1. NATIONAL INCOME ACCOUNTING
CHAPTER 12
NATIONAL INCOME ACCOUNTING
2nd Semester, S.Y 2013 – 2014

2. National Income Accounting
National income accounting is a framework that summarizes and categorizes productive activity in an economy over a period of time.
GDP
GNP
GDP Per Capita
National Income
PCI
PCI refers to income per head. PCI is obtained by dividing the national income by the number of population.

3. GDP: An Economic Barometer
What exactly is GDP?
How do we use it to tell us whether our economy is in a recession or how rapidly our economy is expanding?
And how do we compare economic well-being across countries?
How do we take the effects of inflation out of GDP to compare economic well-being over time?

4. What is gross domestic product (GDP)?
Currency value (such as Philippine peso) of all final goods and services produced within a country in a given period
Total income of a nation
Measure of nation’s economic well-being
Measure of a nation’s economic growth from one period to the next.

5. Gross Domestic Product
GDP or gross domestic product is the market value of all final goods and services produced within a country in a given time period.
This definition has four parts:
Market value
Final goods and services
Produced within a country
In a given time period

6. Gross Domestic Product
Market value
GDP is a market value—goods and services are valued at their market prices.
To add apples and oranges, computers and popcorn, we add the market values so we have a total value of output in pesos.

7. Gross Domestic Product
Final goods and services
GDP is the value of the final goods and services produced.
A final good (or service) is an item bought by its final user during a specified time period.
A final good contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service.
Excluding intermediate goods and services avoids double counting.

8. Let’s Check Your Understanding
Which of the following are final goods or services, and which are intermediate goods or services?
A new automobile
An oil filter purchased in a new automobile
Banking services
Gasoline
A processor chip inside the tablet
A bread flour

9. Gross Domestic Product
Produced within a country
GDP measures production within a country—domestic production.

10. GDP versus GNP
Gross Domestic Product is the total market value of all final goods and services produced in a country in a given time period.
Gross National Product is the total market value of all final goods and services produced by the citizens of a country in a given time period.
GNP equals GDP plus net factor income received from or paid to other countries.
A country’s gross national product, or GNP, is the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of that country. For example, Nike’s income from the capital that it supplies to its Vietnam shoe factory is part of U.S. GNP but not part of U.S. GDP. It is part of Vietnam’s GDP. Similarly, Toyota’s income on the capital it supplies to its Kentucky auto plant is part of U.S. GDP but not part of U.S. GNP. It is part of Japan’s GNP. GNP equals GDP plus net factor income received from or paid to other countries.
The difference between U.S. GDP and GNP is small. But in an oil-rich Middle
Eastern country such as Bahrain, where a large amount of capital is owned by foreigners,
GNP is much smaller than GDP; and in a poor country such as Bangladesh,
whose people work abroad and send income home, GNP is much larger than GDP

11. Gross Domestic Product
In a given time period
GDP measures production during a specific time period, normally a year or a quarter of a year.

12. 𝐺𝐷𝑃=𝐶+𝐼+𝐺+(𝑋−𝑀) What’s included in GDP? Consumption expenditure
Investment
Government expenditure on goods and services
Exports of goods and services
Imports of goods and services
Four groups buy the final goods and services produced: households, firms, governments, and the rest of the world. Four types of expenditure correspond to these groups:

13. What’s included in GDP?
Consumption expenditure is the spending by households on consumption goods and services.
Investment is the purchase of new capital goods (tools, instruments, machines, and buildings) and additions to inventories.
Government expenditure on goods and services is expenditure by all levels government on goods and services.
Net exports of goods and services is the value of exports of goods and services minus the value of imports of goods and services.
Four groups buy the final goods and services produced: households, firms, governments, and the rest of the world. Four types of expenditure correspond to these groups:

14. Consumption Expenditure
Consumption expenditure is the spending by households on consumption goods and services.
Goods: groceries, clothes, gadgets
Services: haircuts, oil changes
Consumption (C) is the expenditure by households on consumption goods and services. It includes durables (goods lasting three or more years), nondurables, and services.

15. Investment by businesses and households
What’s included in GDP?
Investment by businesses and households
Fixed assets for production
New homes
Inventories
Investment (I) is the purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories. In other words, it is spending by firms, including final purchases on machinery, equipment and tools, all construction of new houses, buildings, and apartments, and additions to inventory.

16. Government expenditures by local and national government
What’s included in GDP?
Government expenditures by local and national government
Roads and bridges
School buildings
Other public services
Excluding transfer payments
Government purchases of goods and services (G) are purchases of goods and services by all levels of government. It excludes transfer payments (welfare spending and unemployment compensation) because those payments do not represent new products or services; rather, they are transfers of income.

