College of Business and Accountancy

INSTRUCTOR: MR. BERNIE I. MULLON,CPA

 Good day
Class
Topic: National Income Accounting
Instructor: Bernie I. Mullon, CPA
CPA BOARD FOCUS MACROECONOMICS TOPICS:

❖ National Economics Issues

❖ Measures of Economic Performance

➢ GDP ✅
➢ Business Cycle
➢ Unemployment
➢ Inflation
➢ Fiscal and Monetary Policies
➢ International Trade
➢ Foreign Exchange Rates
NATIONAL INCOME
ACCOUNTING
NATIONAL INCOME ACCOUNTING

Is the system used to measure the aggregate income and

expenditures for a nation. Despite certain limitations, The
national income accounting system provides a valuable indicator of
an economy’s performance. National Income accounting therefore
serves a nation similar to the manner in which accounting serves a
business or household. In each case, accounting methodology is
vital for identifying economic problems and formulating plans for
achieving goals.
 SIMPLE CIRCULAR FLOW MODEL

RESOURCE
MARKET
Wages, and salaries, rent,
interest, profit, labor, land,
capital, entrepreneurial ability

HOUSEHOLDS BUSINESSES
● Sell resources ● Buy resources
● Buy products ● Sell products

PRODUCT
MARKET
Goods and services,
Consumption and
Expenditure

The model shows the flow of resources and payments for their use as well as the flow of goods and
services and payment for them.. Thus, the household sector sells resources to and buys products from the
business sector while the business sector buys resources from and sells products to the household sector.
COMPLEX CIRCULAR FLOW MODEL
 GROSS DOMESTIC PRODUCT (GDP)
Gross Domestic Product (GDP) is the monetary value, in local currency, of all final
economic goods and services produced in a country during a specific period of
time. It is the broadest financial measurement of a nation’s total economic activity.
The total goods and services bought by consumers encompass all private
expenditures, government spending, investments, and net exports.
1. Expenditure Approach
The expenditure approach is the most commonly used GDP formula, which is based on the money
spent by various groups that participate in the economy.

GDP = C + G + I + NX
C = consumption or all private consumer spending within a country’s economy, including, durable
goods (items with a lifespan greater than three years), non-durable goods (food & clothing), and
services.

G = total government expenditures, including salaries of government employees, road

construction/repair, public schools, and military expenditure.

I = sum of a country’s investments spent on capital equipment, inventories, and housing.

NX = net exports or a country’s total exports less total imports.

 GROSS DOMESTIC PRODUCT (GDP)
2. Income Approach
This GDP formula takes the total income generated by the goods and services
produced.

GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

Total National Income – the sum of all wages, rent, interest, and profits.

Sales Taxes – consumer taxes imposed by the government on the sales of

goods and services.

Depreciation – cost allocated to a tangible asset over its useful life.

Net Foreign Factor Income – the difference between the total income that a
country’s citizens and companies generate in foreign countries, versus the
total income foreign citizens and companies generate in the domestic
country.
 GROSS DOMESTIC PRODUCT (GDP)
2. Income Approach
This GDP formula takes the total income generated by the goods and services produced.

Formula: NI =W+R+P+i

GDP = NI + IBT + D
Or GDP = Compensation of employees + rents + profits + net interest + indirect taxes +
depreciation

Compensation of employees (W) - It comprises mainly on income earned from wages, salaries
and certain supplements paid by firms and government to suppliers of labor.
Rental Income of Persons (R) - This account includes the rental fees on houses, apartments,
and condominiums rented out by landlords as well as the offices rented out by building
owners to businesses.
Profits (P) - Include those earned by self-employed proprietorships and partnerships that
simultaneously manage their businesses and at the same time pay themselves for labor
services rendered to their firms.
Net Interest (i) - Households both receive and pay interest
Indirect Business Taxes (IBT)
Depreciation (D)
 GROSS DOMESTIC PRODUCT (GDP)
3. Industry Origin or Gross Value Added Approach

Under this approach, the economy is divided into three

sectors composed of industries, as follows: (1) agriculture,
fishery and forestry sectors (AS); (2) Industry sector (IS) (3)
Service Sector (SS).

