Republic of the Philippines

UNIVERSITY OF EASTERN PHILIPPINES

University Town, Northern Samar, Philippines
Web: [Link] Email: uepnsofficial@[Link]

COLLEGE OF BUSINESS ADMINISTRATION

INTRODUCTION MACROECONOMICS WITH TAXATION

MODULE 5: Measuring Economic

Performance: GDP, Income, and Living
Standards

MODULE DESCRIPTION
` This module introduces students to how a country’s economic performance is measured using Gross
Domestic Product (GDP) and national income, and why these measures do not always reflect people’s actual
quality of life. Using simple explanations and real-life examples, students will learn how economic growth, prices,
income, and living standards are connected, and why development should go beyond numbers.
This module helps non-business students become economically informed citizens who can better
understand news, policies, and everyday economic issues.

MODULE OBJECTIVES
At the end of this module, students should be able to:
1. Explain GDP and national income in simple terms.
2. Distinguish between nominal and real values using everyday examples.
3. Describe how GDP relates to income and living standards.
4. Identify the limitations of GDP as a measure of well-being.
5. Appreciate that economic progress includes quality of life, not just growth.

LESSON 1: GROSS DOMESTIC PRODUCT (GDP) AND NATIONAL

INCOME

💡 1.1. WHAT IS GDP?

GROSS DOMESTIC PRODUCT (GDP) - is the total market value of all final goods and services
produced within a country during a specific period, usually one year or one quarter. It is the
most commonly used measure of the size and performance of an economy.

🧠 What GDP Includes:

 Goods such as food, clothing, vehicles, and electronics
 Services such as education, healthcare, transportation, and tourism
 Production by both local and foreign firms operating within the country
📌 Example:
A meal sold in a restaurant, a jeepney ride, or a tuition fee paid to a school all
contribute to GDP.

🧠 What GDP Does NOT Include:

 Household work (e.g., cooking at home)
 Volunteer work
 Illegal activities not officially recorded
 Second-hand goods

This is because these activities do not involve formal market transactions.

🧠 Why GDP Is Important

GDP helps us:
 Measure economic growth or decline
 Compare the size of economies over time
 Understand overall economic performance

📌 Example:
If GDP increases, it usually means more production, higher incomes, and more job
opportunities.

👉 GDP and People’s Lives

Although GDP measures economic activity, it also affects daily life:
 Higher GDP often leads to better public services
 It supports job creation and business growth
 It increases government revenue through taxes

👉 Limits of GDP
GDP does not measure:
 Income distribution (who gets richer)
 Quality of life or happiness
 Environmental damage
 Informal economic activities

Because of this, economists use other indicators alongside GDP.

💡1.2. EXPENDITURE APPROACH (MOST COMMON FORMULA)

This is the most widely used formula in economics:

GDP = C + I + G + (X - M)

Where:
C = Consumption
 Spending by households (food, clothes, rent, services, etc.)

I = Investment

 Business spending on capital goods (machines, buildings, equipment)

 residential construction
 change in inventories

G = Government Spending
 Government spending on public services and infrastructure (roads, schools, salaries of
public employees)

X = Exports
 Goods and services sold to other countries

M = Imports
 Goods and services bought from other countries

👉 We subtract imports (M) because they are not produced locally.

📌 Example:
If a country has:
C = 500 billion
I = 200 billion
G = 150 billion
X = 100 billion
M = 50 billion

Then:
GDP = 500 + 200 + 150 + (100 − 50)
GDP = 500 + 200 + 150 + 50
GDP = 900 billion

💡 1.3. WHAT IS NATIONAL INCOME?

NATIONAL INCOME refers to the total earnings received by individuals and businesses in an
economy during a given period, usually one year. It shows how income is generated and
distributed as a result of economic activity. While GDP measures production, national income
focuses on who earns from that production.
 National income is important because it helps explain people’s ability to spend, save,
and maintain a certain standard of living.

