National income accounting ppt @ mba

1. National Income Accounting

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

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

4. 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

5. payments for goods and services
goods and services
FIRMS HOUSEHOLDS
factor services
factor payments
(wages, interest, rent, profit)
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.

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

7. 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

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

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

10. 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.

11. 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

12. 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

13. Definition of GDP
 The market value of good i (Vi) is equal
to Pi⋅Qi
 GDP = sum of the market values of all
final goods and services produced
within the year.
n n
GDP = ∑ V = ∑P
i=1
i
i=1
i ⋅ Qi

14. 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”.

15. 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)

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

17. 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 20,000 P 20,000
factors

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

19. 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.

20. 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

21. 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

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

23. 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

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

25. 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

26. 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

27. 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

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

29. 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

30. 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

31.  GDPyear 1 = (100) (50) + (100) (100) = 15,000
 GDPyear 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)

32. Real GDP
Nominal GDP
Real GDP = ⋅ 100.
GDP deflator

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

34. GDP Deflator, (1985=100), Philippines
500.0
450.0
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Inflation Rate, Philippines
18.0
16.0
14.0
percent per year
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

35. 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

36. Inflation Rate
CPI t − CPI t −1
Inflation Rate =
CPI t −1

37. Table A8.5 Estimates of the CPI and Inflation Rate, 1990-98
Year Consumer Price index Inflation rate
(CPI) (in percent)
1990 62.7 --
1991 75.6 20.6
1992 83.8 10.8
1993 91.6 9.3
1994 100.0 9,2
1995 108.2 8.2
1996 117.3 8.4
1997 125.1 6.6
1998 137.9 10.2

38. Real GDP at 1985 prices
GDP (at 1985 Prices), Philippines
1300.0
1200.0
1100.0
1000.0
900.0
Billions
800.0
700.0
600.0
500.0
400.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Year

39. 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
GDP
GDP per capita =
population

40. Population growth is quite high, about about 3% per year in 1980s
and 2.3% per year nowadays.
Total population, Philippines, in million
90.0
80.0
70.0
60.0
million
50.0
40.0
30.0
20.0
10.0
0.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Year

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

42. Per Capita GDP, Philippines, (at constant 1985 prices)
16.000
14.000
12.000
Thousand Pesos
10.000
8.000
6.000
4.000
2.000
0.000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Year
Modest and erratic growth in GDP plus high population growth
means the per capita GDP growth is low.

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

44. 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)

45. 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

46. Exchange Rate 1988-2002
Exchange Rate (P/US$), Philippines, 1988-2005
60.00
50.00
40.00
Pesos per dollar
30.00
20.00
10.00
0.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

47. PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)
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

48. GNP Per Capita (in US$), 1998 and 2003
4500
4000
3500
3000
2500 1998
2000 2003
1500
1000
500
0
China Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam

49. GDP Per Capita PPP$, 2000 prices
20,000
18,000
16,000
14,000
12,000
1980
10,000
2005
8,000
6,000
4,000
2,000
0
nd
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sia
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na
Re
i
la
ne
Ch
ay
pi
ai
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ilip
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Ph
Ko

50. Annual Growth GDP, 1980-2005 (% per year)
9 8.49
8
7
6 5.53
4.87
4.59
Percent
5
4 3.7 3.65
3
2
1 0.63
0
Philippines Indonesia Malaysia Thailand Korea, Rep. Vietnam China

51. Annual Growth GDP, 2000-2005 (% per year)
9.0 8.6
8.0
7.0
6.1
6.0
4.6
Percent
5.0
4.1
4.0 3.3
3.0
3.0 2.5
2.0
1.0
0.0
Philippines Indonesia Malaysia Thailand Korea, Vietnam China
Rep.

52. TABLE 8.8. Economic indicators for selected countries, 1998.
Country Population GNP1 Per capita GNP1 PPP adjusted per capita
(in millions) (in billions) In US Dollars 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

53. PHILIPPINES: Key Economic Indicators, 2003
Per Capita Composition of GRDP(%) GRDP Growth
Region GRDP Index Rates,
Agriculture Industry Services
Phil=100 (1985-
Philippines 100.0 15.0 31.8 53.2 -2003 (%)
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 22
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

54. PHILIPPINES: Average growth of regional GDP (in 1985 prices)
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 & 2.6 3.1 3.6 3.4
S. Tagalog
Other Luzon 3.0 2.3 4.3 3.4
Visayas 2.4 2.1 4.0 3.2
Central 2.7 2.6 4.8 3.7
Visavas
Other Visayas 2.3 1.7 3.4 2.8
Mindanao 2.2 1.7 3.6 2.6

55. PHILIPPINES: Share of National GDP
REGION 1975-85 1985-95 1995-200 1975-200
3 3
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 & 23.3 23.2 21.9 22.8
S.Tagalog
Other Luzon 10.5 10.0 10.1 10.2
Visayas 16.7 16.3 15.8 16.2
Central 6.4 6.5 6.7 6.5
Visavas
Other Visayas 10.3 9.8 9.1 9.7
Mindanao 20.8 19.0 17.2 19.1

56. 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.

57. Table 8.9 Personal Disposable Income, Philippines, 1998 (in million pesos
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

58. 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