flow diagram:

Circular flow diagram summarizes the transactions between the different economic agents agents: households, firms (business), government, and foreigners (rest of the world)

Circular flow diagram:

Circular flow diagram Assumption: The economy composed of households and firms only Households: own factors of production, consume goods and service Firms: hire factors of production to produce goods and services

PowerPoint Presentation:

FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between firms and households in a simple economy. In the upper loop, the arrow emanating from firms to households represents the sale by firms of goods and services to households. On the other hand, the arrow from households to firms represents the payments. n the lower loop, the arrow originating from the households to the firms shows that firms hire labor and capital from households in order to produce goods and services. The arrow emanating from the firms indicates their payments for the use of the factors of production. factor payments (wages, interest, rent, profit) factor services goods and services payments for goods and services HOUSEHOLDS FIRMS

PowerPoint Presentation:

MARKETS FOR FACTORS OF PRODUCTION MARKETS FOR GOODS AND SERVICES FIRMS HOUSEHOLDS Good and services bought Good and services sold Revenue (=GDP) Spending (=GDP) Inputs for Production Land, labor and capital Wages, rent, interest and profit (=GDP) Flow of goods & services Flow of money: pesos Income (=GDP) THE CIRCULAR FLOW DIAGRAM

Circular flow diagram:

Circular flow diagram Assumption: The economy composed of households and firms only Households: own factors of production, consume goods and service Firms: hire factors of production to produce goods and services

Circular flow diagram:

Circular flow diagram Upper loop of the circular flow diagram: transactions in the goods and services markets Lower loop: transactions in the factor markets

With government and foreign agents:

With government and foreign agents Need to account for : Government purchases of goods and services. Government payments for factor services (wages, rent, interest). Transfer payments between different agents. Firms and households pay taxes to government. Taxes paid on income, property, goods and services. Transactions with the foreign sector.

Transfer payments:

Transfer payments Transfer payments – are transactions wherein one party is not obliged to deliver a good or service in return for the payment. Examples: retirement benefits, unemployment benefits, scholarships, and donations .

Transactions with foreign sector:

Transactions with foreign sector Includes sales of goods and services, assets, and transfers Exports - sales of domestically produced goods to other countries Imports - goods bought from other countries

Measurement of economy’s output: The Gross Domestic Product (GDP):

Measurement of economy’s output: The Gross Domestic Product (GDP) The GDP measures the market value of all final goods and services produced within an economy in a given period. GDP only measures current production. Transfer payments and transactions involving goods produced in other periods are not included in the calculation of GDP. GDP is usually expressed in the currency of a particular country, e.g., Philippine peso….indicates the market value of the goods and services

Definition of GDP:

Definition of GDP The market value of good i (V i ) is equal to P i  Q i GDP = sum of the market values of all final goods and services produced within the year.

GDP includes final goods and services only:

GDP includes final goods and services only Final goods - goods and services that are not purchased for the purpose of producing other goods and services or for resale Eg. Rice (final) and palay or unhusked rice (intermediate product) Including intermediate goods and final goods will result in “double counting”.

3 Approaches for measuring GDP:

3 Approaches for measuring GDP Expenditure Approach (upper loop) – measures GDP as the sum of expenditures on final goods and services. Income Approach (lower loop) – measures GDP as the sum of incomes of factors of production (wages, rent, interest and profit. Value-added Approach – measures GDP as the sum of value added at each stage of production (from initial to final stage)

Expenditure Approach:

Expenditure Approach Uses the upper loop of the circular flow diagram. Example: Suppose the economy has only one product, namely, rice. Good Price per unit Q sold Expenditure Rice 20 1000 20,000 GDP 20,000

Income Approach:

Income Approach Uses the lower loop of the circular flow diagram: sum of payments to the various factors of production. Suppose that in the production of rice the sales and expenses are as follows: Sales P 20,000 Expenses: Wages 8000 Rent 4000 Interest 2000 Total 14,000 Profit 6,000 GDP=Sum of Payments to factors 20,000 P 20,000

Value Added Approach:

Value Added Approach Suppose that rice is the only final product of an economy: It goes through several (3) stages of production. Stage of Prod’n Value of intermediate good Value of Sales Value-added Farmer - Palay 12,000 12,000 Rice Miller -Milled Rice 12,000 15,000 3,000 Retailers - Rice 15,000 20,000 5,000 GDP= Total Value Added 20,000

Notes of the 3 approaches:

Notes of the 3 approaches The expenditure approach, income approach, and the value-added approach all come up with the same estimate of the GDP. They are equivalent approaches. In the income approach, profit is also considered a payment to the entrepreneur. So the incomes are (1) wages, (2) rent, (3) interest, and (4) profit. Profit adjusts to make the sum equal to the final value of the good. In the value added approach, only the value added in each stage of production are included. If we add the value of intermediate product with the value of the final product, we commit the sin of “double-counting.” At each stage of production, the value-added is equal to wages, interest, rent, and profit. Therefore the value of the final product is likewise the same of all payments to the factors of production.

