NATIONAL INCOME

Activity 1: IMAGE ANALYSIS

Analyze what the image implies to the best of your ability. After the analysis,

complete the statement below.

The economic situation of the Philippines is

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Processing Questions:

1. What do you think the image is trying to convey?

2. What was your basis for completing the sentence?
3. In your opinion, what measures are used to determine the condition of the
economy?

Activity 2: FACTS ONLY

There are three statements below about the topic. One of these statements is

not true. Each group should conduct a brainstorming session to determine which

statements are true and which are not. Each member will share what they know in

order to come up with collective agreements as a group. Present your group’s

answers in front of the class.

1. Gross National Income and Gross Domestic Product are used to measure the
economic performance of an economy.
2. Only the value of finished products is included in the computation of Gross
National Income.
3. The value of products produced by foreigners working within the Philippines is
not included in the computation of the Gross National Income of their country
of origin.
Activity 3: LOOKING BACK

Answer the question below based on your own experience or opinion. The

answer does not need to be correct for this activity. You will answer this again after

the activities under Development and Reflection to see the improvement of your

knowledge about the lesson.

Why is it important to measure the economic performance of a country?

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Importance of Measuring National Income

According to Campbell R. McConnell and Stanley Brue in their book Economics:

Principles,

Problems, and Policies (1999), the importance of measuring national income is as

follows:

1. The system of measuring national income provides an idea of the level of

economic production in a particular year and explains why the country’s
production is high or low.
2. By comparing national income over several years, we can track the direction
our economy is taking and determine whether there is progress or a decline
in the country’s total production.
3. The information gathered from national income serves as a guide for
economic planners in formulating programs and policies that will improve the
standard of living of citizens and enhance the country’s economic
performance.
4. Without a systematic way of measuring national income, conclusions would
be based merely on speculation without a solid foundation; thus, the data
would not be reliable.
5. Through National Income Accounting, the health of the economy can be
measured.

Gross National Income

Gross National Income (GNI), formerly called Gross National Product (GNP), refers

to the total market value of goods and services produced by the citizens of a

country. GNI is usually measured quarterly or annually and is expressed using a

country’s currency. For comparison purposes, the US dollar is commonly used as a

standard.
 Only the value of finished or completed goods and services is included in the

computation of Gross National Income (GNI). These products have already

undergone processing for consumption. In computing GNI, the value of raw

materials used in the production process is no longer counted to avoid double

counting. For example, if thread were counted in GNI and the clothing made from

that thread were also counted, the thread would be counted twice. To prevent this,

the value of the thread is not counted separately as a finished product; instead, its

value is already included in the value of the clothing.

Non-market activities are also excluded from the computation of Gross

National Income (GNI) if no monetary income is earned from them. An example is

planting vegetables in one’s backyard for family consumption. Products generated

from the informal sector or underground economy—such as street vending, repairing

broken household items, and selling turon along sidewalks—are also not included in

the computation of Gross National Income. This is because these activities are

unregistered and lack documented data sources from which the value of their

production can be measured. Second-hand goods are likewise excluded from the

computation of Gross National Income because their value was already included

when they were first produced.

Difference Between Gross National Income (GNI) and Gross Domestic

Product (GDP)

Gross National Income measures the total market value of all finished goods

and services produced within a given period by the citizens of a country. The factors

of production are owned by the country’s citizens, regardless of where in the world

the production takes place.

Gross Domestic Product, on the other hand, measures the total market value

of all finished goods and services produced within a given period inside a country.

This means that all factors of production used to produce goods and services within

the country are included, even if they are owned by foreigners located within the

country.

For example, income earned by foreigners within the Philippines is included in

the country’s Gross Domestic Product because it is generated within the country.

However, this income is not included in the Philippines’ Gross National Income
because the earners are not citizens of the country. Instead, the income earned by

these foreigners in the Philippines is included in the Gross National Income of their

own country.