GDP or GVA = AS + IS + SS

The gross value added is the domestic product of goods

and services produced by industries within the country. This
total output does not include the value of imported goods
and services.
 GROSS DOMESTIC PRODUCT (GDP)
APPLYING THE FORMULA:
Expenditure Approach Income Approach

GDP = C + G + I + NX GDP = TNI+ST+D+NFI

? ?
1000 = 200 + 500 +150 +100 2000 = 1000 + 500 +250 +250
 GROSS DOMESTIC PRODUCT (GDP)
APPLYING THE FORMULA:

Industry Origin or Gross Value Added Approach

GDP = AS + IS + SS

?
1000 = 250 + 400 +350
Assuming the measurement of the philippines annual
gross domestic product (simplified) for the year
2016 using the following approaches:
H. Indirect business taxes, adjustments
● The Final Expenditure Approach & statistical discrepancy (28,150)
● The Factors Income Approach I. Rental income of persons (14,695)
● The Industrial Origin Approach
J. Net Interest (5,680)
K. Wages, salaries and supplements
GIVEN: AT CURRENT PRICES (PESOS IN MILLIONS)
(98,320)
A. Personal Consumption Expenditure L. Agriculture (43,280)
● Durable Goods (7,579) M. Fishery and forestry (32,750)
● Nondurable Goods (67,560) N. Mining (22,810)
● Personal Services (19,830) O. Quarrying (21,235)
B. Private Domestic Investment P. Manufacturing (31,090)
● Residential Fixed (5,210) Q. Construction (15,888)
● Business Fixed (15,260) R. Transportation, communication,
● Change in inventories (4,559)
storage & utilities (62,280)
C. Government consumption & Investment purchases (19,810)
D. Net Exports S. Commerce (20,579)
● Export (9,820) T. Services (23,134)
● Import (13,480) U. Trade (38,189)
E. Corporate Profits before taxes
● Corporate Profit Taxes (3,690)
● Dividends (4,250)
● Undistributed Profits (3,390)
F. Income of unincorporated enterprises (7680)
G. Depreciation (Overall) (9,950)
GROSS DOMESTIC COMPUTATION USING DIFFERENT APPROACHES:
GDP USING THE FINAL EXPENDITURE APPROACH

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

Given:
(C) Personal Consumption Expenditure P 94,969
● Durable Goods (7,579)
● Nondurable Goods (67,560)
● Personal Services (19,830
(I) Private Domestic Investment 25,069
● Residential Fixed (5,210)
● Business Fixed (15,260)
● Change in inventories (4,559)
(G) Government Consumption & Investment Purchases 19,810
Net Exports (3,660)
● (x) Export 9,820
● (M)Import 13,480

Total GDP P 136,188 (in millions)

GROSS DOMESTIC COMPUTATION USING DIFFERENT APPROACHES:
NATIONAL INCOME

Formula: NI = W + R + i + P

Given:
(P) Corporate profits before taxes P 11,330
● Corporate Profit taxes 3,690
● Dividends 4,250
● Undistributed profits 3,390
(P) Income of unincorporated enterprises (7680) 7,680
(R ) Rental Income of persons (14,695) 14,695
(i) Net interest (5,680) 5,680
(W) Wages, salaries, and supplements (98,320) 98,320

Total GDP P 137,705 (in millions)

GROSS DOMESTIC COMPUTATION USING DIFFERENT APPROACHES:
GDP USING THE FACTORS INCOME APPROACH

Formula: GDP = NI + IBT + D

Given:
(NI) National Income P 137,705

(D) Depreciation (overall) 9,950

(IBT) Indirect Business Taxes, adjustments and

statistical discrepancy 28,150

Total GDP P 175,805 (in millions)

