CHAPTER 6: NATIONAL INCOME ACCOUNTS

KEY POINTS FOR NATIONAL INCOME ACCOUNTS: GDP = CONSUMPTION + INVESTMENT + GOVERNMENT EXPENDITURES + NET EXPORTS GNP EXPENDITURE APPROACH (Net Factor Income Abroad) GNP = GDP + NFIA INCOME APPROACH (Indirect Taxes & Depreciation) GNP = NI + INDIRECT TAXES + DEPRECIATION INDUSTRIAL APPROACH DISPOSABLE INCOME AND CONSUMPTION NATIONAL INCOME & LORENZ CURVE TYPES OF INCOME DISTRIBUTION PERSONAL FUNCTIONAL 4 CAUSES OF INCOME INEQUALITY

GROSS NATIONAL PRODUCT Market value of all the final products in the circular flow ( number of goods & services) TRADE & COMMERCE: PRODUCTION & CONSUMPTION CONSUMPTION OF HOUSEHOLDS

LIMITATION OF GNP: QUALITY OF PRODUCTS DOES NOT REFLECT INCOME OF WORKERS (PER CAPITA INCOME)

FINAL GOODS AND SERVICES PRODUCED WITHIN NATIONAL BOUNDARIES

CONSUMPTION = P800K PER CAR X 200K UNITS SOLD = P 160 B GOES TO GDP

ONLY EXPENDITURES ON THE FINAL PRODUCT BELONG TO THE GDP NO MULTIPLE COUNTING IN MEASURING GDP P60 of GARDENIA for CONSUMPTION P60 x 10,000 units = P600, 000 goes to the GDP

BUYING USED GOODS? DOES THIS GO TO GDP? Depreciated Value = final product was not purchased on the same year

decrease in the economic potential of an asset over its productive or useful life.

NFIA: NET FACTOR INCOME FROM ABROAD NFIA is the difference between the factor income earned from abroad by normal residents of a country and the factor income earned by non-residents (foreigners) in the domestic territory

GNP = NI + INDIRECT TAXES + DEPRECIATION II. INCOME APPROACH GNP = NI + INDIRECT TAXES + DEPRECIATION NI (NATIONAL INCOME): wages and salaries, profits and dividends, rent and interest, GOVERNMENT INCOME INDIRECT TAXES: VAT (TAX PAID ON A SALE OF A PRODUCT) DEPRECIATION: PURCHASE OF EQUIPMENT AND BUILDINGS THAT WERE INSTALLED IN THE PAST (DEVALUED)

III. INDUSTRY-ORIGIN APPROACH GNP = Sum of the Gross value-added of all sectors + Indirect tax + depreciation SECTORS: agriculture, fishery, forestry, service

Personal Income (PI) It is the income received by the households. Personal Disposable Income (PDI) income used for consumption. If disposable income is rising, most business can expect to find their sales rising as well.

SIGNIFICANCE OF “C” CROSSING THE 45* LINE? CONSUMPTION < DI CONSUMPTION > DI MPC? = DI IS FROM 6 TO 8 DI = FROM 6 8 C? 5.5 7 1.5/2 = 0.75 CONSUMPTION SCHEDULE

DISTRIBUTION OF NATIONAL INCOME The allocation of income among the owners of the factors of production. (LAND, LABOR, CAPITAL, ENTREPRENEUR) There are those who receive more income and there are those who receive less.

TYPES OF INCOME DISTRIBUTION Personal Distribution Deals with the allocation of income among persons or households and the total incomes they receive. The degree of income inequality among households or families is shown by the Lorenz Curve. The further the Lorenz Curve from the line of equality, the greater is income inequality among families.

FUNCTIONAL DISTRIBUTION It is the allocation of income among the factors of production: land, labor, capital, and entrepreneur. The incomes of the factors of production are rent for land, wages for labor, interests for capital, and profits for the entrepreneur.

CAUSES OF INCOME INEQUALITY Intelligence and Talents

Education and Training

Unpleasant and Risky Jobs

Ownership of Productive Factors