Similarly, the income earned by Overseas Filipino Workers (OFWs) working in

Singapore is included in Singapore’s Gross Domestic Product but not in its Gross

National Income. Instead, the income earned by these OFWs is counted as part of

the Philippines’ Gross National Income.

Activity 4: GNI and GDP

After reading the text, fill in the Venn Diagram below with the correct data.

List the differences between GNI and GDP, and then write their similarities in the

overlapping section.

Processing Questions:

1. Based on the completed Venn diagram, how does Gross National Income
differ from Gross Domestic Product?
2. Why is it necessary to measure the economic performance of a country?
3. Why are there activities that are not included in the measurement of GNI and
GDP?
METHODS OF MEASURING GNI AND GDP

Methods of Measuring GNI

According to Villegas and Abola (1992), there are three methods of measuring

Gross National Income:

(1) the expenditure approach,

(2) the income approach (based on factor income of production), and

(3) the industrial origin approach.

Expenditure Approach

The national economy is composed of four sectors: households, business

firms, government, and the foreign sector. The expenditures of each sector are as

follows:

a. Personal consumption expenditure (C) – this includes the

expenses of citizens such as food, clothing, recreation, hairdressing services,

and others. All expenditures of households are included here.

b. Investment expenditure (I) – includes the expenses of business

firms such as office equipment, raw materials for production, workers’ wages,

and others.

c. Government expenditure (G) – includes government spending for

social projects and other government expenses.

d. Foreign sector expenditure (X – M) – this is obtained by subtracting

imports from exports.

e. Statistical discrepancy (SD) – any shortage or excess in

computation that cannot be identified as to where it should be classified. This

occurs because there are transactions for which data or information sources

are insufficient.

f. Net Factor Income from Abroad (NFIFA) – also called Net Primary

Income. This is obtained by subtracting the income earned by foreigners

within the country from the income earned by citizens abroad.

The formula for computing Gross National Income using the expenditure

approach is: GNI = C + I + G + (X – M) + SD +

NFIFA

Study and analyze the table of GNI and GDP of our country for the years 2012–2013
shown below.

Type of AT CURRENT PRICES AT CONSTANT PRICES

Expenditur 2012 2013 Growth 2012 2013 Growth
e Rate (%) Rate (%)
1. 7,837,881 8,455,783 7.9 4,442,52 4,691,06 5.6
Household 3 0
final
consumptio
n
expenditur
e
2. 1.112,586 1,243,113 11.7 653,067 709,109 8.6
Governmen
t
final
consumptio
n
expenditur
e

3. Capital 1,950,524 2,243,714 15.0 1,168,38 1.381,25 18.2

formation 6 6
A. Fixed 2,047,957 2,332,663 13.9 1,280,042 1,430,438 11.7
Capital
1. 1,074,169 1,236,436 15.1 517,184 573,475 10.9
Construction
2. Durable 751,133 875,079 16.4 630,084 720,598 14.4
Equipment
3. Breeding 181,123 178,032 -1.7 100,069 98,536 -1.5
stock and
Orchard
Development
4. 41,531 44,116 6.2 32,705 37,739 15.4
Intellectual
Property
Products
B. Changes -97,433 -88,949 -111,656 -49,092
in
Inventories

4. Exports 3,254,460 3,332,196 2.4 3,054,07 3,077,98 0.8

1 4
A. Exports of 2,120,180 2,124,279 0.2 2,426,493 2,428,474 0.1
goods
B. Exports of 1,134,279 1,207,917 6.5 627,578 649,510 3.5
services