Additional Topics:

Additional Topics GDP vs GNP Real vs current GDP Inter-country comparisons of GDP Convert to international currency like US dollars Convert to per capita measures


THE NATIONAL ACCOUNTS OF THE PHILIPPINES same principles as above but need to make adjustments in order to accommodate the realities in modern economies Expenditure approach GDP = C + G + I + X –M+ SD

Table. Expenditures on GDP, 2002 in million pesos.:

Table. Expenditures on GDP, 2002 in million pesos. Item Symbol Value Personal Consumption Expenditure C 2,750,9000 Government Consumption Expenditure G 488,700 Gross Domestic Capital Formation I 776,200 Exports of Goods and Services X 1,968,500 Less: Imports of Goods and Services M 1,989,100 Statistical Discrepancy SD 27,500 Gross Domestic Product GDP 4,022,700

Expenditure Approach:

Expenditure Approach C - spending of households and private non-profit institutions on goods and services Non-durables - goods and services that are consumed rapidly Durable goods - that last for a longer period of time I - investment spending of domestic agents. Its major components are “changes in” Fixed Capital and Changes in Stocks G - government’s payments for the salaries of its workforce as well as purchases of goods and services  used for the government’s day to day operations and projects. X - the spending of the rest of the world on goods and non-factor services produced in the country M - the country’s purchases of goods and non-factor services from the rest of the world. SD - accounts for accounting and reporting errors in the accounts. Needed to ensure that GDP value from all approaches are the same

Income Approach:

Income Approach ITEMS SYMBOLS VALUE Compensation of Employees COE 1,093,800 Net Operating Surplus NOS 2,215,100 Depreciation D 357,200 Indirect Business Taxes less Subsidies IBTS 356,600 Gross Domestic Product GDP 4,022,700

Income Approach:

Income Approach GDP = COE + NOS + D + IBTS In a simple world, GDP = COE + NOS. In practice, require two adjustments (D and IBTS) D - accounts for the wear and tear of physical capital “D” is treated as a business cost  not included in NOS. However, “D” is part of “I” in the expenditure side of the national accounts IBTS - includes taxes on the use or purchase goods and services and grants from government to firms. E. g sales taxes, value added tax Not included in NOS but is part of the market prices, of which the items in the expenditure accounts are quoted

Value added or Industrial Origin approach:

Value added or Industrial Origin approach GDP = value added of different activities (sectors) ITEM VALUE Agriculture, Fishery and Forestry 519,400 Industry 1,307,400 Services 2,123,900 Gross Domestic Product 4,022,700

The distinction between GDP and GNP:

The distinction between GDP and GNP GNP = GDP + Net Factor Income from the Rest of the World (NFIRW) NFIRW - measures the difference between the earnings of Philippine residents in other countries and foreign residents in the Philippines

The distinction between GDP and GNP:

The distinction between GDP and GNP Gross Domestic Product GDP 4,022,700 Net Factor Income from the Rest of the World NFIRW 267,500 Gross National Product GNP 4,290,200

Nominal and Real GDP :

Nominal and Real GDP GDP at current prices or nominal GDP - GDP measured using the prices of the year for which it is calculated Nominal GDP can be a misleading indicator of changes in output or income because it also embodies changes in the prices of goods and services. Real GDP or GDP at constant prices  measures the total value of output using the prices of a selected year (the base year). Real GDP better for analysis overtime because it eliminates the effects of price changes

Table 8.5:

Table 8.5 YEAR 1 YEAR 2 QUANTITY Ice Cream 100 100 Buko Pie 100 100 PRICE Ice Cream 50 100 Buko Pie 100 200 VALUE Ice Cream 5,000 10,000 Buko Pie 10,000 20,000 NOMINAL GDP 15,000 30,000

PowerPoint Presentation:

GDP year 1 = (100) (50) + (100) (100) = 15,000 GDP year 2 = (100) (50) + (100) (100) = 15,000 In practice, calculating real GDP using the previous approach is a tedious process because there are so many goods and services are produced in an economy. Can simplify the calculation process by using the GDP deflator. GDP deflator - a price index that allows us to convert nominal GDP into real GDP. (note: price index to be defined later)