17. What’s included in GDP? Net exports
the value of exports of goods and services minus the value of imports of goods and s
Net exports of goods and services (X-IM or NX) is the value of exports of goods and services minus the value of imports of goods and services. In the United States, it is the value by which American spending on foreign goods and services exceeds foreign spending on American goods and services.

18. What are not included in GDP?
Intermediate goods
Used goods or Second-hand Sales
Underground production (black market)
Financial transactions
Household production and consumption
Transfer payments
Intermediate goods. Only the final goods and services purchased for final use and not for resale or further processing and manufacturing are included in GDP. Intermediate goods are not counted in GDP. Intermediate goods are goods and services that are used for further processing and manufacturing or resale, for example, the lead that will eventually go in a pencil. This process avoids double-counting and therefore exaggerating GDP. Goods produced but not sold do go into GDP in the form of inventory investment. After that, they are not included in the GDP of the year in which they are sold.
Second-hand sales/used goods. Expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods. Buying a house that is not new is not part of GDP. Also, bartered goods are not included in GDP.
The black market/underground production. Illegal drugs, illegal goods, and illegal services in the underground economy are not part of GDP. The hidden part of the economy in which people trade in illegal goods and services and try to avoid taxes and regulations cannot be correctly ascertained.
Financial transactions. When households buy financial assets such as bonds and stocks, they are making loans, not buying goods and services. Nothing new has been produced.
Transfer payments. Transfer payments are payments from the government, including education grants, Social Security payments, welfare checks, and unemployment checks. They do alter household income, but they do not reflect the economy’s production.

19. What GDP does not tell us?
Does not measure income distribution
Does not measure non-monetary output or transactions (e.g., barter, household activities)
Does not take into account desirable externalities, such as leisure or environment
Does not measure social well-being
Correlates to standard of living but is not a measure of standard of living

20. Real and nominal GDP
When GDP is computed in the current year’s prices, rising prices (inflation) can make it difficult to determine if a change in GDP from one year to the next is due to the country’s production of more goods and services or to increases in the price level.
Nominal GDP: GDP that is not adjusted for inflation. This reflects the current value of goods and services in current prices. Thus, it ignores the effect of inflation on the growth of GDP.
Real GDP: measures the value of goods and services adjusted for change in the price level. It reflects the real change in output. This measure is called constant or adjusted GDP or constant money GDP.
Nominal GDP is GDP at current price Real GDP is GDP adjusted for inflation.

21. Calculation of Nominal GDP
Year
Quantity
Price
Nominal GDP
Good A
1,000
850
850,000
Good B
2,000
1,750
3,500,000
Good C
1,500
25,800
38,700,000
Good D
4,000
350
1,400,000
Good E
2,500
755
1,887,500
Good F
1,800
475
855,000
TOTAL
47,192,500
Price Index a normalized average (typically a weighted average) of prices for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ between time periods or geographical locations.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃=𝑃𝑟𝑖𝑐𝑒 𝑥 𝑂𝑢𝑡𝑝𝑢𝑡

22. Calculation of Real GDP
Year
Quantity (Aggregate Output)
Price
Nominal GDP
Price Index
Real GDP
2009
1,000 50
50,000 33
1,500
2010
100
100,000 67
2011
150
150,000
2012
200
200,000
133
2013
250
250,000
167
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃= 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
𝑃𝐼 = 𝑃𝑟𝑖𝑐𝑒 𝑖𝑛 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑦𝑒𝑎𝑟 𝐵𝑎𝑠𝑒𝑑 𝑦𝑒𝑎𝑟
Price Index a normalized average (typically a weighted average) of prices for a given class of goods or services in a given region, during a given interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ between time periods or geographical locations.
*Base Year is 2011

23. GDP Deflator
GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.
It helps to adjust the Nominal GDP to a Real GDP figure
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟= 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑥100
helps to adjust the Nominal GDP to a Real GDP figure.
Measurement in national accounts
In most systems of national accounts the GDP deflator measures the ratio of nominal (or current-price) GDP to the real (or chain volume) measure of GDP. The formula used to calculate the deflator is:
Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.[1]
It is often useful to consider implicit price deflators for certain subcategories of GDP, such as computer hardware. In this case, it is useful to think of the price deflator as the ratio of the current-year price of a good to its price in some base year. The price in the base year is normalized to 100. For example, for computer hardware, we could define a "unit" to be a computer with a specific level of processing power, memory, hard drive space and so on. A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation. This can lead to a situation where official statistics reflect a drop in prices, even though they have stayed the same. Consider the example of the computer. From year to year, assume that the price of a new computer stays the same, but the computing power doubles. This would result in a price deflator of 50, though the consumer would have to spend the same amount of money on both systems.
Unlike some price indexes (like the CPI), the GDP deflator is not based on a fixed basket of goods and services. The basket is allowed to change with people's consumption and investment patterns.[2] (Specifically, for GDP, the "basket" in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good.) Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. For instance, if the price of chicken increases relative to the price of beef, it is claimed that people will likely spend more money on beef as a substitute for chicken.