5. Less: 3,590,563 3,631,207 1.1 3,006,37 3,136,32 4.3

Imports 6 4
 A. Import of 2,875,855 2,877,436 0.1 2,415,218 2,510,593 3.9
goods

6. Statistical 0 -97,495 0 40,682

Discrepancy

GROSS 10,564,88 11,546,10 9.36 6,311,67 6,763,76 7.2

DOMESTIC 6 4 1 7
PRODUCT

Net Primary 2,043,843 2,284,037 1,184,875 1,296710

Income

GROSS 12,608,73 13,830,14 9.7 7,496,54 8,060,47 7.5

NATIONAL 0 0 6 7
INCOME

2. Method Based on Industrial Origin (Industrial Origin / Value Added

Approach) Under the method based on industrial origin, the Gross Domestic

Product (GDP) of a country is measured by adding together the total value of

production of the country’s major industries. These include the agriculture, industry,

and services sectors. On the other hand, if Net Factor Income from Abroad or Net

Primary Income is included in the computation, it will measure the country’s Gross

National Income (GNI), as shown below (12–2013).

GROSS NATIONAL INCOME AND GROSS DOMESTIC PRODUCT BY INDUSTRY:

ANNUAL 2012 AND 2013 AT CURRENT AND CONSTANT 2000 PRICES, AT
MILLION PESOS
INDUSTRY/ AT CURRENT PRICES AT CONSTANT PRICES
INDUSTRY GROUP 2012 2013 Growth 2012 2013 Growth
Rate Rate
(%) (%)
Agriculture, farming, 1,250,616 1,297,903 3.8 698,937 706,647 1.1
hunting ,fishing
Industry sector 3,284,508 3,582,737 9.1 2,022,62 2,213,89 9.5
3 2
Service sector 6,029,762 6,665,414 10.5 3,590,11 3,843,22 7.1
1 9
GROSS DOMESTIC 10,564,88 11,546,10 9.3 6,311,67 6,763,76 7.2
PRODUCT 6 4 1 7
Net Primary Income 2,043,843 2,284,037 1,184,87 1,296,71
5 0
GROSS INATIONAL 12,608,73 13,830,14 9.7 7,496,54 8,060,47 7.5
INCOME 0 0 6 7
 Income Approach

a. Compensation of employees – wages and salaries paid to households by

business firms and the government.

b. Net Operating Surplus – profits earned by private corporations and

government-owned and controlled corporations, as well as other businesses.

c. Depreciation – the decline in the value of physical assets due to wear and

tear from continuous use over time.

d. Indirect taxes – Subsidies

1. Indirect taxes – these include sales tax, customs duties, licenses, and other

indirect taxes.

2. Subsidies – money shouldered and paid by the government without

receiving any product or service in return. An example is the government’s

payment of part of the fare of passengers using the Light Rail Transit (LRT).

Activity 5: HOW IS THIS MEASURED?

Answer the processing questions that follow:

Value added
approach/industrial origin

Expenditure Income
approach approach

METHODS OF MEASURING
NATIONAL INCOME

Processing Questions:

1. What are the methods of measuring national income?

2. How do they differ from one another?

 3. In your opinion, why should national income be measured?

CURRENT/NOMINAL AND REAL/CONSTANT PRICES

GROSS NATIONAL PRODUCT

We discussed in the first lesson how national income is measured. Remember that

what is counted in national income is the market value of finished goods and

services, not their total quantity. What if there is an increase or decrease in prices

but the total number of products produced in the economy does not change? If

national income is compared across years in which prices have changed, the

comparison would no longer be reliable. This is where the importance of measuring

national income at real/constant prices comes in.

Gross National Income at current prices (current or nominal GNI) represents

the total value of finished goods and services produced within a given period based

on current prices. On the other hand, real GNI or GNI at constant prices represents

the total value of finished goods and services produced within a given period based

on past prices or through the use of a base year.

In measuring current and real GNI, it is first necessary to determine the Price

Index. The Price Index measures the average change in the prices of goods and

services. Through the Price Index, one can determine whether there has been an

increase or decrease in the prices of goods or services. The Price Index can be

computed using the formula below:

PRICE INDEX = Price in the current year/Price in the base year x 100

The computation of the price index can be seen in the example below.

