National Income Accounting

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National Income Accounting

• Economics 11- UPLB
• Department of Economics, CEM

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National income accounting (NIA)

• is the measurement of indicators of national
  output/income .e.g. GDP, GNP

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Circular flow diagram

• summarizes the transactions between the different
  economic agents
• agents households, firms (business), government,
  and foreigners (rest of the world)

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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

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Revenue (GDP)
Spending (GDP)
MARKETS FOR GOODS AND SERVICES
Good and services sold
Good and services bought
HOUSEHOLDS
FIRMS
Land, labor and capital
Inputs for 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
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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

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Circular flow diagram

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

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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.

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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.

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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

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Measurement of economys outputThe 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

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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.

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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.

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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)

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Expenditure Approach

• Uses the upper loop of the circular flow diagram.
• Example Suppose the economy has only one
  product, namely, rice.

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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

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Value Added Approach

• Suppose that rice is the only final product of an
  economy It goes through several (3) stages of
  production.

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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.

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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

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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

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Table. Expenditures on GDP, 2002 in million pesos.
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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 - governments payments for the salaries of its
  workforce as well as purchases of goods and
  services ? used for the governments 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 countrys 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

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Income Approach
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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

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Value added or Industrial Origin approach

• GDP value added of different activities
  (sectors)

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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

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The distinction between GDP and GNP
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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

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Table 8.5
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• 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)

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Real GDP
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Calculation of Real GDP
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TABLE A8.4. Weights used In the CPI, base year,
1994.
Source National Statistics Office
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Inflation Rate
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Table A8.5 Estimates of the CPI and Inflation
Rate, 1990-98
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Real GDP at 1985 prices
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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 countrys performance relative to
  its neighbors

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Population growth is quite high, about about 3
per year in 1980s and 2.3 per year nowadays.
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Per capita GDP
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Modest and erratic growth in GDP plus high
population growth means the per capita GDP growth
is low.
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TABLE 8.7. Selected output Indicators for the
Philippines, selected years
Source NSCB (1998), Philippine Statistical
Yearbook.
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GNP for cross country comparisons

• Convert a countrys GNP to US dollars, or some
  common currency, by using the countrys 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)

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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

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Exchange Rate 1988-2002
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PER CAPITA GROSS NATIONAL INCOME, 2004 (US)
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TABLE 8.8. Economic indicators for selected
countries, 1998.
Source World Bank (1999), World Development
Report.
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PHILIPPINES Key Economic Indicators, 2003
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PHILIPPINES Average growth of regional GDP (in
1985 prices)
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PHILIPPINES Share of National GDP
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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.

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