Chapter 9: National
Income Analysis
Objectives
In this chapter, you will learn how to:
Measure GDP using the different
approaches
Distinguish GDP from GNP
Delineate the other measures of
national income
Measure real and nominal GDP
Calculate the GDP deflator and other
price indices
Explain the shortcomings of GDP
National income
accounting (NIA)
is the measurement of indicators
of national output/income; .e.g.
GDP, GNP
Circular flow diagram
summarizes the transactions
between the different economic
agents
agents: households, firms
(business), government, and
foreigners (rest of the world)
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
Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
Good and SERVICES
Good and
services sold
services
bought
FIRMS
Land, labor
Inputs for
and capital
Production MARKETS FOR
FACTORS OF
PRODUCTION
Wages, rent, Income (=GDP)
interest and
profit (=GDP)
Flow of goods & services
Flow of money: pesos
THE CIRCULAR FLOW DIAGRAM
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
Circular flow diagram
Upper loop of the circular flow
diagram: transactions in the
goods and services markets
Lower loop: transactions in the
factor markets
With government and
foreign agents
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).
c. 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.
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.
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
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
Definition of GDP
The market value of good i
(Vi) is equal to PiQi
GDP = sum of the market
values of all final goods and
services produced within the
year. n n
GDP Vi Pi Qi
i1 i1
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”.
3 Approaches for
measuring GDP
1. Expenditure Approach (upper loop) –
measures GDP as the sum of
expenditures on final goods and
services.
2. Income Approach (lower loop) –
measures GDP as the sum of incomes of
factors of production (wages, rent,
interest and profit.
3. Value-added Approach – measures GDP
as the sum of value added at each stage
of production (from initial to final stage)
Expenditure Approach
Expenditure approach
GDP = C + G + I + X –M
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
Expenditure Approach
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.
Expenditure Approach
SD - accounts for accounting
and reporting errors in the
accounts. Needed to ensure
that GDP value from all
approaches are the same
Income Approach
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 20,000 P 20,000
to factors
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 intermedia Value of Value-
te good Sales added
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
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
Notes of the 3
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.
Notes of the 3
approaches
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.”
Notes of the 3
approaches
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.
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
Table. RP Expenditures on GDP, 2009 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
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
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
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
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
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)
Real GDP
Nominal GDP
Real GDP 100.
GDP deflator
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)
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
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
Inflation Rate
CPI t CPI t 1
Inflation Rate
CPI t 1
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
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
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
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
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
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.
TABLE 8.7. Selected output Indicators for the Philippines, selected
years
Item 1984 1985 1995 1996 1997
(1) GDP at current
2,171,92 2.423.64
prices (million 524,481 571,883 608,887
2 0
pesos)
(2) GDP deflator
(base year - 85.01 100.00 102.95 255.78 271.40
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 11,634 10,524 10,662 11,810 12,145
prices (pesos)
(6) Population
53.03 54.34 55.68 71.90 73.53
(million persons)
Source: NSCB (1998), Philippine Statistical Yearbook.
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)
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
Exchange Rate 1988-2002
Exchange Rate (P/US$), Philippines, 1988-2005
60.00
50.00
40.00
Pesos per dollar
30.00
20.00
10.00
0.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
PER CAPITA GROSS NATIONAL INCOME, 2004 (US$)
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
GNP Per Capita (in US$), 1998 and 2003
4500
4000
3500
3000
2500 1998
2000 2003
1500
1000
500
0
China Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam
GDP Per Capita PPP$, 2000 prices
20,000
18,000
16,000
14,000
12,000
1980
10,000
2005
8,000
6,000
4,000
2,000
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Annual Growth GDP, 1980-2005 (% per year)
9 8.49
6 5.53
4.87
4.59
Percent
4 3.7 3.65
1 0.63
0
Philippines Indonesia Malaysia Thailand Korea, Rep. Vietnam China
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.
TABLE 8.8. Economic indicators for selected countries, 1998.
Country Population GNP1 Per capita GNP1 PPP adjusted per
(in millions) (in billions) In US Dollars capita 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
Source: World Bank (1999), World Development Report.
PHILIPPINES: Key Economic Indicators, 2003
Per Capita Composition of GRDP(%) GRDP Growth
Region GRDP Index Rates,
Agriculture Industry Services
Phil=100 (1985- -
2003 (%)
Philippines 100.0 15.0 31.8 53.2 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
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 2.3 1.7 3.4 2.8
Visayas
Mindanao 2.2 1.7 3.6 2.6
PHILIPPINES: Share of National GDP
REGION 1975- 1985- 1995- 1975-
85 95 2003 2003
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
[Link]
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 10.3 9.8 9.1 9.7
Visayas
Mindanao 20.8 19.0 17.2 19.1
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.
Table 8.9 Personal Disposable Income, Philippines, 1998 (in million pesos
Item Item Amount
Number
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
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