Assume that the base year is 2006. Based on the price index formula, between the

years 2006 and 2007, the price index is 109.5. This indicates a 9.5% increase in the

prices of goods. Meanwhile, prices of goods rose by 24% from 2007 to 2008, and a

35% increase was recorded from 2008 to 2009. The largest price increase occurred

from 2009 to 2010, reaching 52%.

 Year Current/Nominal Price Index Real/Constant
GNI Prices GNI
2006 7,883,088 100 7,833,088
2007 8,634,132 109.5 7,885,052
2008 9,776,185 124.0 7,884,020
2009 10,652,466 135.1 7,884,874
2010 11,996,077 152.2 7,881,785

It is important to understand real/constant prices GNI because there are times

when the prices of goods rise, which can affect the measurement of GNI. Since GNI

is measured using market values, it will appear higher if prices increase even when

there is no change in the quantity of production. In such cases, it is better to use

real or constant prices GNI. Real/constant prices GNI is used to measure whether

there is an actual change or growth in the total production of the country without

being affected by price increases. This can be determined using the formula below

to compute real GNI.

Upon examination, real/constant prices GNI is lower compared to nominal/current

price GNI because a base year is used so that the measurement of the country’s

Gross National Income is not affected by price increases. This type of measurement

is more reliable because it truly represents the total production of the country,

removing the effect of price increases.

Real GNP = Price Index base year/Price Index current year x Current Price

You can determine whether there has been economic progress through the growth
rate.

Use the formula below to measure the growth rate of Gross National Income.

� Growth Rate = GNI in the current year – GNI in the previous year/GNI in
the

previous year x 100

The growth rate measures the percentage by which the economy has improved

compared to the previous year. When the growth rate is positive, it indicates that

the country’s economy has improved. On the other hand, when the growth rate is
negative, it suggests that no improvement has occurred in the country’s economy,

implying that it has become sluggish. This important data is used by those who plan

the country’s economy to create and develop policies aimed at addressing issues

related to the decline in the nation’s economic performance. The example below

shows the improvement of the country’s economic activities over time.

Year Current/Nominal Price Index Real/Constant Growth

GNI Prices GNI Rate
2006 7,883,088 - 5,911,313 -
2007 8,634,132 9.53% 6,276,013 6.17%
2008 9,776,185 13.28% 6,590,009 5.00%
2009 10,652,466 8.96% 6,988,767 6.05%
2010 11,996,077 12.61% 7,561,386 8.19%
�

Meanwhile, income per capita can measure what happens if the Gross Domestic

Product is divided by the total population of a country. It gauges the economic

condition of the citizens. Income per capita also estimates whether the total value of

the country’s production is sufficient to meet the needs of its people. Typically, a

small population combined with a high income per capita indicates a strong capacity

of the economy to provide for its citizens’ needs. If population growth is faster than

income per capita, it will be difficult for the economy to sustain the needs of the

country’s population. This serves as a basis for understanding the economic

condition of the citizens.

LIMITATIONS IN MEASURING NATIONAL INCOME

Although the national income of a country can be measured using the formula

introduced in the first lesson, it is not a perfect indicator because there are

economic activities that are not included in national income measurement, such as:

Non-market activities

In measuring national income, products and services created by individuals for

personal use are not included, such as child care, washing dishes, and planting in

one’s backyard. Although no money is earned from these activities, they still

produce useful results.

Informal sector

A large portion of production and income is not reported to the government, such

as transactions in the black market, illegal drug trade, stolen vehicles and

equipment, illegal gambling, and irregular transactions paid for by companies to

gain favorable outcomes. Some legal transactions are also not reported to the

government, such as selling second-hand items, renting to those disposing of waste,

and many others. These activities are not counted in national income even though

goods and services are produced and money is earned.

Externalities or effects

Unintended effects, or externalities, often have value that is not reflected in

national income measurement. For example, the cost of a power plant to reduce

pollution damage is included in national income measurement. Meanwhile, the value

of a clean environment is not counted in national income.