24. GDP and the Circular Flow of Expenditure and Income
GDP measures the value of production, which also equals total expenditure on final goods and total income.
The equality of income and output shows the link between productivity and living standards.
The circular flow diagram illustrates the equality of income, expenditure, and the value of production.

25. Approaches in GDP Calculation
Expenditure Approach
Production Approach
Income Approach

26. Expenditure Approach
The expenditure approach adds all the expenditures of the end-users of the output produced in a given year. It divides GDP into four areas: households (consumption), businesses (investment), government, and foreigners (net exports).

27. What are the components of GDP?
Personal Consumption Expenditures
(C)
Investment
(I)
Government
(G)
Net Exports
(X-M)
Fixed Investment
Inventories
Exports
Imports
Expenditures on final goods and services are divided into four types: consumption, investment, government purchases, and net exports (exports – imports) of goods and services.
Nonresidential
Residential
GDP = C + I + G + (X-M)

28. How much of GDP is each component?
Component % of GDP
Government %
Investment %
Consumption (PCE) %
The chart shows the average percent of GDP for each component of GDP. Consumption is the highest proportion of GDP, at 70%. Government spending accounts for 19% of GDP on average, and investment, 16%. Net exports have averaged -5%. Since imports have exceeded exports, net exports has been a drag on GDP. Changes to components of real GDP will change the overall level of real GDP.
Net Exports %
GDP %

29. Production Approach
The production approach looks at GDP from the standpoint of value added by each input in the production process.

30. Income Approach
The income approach divides GDP according to who receives the income from the spending flow. In addition to aggregate income, national income and personal income are also used as measures of income.

31. Expenditure and Income Approach
GDP
Amount (Billion Pesos)
Corporate profits
305
Consumption of fixed capital or Depreciation
479
Gross private domestic investment
716
Personal taxes
565
Personal saving
120
Government expenditures
924
Imports
547
Net interest
337
Compensation of employees
2,628
Rental income 19
Exports
427
Personal consumption expenditure
2,966
Indirect business taxes
370
Contributions for social security
394
Transfer payments
543
Proprietor's income
328
Suppose the following are data for a given year from the annual report of NEDA. Calculate GDP using the expenditure approach and income approach

32. Expenditure and Income Approach
Expenditure Approach
𝐺𝐷𝑃=𝐶+𝐼+𝐺+(𝑋−𝑀)
=2, (427−547)
=4,486
Income Approach
GDP=𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠+𝑟𝑒𝑛𝑡𝑠+𝑝𝑟𝑜𝑓𝑖𝑡𝑠+ 𝑛𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡+𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒𝑠+𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
=2,
=4486

33. Amount (Billion Pesos)
National Income
GDP
Amount (Billion Pesos)
Corporate profits
305
Consumption of fixed capital or Depreciation
479
Gross private domestic investment
716
Personal taxes
565
Personal saving
120
Government expenditures
924
Imports
547
Net interest
337
Compensation of employees
2,029
Rental income 19
Exports
427
Personal consumption expenditure
2,966
Indirect business taxes
370
Contributions for social security
394
Transfer payments
543
Proprietor's income
328
Using the data in no. 8, compute the national income (NI) by making the required subtraction from GDP. Explain why NI might be a better measure of economic performance than GDP.

34. National Income
𝑵𝑰=𝑮𝑫𝑷−𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
𝑁𝐼=4,486−479
𝑁𝐼=4,007

35. Personal Income and Disposable Income
GDP
Amount (Billion Pesos)
Corporate profits
305
Consumption of fixed capital or Depreciation
479
Gross private domestic investment
716
Personal taxes
565
Personal saving
120
Government expenditures
924
Imports
547
Net interest
337
Compensation of employees
2,029
Rental income 19
Exports
427
Personal consumption expenditure
2,966
Indirect business taxes
370
Contributions for social security
394
Transfer payments
543
Proprietor's income
328
Again using the data in no. 8, derive personal income (PI) from national income (NI). Then make the necessary adjustments to PI to obtain disposable income (DI).

36. Personal Income and Disposable Income
Personal income (PI)
Personal Income (PI) =𝑁𝐼−𝑃𝑟𝑜𝑓𝑖𝑡𝑠− 𝐶𝑜𝑛𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠 𝑓𝑜𝑟 𝑆𝑜𝑐𝑖𝑎𝑙 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦+𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝑃𝐼=4,007−633−
𝑃𝐼=3,523
Disposable income (DI)
𝐷𝐼=𝑃𝐼−𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑡𝑎𝑥𝑒𝑠
𝐷𝐼=3,523−565
𝑃𝐼=2,958