APPLIED BUSINESS ECONOMICS PROGRAM

Economic Policy, SY 2018-19 Apr-June 2019

Exercise #1 National Income Accounts

Fill the blanks from a list of phrases/terms or multiple choice:

Circular Flow and National Income Accounts

1. A simple model of the economy is the circular flow of goods and services. Firms produce goods and services which
households consume. However, households need to obtain income from firms as resource owners, and are thus able
to spend. The form of payment depends on the resources used: labor – wages; land – rent; capital - interest; and (1)
entrepreneur -
a. entrepreneur – royalties
b. entrepreneur – gains & losses
c. entrepreneur - profits
d. entrepreneur – dividends

Answer: c. entrepreneur - profits

2. The circular flow of income for a two-sector model shows:

a. the flow of income between the household and business (firms) sectors.
b. the amount of money held by the household and business sectors
c. whether the household sector is satisfied with the output of the business sector
d. whether the business sector is satisfied with spending of the household sector

Answer: a. the flow of income between the household and business (firms) sectors

3. A better understanding of the circular flow model would tell us that a variable generated over a period of time is:
a. Wealth
b. Stock
c. Flow
d. Asset
e. Supply

Answer: b. flow

4. However, in this circular flow, there are outflows and inflows. Outflows consists of: savings (S), taxes (T) and imports
(M), while inflows may be in the form of investments (I), government spending (G), and exports (X). At equilibrium,
outflows are equal to inflows, i.e., S+T+M = I+G+X. Manipulating this equation would give us a useful result which is
(S-I) + (T-G) = X-M. (6.) This means that private sector balance plus public sector balance is always equal to X-M.
Private sector balance is measured by __________ and is object of ___ policy:
a. (S-I) and monetary policy
b. (T-G) and monetary policy
c. (X-M) and fiscal policy
d. (X-M) and exchange rate and trade policy

Answer: a. (S-I) and monetary policy

5. During the post World War II period, we almost always had deficits in the current account (X-M), often due to public
sector deficits. The exception, where we had a positive, current account despite public sector deficits was during New
Millennium, starting with the regime of Gloria Macapagal-Arroyo until Pres. Aquino III, due to:
a. Large private sector surpluses primarily from profitable corporations
b. Large private sector surpluses primarily from GOCCs
c. Large private sector surpluses primarily from OFWs
d. Large borrowing from abroad

Answer: c. large private sector surpluses primarily from OFWs

Measures of Economic Performance

6. Economic performance has to be measured. This is usually done by estimating the production for the quarter or
year. There are three approaches to computing Gross Domestic Product (GDP) because in totals: production=
income= expenditure. The sum of the peso values of all the final goods and services produced by the economy is
reflected in the nation’s GDP and gross national product (GNP). To distinguish between the two, economists usually
relate GDP with everything that is produced in the Philippines or “gawa dito sa Pilipinas,” while GNP is income of
Filipinos “gawa ng Pilipino.” Now termed as “Gross National Income.” Therefore, dividends sent by Oishi from China
is forms part of the Philippines’:
a. Gross Domestic Product
b. Gross Domestic Income
c. Gross National Income
d. Gross Nominal Income

Answer: c. Gross National Income

,
7. The difference between GDP and GNP (GNI) used to be called “Net Factor Income from Abroad” (or presently, “Net
Primary Income”) the biggest item here comes from OFW remittances, but there are negative components of this
item, such as:
a. Earnings of Manny Paquiao in Las Vegas
b. Royalties paid to MacDonald’s USA by the local general franchisee
c. Payments for imports of services
d. Dividends received by San Miguel Corp. from San Miguel HK Ltd. (Hong Kong based)

Answer: b. Royalties paid to MacDonald’s USA by the local general franchisee

8. Which of the following is not included in GDP?

a. Earnings of overseas Filipino workers (OFW)
b. Earnings of foreign investors in the Philippines
c. Earnings of exporters
d. Rental of a building in BGC

Answer: a. Earnings of overseas Filipino workers (OFW)

9. & 10. National Income Accounts. Based on the table below, place figures in the proper column, and compute
GDP, GNI, and the statistical discrepancy (and where this is lodged)

Item P Billion Expenditure Production

Approach Approach
HH Final Consumption Expenditures 9,159
Gross Value Added in Agriculture 1,430
Exports of goods & services 3,679
Gross Value Added in Services 7,258
Depreciation Allowance 858
Gross Value Added in Industry 3,947
Capital Formation 2,490
Subsidies to Households 65
Government Final Consumption Expenditures 1,348
Imports of goods & services 3,974
Statistical Discrepancy
Gross Domestic Product
Net Factor Income from Abroad/ Net Primary Income 2,685
Gross National Income (Product)

11. Based on the expenditure approach, the largest sector is the ______________________, but ______________
the last 5 years is leading the growth.
a. Capital Formation and Household Final Consumption Expenditures
b. Services sector and the Agriculture sector
c. Government Final Consumption Expenditures and Capital Formation
d. Household Final Consumption Expenditure and Capital Formation

12. To compute a firm/industry’s value-added basis (production approach), we must deduct from the value of the
market price of the good it has produced:
a. All indirect business taxes paid
b. Depreciation
 c. Undistributed profits
d. Distributed profits
e. All purchases from other firms/industries

Answer: b. Depreciation

13. Some of the limitations of real Gross Domestic Product per capita as a measure of performance include: equal
treatment for every peso of production regardless of what is produced, exclusion of losses on fixed capital, and:
a. Non-market activities, such as illegal production and trade in dangerous drugs
b. Non-market activities, such as government expenditures
c. Non-market activities, such as money laundering
d. Non-market activities, such as the value of household chores done by a full-time housewife.

Answer: d. non-market activities, such as the value of household chores done by a full-time housewife

14. Your research assistant gave you the following GDP current prices information, when you asked her for the
growth of the economy as measured by GDP from 2015 to 2016 (col. B). Fortunately, you had on hand the Implicit
price index for GDP as follows: 175.3 for 2015 and 178.2 for 2016.

. What was the GDP growth rate of the economy in real terms in 2016?
Year GDP Current Prices (P B) Implicit Price Index Real GDP= 100*(GDP
current)/Imp. Price Index
2015 13,322,041 175.3 7,599,567.028
2016 14,480,720 178.2 8,126,105.50

 GDP Growth 2015-2016: 8.6975%

 Real GDP Growth 2015-2016: 6.9285%

Under what expenditure account of GDP would you classify the following transactions:

Transaction Consumption Investment Government Exports Imports

(or HFCE) (or Capital (or GFCE)
Formation
15. Purchase of brand new air-conditioner
by Santos family
16. Expenses related to the planting of
mango trees (harvest to start in 7th year)
17. Proceeds from the sale of copper
cathodes to foreign buyers
18. Payments for the purchase of wheat
from the US for use in production of pan de
sal
19. Purchase of office supplies by the
Department of Finance

20. In an effort to have a broader measure of development, UNDP has formulated the Human
Development Index, which includes: (a) adult literacy; (b) life expectancy at birth © combined primary,
secondary, and tertiary education, and:
a. GDP in US$ terms (converted at current exchange rate)
b. GDP per capita in US $ terms (computed at current exchange rates)
c. GDP per capita in PPP US$ terms
d. GDP in PPP US$ terms

Answer: c. GDP per capita in PPP US$ terms