Quality of life

Although an increase in national income is said to improve people’s living

conditions, it should be noted that additional goods and services produced in a

country do not guarantee individual happiness. In fact, many factors not included in

national income measurement contribute to better living conditions, such as a clean

environment, longer rest periods, and a healthy lifestyle. National income measures

the total economy but not the quality of life of individuals.

All these limitations suggest that national income is not an ideal measure of

human wellbeing. Nevertheless, despite its limitations, it still reflects the level of

economic progress. For this reason, many countries and governments worldwide

continue to use national income as a standard for assessing a healthy economy.

Activity 6: MATH SKILLS

After reading and understanding the text, you will test your computational
knowledge.
This is to develop your ability to compute, which is an effective tool in studying
Economics.

Compute the Price Index and Real GNP. Use 2006 as the base year.

Year Nominal GNP Price Index Real GNP

2006 10,500
2007 11,208
2008 12,223
2009 13,505
2010 14,622

Processing Questions:

1. What does the Price Index measure?

2. Why is the Nominal GNI usually larger compared to the Real GNI of the
Philippines?

3. What are the consequences of a large population but a low GNI in the

contemporary period?

Activity 7: REFLECTION

Now you can write down all the things and information you have learned.

Why is it important to measure the economic performance of a country?

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Activity 8: ECONOMY REFLECTION

Read the statement from the National Statistical Coordination Board (NSCB)

regarding the growth of the country’s economy. After reading, write an essay

entitled:

“The Philippine Economy: Where Is It Heading?”

Philippine Economy posts 7.0 percent GDP growth in Q3 2013 (Posted 28

November 2013)

HIGHLIGHTS
• The domestic economy grew by 7.0 percent in the third quarter of 2013

from 7.3 percent recorded the previous year boosting the 2013 first

nine months growth to

7.4 percent from 6.7 percent last year. The third quarter growth was

driven by the Services sector with the robust performance of Real

Estate, Renting & Business Activities, Trade and Financial

Intermediation sustained by the accelerated growth of the Industry

sector.

• On the demand side, growth in the third quarter of 2013 came from

increased investments in Fixed Capital, reinforced by consumer and

government spending, and the robust growth in external trade.

• With accelerated growth of the Net Primary Income (NPI) from the Rest

of the World in the third quarter of 2013 by 11.9 percent, the Gross

National Income (GNI) expanded by 7.8 percent in the third quarter of

2013 from 7.3 percent in the third of 2012.

• On a seasonally adjusted basis, GDP posted a positive growth of 1.1

percent in the third quarter of 2013 but this was a deceleration from

1.6 percent in the previous quarter while GNI accelerated by 1.8

percent in the third quarter of 2013 from 1.1 percent in the second

quarter of 2013. The entire Agriculture sector rebounded its seasonally

adjusted growth to 0.7 percent from a decline of 0.7 percent in the

previous quarter while Industry decelerated to 0.3 percent from 1.4

percent. On the other hand, the Services sector recorded a 1.6 percent

growth for the third quarter of 2013 from 2.1 percent in the previous

quarter with the positive growth of all its subsectors.

• With projected population growing by 1.6 percent to level of 97.6

million, per capita GDP grew by 5.2 percent, per capita GNI accelerated

by 6.0 percent while per capita Household Final Consumption

Expenditures (HFCE) decelerated by 4.5 percent.

Reference:

[Link]

[Link] f retrieved on July 16, 2014

Use the rubric for essay grading as your guide.

Criteria Very Good (3) Good (2) Fair (1) Points

Content Shows Shows three Shows
more pieces of fewer
than three evidence of the than three
pieces of country’s pieces of
evidence of the economic evidence of the
country’s progress. country’s
economic
economic
progress.
progress.

Message The message is The message is The message is

clear and somewhat clear. not appropriate.
appropriate.
Time Followed the Exceeded the Exceeded the
correct time for time by one time by more
completion minute than one
minute
Score

NOTE:

This lesson emphasized the concept of national income. It also explained the

importance of measuring it.