Real GDP:

Real GDP

Calculation of Real GDP:

Calculation of Real GDP Item 1990 1998 2002 GDP at current prices (million PhP) 1,072,000 2,665,100 4,022,700 GDP deflator (base year 1985) 149.5 300.1 384.6 GDP at constant prices (million PhP) 720,700 888,000 1,046,100

TABLE A8.4. Weights used In the CPI, base year, 1994.:

Item Weight (In percent) Food, Beverages and tobacco 55.1 Clothing 3.7 Housing and Repairs 14.7 Fuel, Light and Water 5.7 Services 12.3 Miscellaneous items 8.5 All Items 100.0 Source: National Statistics Office TABLE A8.4. Weights used In the CPI, base year, 1994.

Inflation Rate:

Inflation Rate

The CPI and Inflation Rate, 2003-2011:

Year Consumer Price index (CPI) Inflation rate (in percent) 2003 62.7 -- 2004 75.6 20.6 2005 83.8 10.8 2006 91.6 9.3 2007 100.0 9,2 2008 108.2 8.2 2009 117.3 8.4 2010 125.1 6.6 2011 137.9 10.2 The CPI and Inflation Rate, 2003-2011

Real GDP at 1985 prices:

Real GDP at 1985 prices

GDP per capita:

GDP per capita Measures how much output or income was produced or received, on the average, by an individual in an economy Useful for comparing the performance of a country overtime and a country’s performance relative to its neighbors

PowerPoint Presentation:

Population growth is quite high, about about 3% per year in 1980s and 2.3% per year nowadays.

Per capita GDP:

Per capita GDP Item 1990 1998 2002 GDP at constant (million pesos) 720,700 888,000 1,046,100 Population (millions) 62.0 75.2 81.8 Per capita GDP at constant prices 11,624.20 11,808.5 12,788.5

PowerPoint Presentation:

Modest and erratic growth in GDP plus high population growth means the per capita GDP growth is low.

TABLE 8.7. Selected output Indicators for the Philippines, selected years:

Item 1984 1985 1995 1996 1997 (1) GDP at current prices (million pesos) 524,481 571,883 608,887 2,171,922 2.423.640 (2) GDP deflator (base year -1985) 85.01 100.00 102.95 255.78 271.40 (3) GDP at constant prices (million pesos) 616,964 571,883 591,440 849,137 893,014 (4) Per capita GDP at current prices (pesos) 9,890 10,524 10,935 30,208 32,961 (5) Per capita GOP at constant prices (pesos) 11,634 10,524 10,662 11,810 12,145 (6) Population (million persons) 53.03 54.34 55.68 71.90 73.53 TABLE 8.7. Selected output Indicators for the Philippines, selected years Source: NSCB (1998), Philippine Statistical Yearbook.

GNP for cross country comparisons:

GNP for cross country comparisons Convert a country’s GNP to US dollars, or some common currency, by using the country’s exchange rate When comparing income across countries, it also makes sense to use per capita estimates  eliminates differences in population size. E.g. (data is for 1998)

PPP Adjusted GNP:

PPP Adjusted GNP PPP – purchasing power parity GNP is adjusted to account for the fact that 1 USD when spent in one country does not buy the same quantity of goods when spent in another country E.g. Philippines, 1998 per capita GNP (in USD) = 1050 per capita GNP (PPP adjusted, in USD) = 3,540

Exchange Rate 1988-2002:

Exchange Rate 1988-2002

PowerPoint Presentation:

Per Capita GNI Per Capita GNI Poverty rate Myanmar b 217 26.6 Nepal 250 30.9 Cambodia 350 34.7 Lao PDR 390 33.5 Bangladesh 440 49.8 Viet Nam 540 19.5 Pakistan 600 32.6 India 620 26.1 Sri Lanka 1010 22.7 Indonesia 1140 18.2 Philippines 1170 30.0 China 1500 3.1 Thailand 2490 9.8 Malaysia 4520 7.5 Korea, Rep. of 14000 3.6 Taiwan 14770 0.8 Singapore 24760 0.0 PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)

PowerPoint Presentation:

TABLE 8.8. Economic indicators for selected countries, 1 998. Country Population (in millions) GNP 1 (in billions) Per capita GNP 1 In US Dollars PPP adjusted per capita GNP* France 59 1,466.2 24,940 22,320 Germany 82 2,122.7 25.850 20,810 Indonesia 204 138.5 680 2,790 Japan 126 4,089.9 32,380 23,180 Malaysia 22 79.8 3,600 6,990 Philippines 75 78.9 1,050 3,540 Singapore 3 95.1 30,060 28,620 Thailand 61 134.4 2.200 5,840 United Kingdom 59 1,263.8 21.400 20.640 United States 270 7,921.3 29.340 29.340 Source: World Bank (1999), World Development Report.