🧠 Main Components of National Income

1. WAGES AND SALARIES - are payments received by workers in exchange for their labor.
This includes:
1. Monthly or daily pay
2. Overtime pay
3. Allowances and bonuses

📌 Philippine Examples:
 Salaries of teachers, nurses, and office workers
 Daily wages of factory workers or construction laborers

👉 Why This Matters:

Wages and salaries make up the largest portion of national income and directly affect
household consumption and living standards.

2. BUSINESS PROFITS - are the earnings received by entrepreneurs and companies after
deducting costs.
This applies to:
1. Small businesses (sari-sari stores, food stalls)
2. Medium and large firms
3. Corporations

📌 Example:
A small restaurant earns profit after paying for ingredients, rent, and employee wages.

👉 Why This Matters:

Profits encourage businesses to expand, create jobs, and invest in new technologies.

3. RENT - is income earned from owning property or natural resources.

This includes:
1. Rent from houses or apartments
2. Payments for land used for farming or business
3. Leasing of buildings or commercial spaces

📌 Philippine Example:
A family earns rental income from a boarding house near a university.

👉 Why This Matters:

Rent reflects income from ownership of assets and contributes to wealth accumulation.
4. INTEREST INCOME - is earned by lending money or saving in financial institutions.
This includes:
1. Interest from savings accounts
2. Time deposits
3. Government bonds or loans

📌 Example:
A person earns interest by saving money in a bank or investing in government securities.

👉 Why This Matters:

Interest income encourages saving and supports investment in the economy.

💡 1.4. WHY GDP AND INCOME MATTER

GDP and national income are used to:
1. Measure economic growth
2. Compare countries’ economic performance
3. Guide government policy and planning

📌 Example:
If GDP grows, the government may collect more taxes and have more funds for public
services like education, health care, and infrastructure.

👉 While GDP measures production, national income measures income earned from that
production.
👉 Simple Link: More production → more income → more spending and savings.

LESSON 2: NOMINAL VS. REAL VALUES

Understanding the difference between nominal and real values is essential because it
helps us see the true impact of income, prices, and economic growth on everyday life. While
nominal values show numbers in pesos, real values show what those numbers can actually
buy.

💡 2.1. NOMINAL VALUES

NOMINAL VALUES are measured using current prices at the time of measurement. They do not
account for changes in the price level (inflation).

1. Nominal values are useful for tracking money amounts and reporting financial figures.
2. However, they can be misleading if prices rise quickly, because higher numbers do not
necessarily mean more purchasing power.
 📌 Philippine Example:
 Your allowance is ₱1,000 per week in 2020.
 In 2025, your allowance increases to ₱1,200.

Nominal income increased by ₱200.

✅ But does this mean you are better off? It depends on how much prices have
increased.

FORMULA:
Nominal GDP = Σ (Pt × Qt)

Where:
Pₜ = Current year price
Qₜ = Current year quantity
Σ = Sum of all goods and services produced
👉 It uses current market prices (no adjustment for inflation).

📌 Example: Suppose in 2026:

100 laptops at ₱30,000 each
500 phones at ₱10,000 each
Nominal GDP = (30,000 × 100) + (10,000 × 500)
Nominal GDP = 3,000,000 + 5,000,000
Nominal GDP = ₱8,000,000

💡 2.2 REAL VALUES

REAL VALUES - are adjusted for inflation, showing the true purchasing power of money. Real
values allow you to compare income, prices, or GDP across time without the distortion of rising
prices.
1. Real values are often called “inflation-adjusted” values.
2. They answer the question: “How much can I actually buy with my money?”

📌 Philippine Example:
 Suppose prices of goods have increased by 10% since 2020.
 Your ₱1,200 allowance in 2025 can now buy what ₱1,090 could buy in 2020.
 Real increase in income = ₱90, not the ₱200 nominal increase.