GROSS DOMESTIC COMPUTATION USING DIFFERENT APPROACHES:
GDP USING THE INDUSTRIAL ORIGIN APPROACH

Formula: GDP OR Gross Value Added = AS + IS + SS

Given:
(AS) Agriculture Sector P 76,030
● Agriculture 43,280
● Fishery and Forestry 32,750
(IS) Industry Sector 91,023
● Mining (22,810)
● Quarrying (21,235)
● Manufacturing (31,090)
● Construction (15,888)
(SS) Service Sector 134,182
● Transportation, communication, storage & utilities (62,280)
● Commerce (20,579)
● Services (23,134)
● Trade (38,189)

Total GDP P 311,235 (in millions)

GDP SHORTCOMINGS

1. Underground Economy - Illegal Activities (e.g., illegal gambling,

prostitution, the manufacture and sale of illegal drugs and guns,
loan-sharking and smuggling) an other transactions without the
government’s approval are goods and goods services that meet all the
requirements of GDP: they are final products with a value determined in
markets, but GDP does not include unreported illegal activities. Hence, if
the underground economy is sizable, GDP understates an
economy’s performance.

2. Economic Bads - More production means a larger GDP, regardless of

the level of pollution created in the production process. Air, water and
noise pollution are economic “bads” that impose costs on society and
the environment but these are not reflected in private market prices
and quantities bought and sold. Thus, if production results in pollution
or environmental damage like deforestation, destruction of marine
life, GDP overstates the nation’s well-being.
GDP SHORTCOMINGS

3. NonMarket Transactions - Because GDP counts only market

transactions, it excludes certain unpaid activities such as homemade
production, childcare, and homemade services like repairs and
maintenance. Thus, if you clean your house or do the gardening yourself,
and plant vegetables at your backyard for your own consumption, GDP
ignores the value of all these activities, although there is certainly
production happening because of such activities.

4. Neglect of Leisure Time - In general, the wealthier a nation

becomes, the more leisure time its citizen can afford. Thus, rather than
working longer hours, workers often choose to increase their time for
recreation and travel. As such, GDP also understates the welfare of
employees because no allowance is made for people working fewer hours
than they once did.
GDP SHORTCOMINGS

5. Distribution, Kind and Quality of Products. GDP is blind as to

whether a small fraction of the population consumes most of a country’s
GDP or consumption is evenly divided. GDP also wears a blindfold with
respect to the quality and kind of goods and services that make up a
nation's GDP. In other words, GDP does not reflect who exactly consumes
the goods and services produced by the economy and whether the products
and services produced are of good quality or not. What is only being
accounted is how much goods and services have been produced
during the year.
 Nominal or Current GDP vs. Real GDP
Nominal or Current GDP - is the value of all final goods and
services based on the prices existing during the time period of
production.

Real (GDP) - Is the value of all final goods and services

produced during a given time period based on the prices
existing in a selected base year.
 Nominal or Current GDP vs. Real GDP
Formula for converting nominal GDP to real GDP:

Normal GDP = (Real GDP X GDP Deflator) /100

GDP Deflator = (Real GDP/Normal GDP) X 100

Normal GDP
Real GDP = X 100
GDP Deflator
For example:

Suppose GDP rises from P30 Trillion in 2011 to P50 Trillion in 2020, the current
year. If the GDP Deflator is 125 in 2020, What is the real GDP in 2020?
Answer:
50 Trillion
40 Trillion = 125 X 100
 GNP versus GDP
Gross National Product (GNP) - Is the measure of the
market value of all final goods and services produced within a
given period by factors of production owned by a country’s
citizen, regardless of where the output is produced. (net factor
income from the rest of the world).

Gross Domestic Product (GDP) - The total market value of

all final goods and services produced within a given by factors
of production located within a country.

In a country whose economy is dominated by multinational

corporations or foreigners, the GDP is bigger than GNP. This
is the actual situation in many less developed countries.
THE PHILIPPINE
ECONOMY
 UC CPA REVIEW

SIR BERN’S
ADVICE
 SIR BERN’S ADVICE

EXPECTATION
VS.
REALITY
 SIR BERN’S ADVICE

The feeling that good things are going to happen

EXPECTATION
in the future

something that constitutes a real or actual thing,

REALITY as distinguished from something that is merely
apparent.
SIR BERN’S ADVICE
SIR BERN’S ADVICE
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