PHILIPPINES: Key Economic Indicators, 2003:

PHILIPPINES: Key Economic Indicators, 2003 Region Per Capita GRDP Index Phil=100 Composition of GRDP(%) GRDP Growth Rates, (1985- -2003 (%) Agriculture Industry Services Philippines 100.0 15.0 31.8 53.2 3.1 NCR 275.8 - 37.1 62.9 3.4 CAR 129.9 11.0 56.5 32.5 6.4 Ilocos 53.7 36.0 8.9 55.1 2.5 Cagayan Valley 52.3 45.8 7.5 46.7 2.8 C. Luzon 75.2 20.5 32.7 46.8 3.0 S. Tagalog 85.7 20.2 37.5 42.3 3.5 Bicol 43.3 22.7 16.1 61.2 2 2 W. Visayas 83.5 22.6 25.7 51.7 2.9 C. Visayas 93.4 10.4 27.9 61.7 3.7 E. Visayas 50.5 29.9 25.7 44.4 2.0 W. Mindanao 62.1 40.2 14.8 45.0 2.4 N. Mindanao 101.8 28.6 30.2 41.2 2.7 S. Mindanao 92.4 25.2 25.2 49.6 1.7 C. Mindanao 76.6 40.2 28.0 31.8 3.4 ARMM 23.2 48.6 10.3 41.1 2.5 Caraga 47.8 38.0 18.0 44.0 2.1

PowerPoint Presentation:

REGION 1975-85 1985-95 1995-2003 1975-2003 Philippines 2.5 2.5 3.9 3.2 Luzon 2.6 2.8 4.0 3.4 NCR 2.4 2.8 4.3 3.4 Central Luzon & S. Tagalog 2.6 3.1 3.6 3.4 Other Luzon 3.0 2.3 4.3 3.4 Visayas 2.4 2.1 4.0 3.2 Central Visavas 2.7 2.6 4.8 3.7 Other Visayas 2.3 1.7 3.4 2.8 Mindanao 2.2 1.7 3.6 2.6 PHILIPPINES: Average growth of regional GDP (in 1985 prices)

PowerPoint Presentation:

REGION 1975-85 1985-95 1995-2003 1975-2003 Philippines 100 100 100 100 Luzon 62.6 64.8 66.4 64.5 NCR 28.8 31.6 34.4 31.5 Central Luzon & S.Tagalog 23.3 23.2 21.9 22.8 Other Luzon 10.5 10.0 10.1 10.2 Visayas 16.7 16.3 15.8 16.2 Central Visavas 6.4 6.5 6.7 6.5 Other Visayas 10.3 9.8 9.1 9.7 Mindanao 20.8 19.0 17.2 19.1 PHILIPPINES: Share of National GDP

Personal Disposable Income:

Personal Disposable Income Personal disposable income represents the income that households are free to spend or save. It excludes the components of national income that do not accrue directly to households. It also includes a few items that are not part of national income but nonetheless influence the amount of income that households can spend.

PowerPoint Presentation:

Item Number Item Amount 1 Net operating surplus of households and unincorporated business 1,062,091 2 Compensation of employees, net 910,259 3 Total (Items 1 and 2) 1,972,350 4 Interest on public debt from the general government 73,957 5 Other property Income 188,699 6 Social security benefits 138,846 7 Casualty insurance claims 1,304 8 Current transfers 68.396 9 Total (Items 4 to 8) 371,202 10 Interest payments on consumer debt 7,984 11 Other payments 22,634 12 Direct taxes 90.268 13 Compulsory fees, fines and penalties 29,181 14 Net casualty insurance premiums 1304 15 Social security contributions 53,629 16 Other current transfers 11,797 17 Total (Items 10 to 15) 216,797 18 Disposable Income (Item 3 +Item - Item 17) 2,126,755 Table 8.9 Personal Disposable Income, Philippines, 1998 (in million pesos

Some Limitations of GDP or GNP as measures of growth:

Some Limitations of GDP or GNP as measures of growth Ignores income distribution Ignores environmental degradation Does not include activities that do not go through the formal markets sectors Does not include “illegal” activities like drug trafficking, prostitution, moonlighting

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