FORMULA:

Real GDP = Σ (P_{base} × Q_{current})

Where:

 P₍base₎ = Price in the base year

 Q₍current₎ = Quantity produced in the current year
  Σ = Sum of all goods and services

👉 Real GDP removes the effect of inflation.

📌 Example:
Base Year Price of Laptop = ₱25,000
Current Year Production = 100 laptops

Real GDP = 25,000 × 100

Real GDP = ₱2,500,000
👉 Even if the current price becomes ₱30,000, we still use ₱25,000 (base year price).

💡 2.3 WHY THE DIFFERENCE MATTERS

ASPECT NOMINAL VALUE REAL VALUE
Measures Money amount Purchasing power
Adjusted for
No Yes
inflation?
Shows amount of money
Usefulness Shows what money can actually buy
earned
₱1,090 real income after inflation
Example ₱1,200 allowance in 2025
adjustment

👉 Economists use real GDP and real income to understand actual improvements in living
conditions.

💡 2.4 REAL VS. NOMINAL IN THE ECONOMY

 Nominal GDP = total value of goods and services at current prices

 Real GDP = total value adjusted for inflation, showing actual growth in production

📌 Philippine Context:
 In a year with 5% inflation, nominal GDP may increase by 7%, but real GDP only
grows by 2%—meaning actual production only increased slightly.

LESSON 3: GDP AND LIVING STANDARDS

💡 3.1. GDP PER CAPITA

GDP PER CAPITA is a measure that shows the average economic output per person in a
country. It is calculated by dividing the Gross Domestic Product (GDP) of a country by its total
population.
 Formula:
GDP
GDP per capita = -------------------
Population

👉 In simple terms, it estimates how much each person would “earn” if the total production
were shared equally.
📌 Example:
A country with high GDP but very large population may still have low GDP per capita.

💡 3.2. GDP AND DAILY LIFE

Higher GDP can mean:

1. More job opportunities
2. Better public services
3. Improved infrastructure

👉 But higher GDP does not automatically mean better lives for everyone.
👉 GDP measures economic activity, but true development depends on how income is shared,
how people live, and how society cares for its future.

💡 3.3. BEYOND GDP – BETTER MEASURES OF LIVING STANDARDS

While GDP shows how much an economy produces, it does not fully reflect people’s
quality of life. To better understand living standards, economists use alternative indicators that
focus on human well-being.

ALTERNATIVE INDICATORS: Economists also look at:

1. Human Development Index (HDI) - The HDI measures development using three key factors:
1. Income level
2. Education (years of schooling)
3. Health (life expectancy)

👉 It shows whether people are living longer, learning more, and earning enough, not just
producing more.

2. Poverty Rate s- show the percentage of the population unable to meet basic needs such as
food, shelter, and clothing.

👉 Even with rising GDP, high poverty rates indicate that economic growth is not shared
equally.
3. Employment and Job Quality - This indicator looks beyond job numbers and considers:
1. Job security
2. Fair wages
3. Safe working conditions

👉 Having a job matters, but having decent and stable work matters more for living
standards.

4. Access to Health and Education - Access to quality healthcare and education improves
productivity and long-term well-being.

👉 Countries with better access to these services tend to have healthier, more skilled,
and more productive citizens.
👉 These give a more complete picture of development.

💡 3.3. LIMITS OF GDP AS A MEASURE OF WELL-BEING.

1. Income Inequality - GDP does not show how income is distributed.

📌 Example:
GDP may increase, but only a small group becomes richer while many remain poor.

2. Non-Market Activities - GDP does not include:

 Household work
 Volunteer work
 Caregiving
👉 These activities improve well-being but are not counted.

3. Environment and Sustainability - GDP increases even when:

 Natural resources are depleted
 Pollution increases

📌 Example:
Logging increases GDP but may harm the environment and future generations.

4. Quality of Life Factors Not Measured by GDP - GDP does not measure:
 Health and life expectancy
 Education quality
 Safety and security
 Happiness and well-being

PREPARED BY:
JEAN T. TURLA, LPT
SPECIAL LECTURER