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(NIA)
is the measurement of indicators of
national output/income; .e.g. GDP,
GNP
Circular flow diagram
FIRMS HOUSEHOLDS
factor services
factor payments
(wages, interest, rent, profit)
FIGURE 8.1. Circular flow diagram. The diagram above represents the transactions between
firms and households in a simple economy.
In the upper loop, the arrow emanating from firms to households represents the sale by firms of
goods and services to households. On the other hand, the arrow from households to firms
represents the payments.
n the lower loop, the arrow originating from the households to the firms shows that firms hire
labor and capital from households in order to produce goods and services. The arrow
emanating from the firms indicates their payments for the use of the factors of production.
Revenue Spending
(=GDP) (=GDP)
MARKETS FOR
GOODS AND
Good and SERVICES
Good and
services sold services
bought
FIRMS HOUSEHOLDS
Land, labor
Inputs for
and capital
Production MARKETS FOR
FACTORS OF
PRODUCTION
Wages, rent, Income (=GDP)
interest and
profit (=GDP)
Flow of goods & services
Sales P 20,000
Expenses:
Wages 8000
Rent 4000
Interest 2000
Total 14,000
Profit 6,000
GDP=Sum of Payments to 20,000 P 20,000
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 intermediate Value of Value-added
good Sales
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
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.
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.”
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
THE NATIONAL ACCOUNTS OF THE
PHILIPPINES
Depreciation D 357,200
Indirect Business Taxes less IBTS 356,600
Subsidies
Gross Domestic Product GDP 4,022,700
Income Approach
GDP = COE + NOS + D + IBTS
In a simple world, GDP = COE + NOS. In practice,
require two adjustments (D and IBTS)
D - accounts for the wear and tear of physical capital
“D” is treated as a business cost not included in NOS.
However, “D” is part of “I” in the expenditure side of the
national accounts
IBTS - includes taxes on the use or purchase goods and
services and grants from government to firms. E. g
sales taxes, value added tax
Not included in NOS but is part of the market prices, of
which the items in the expenditure accounts are quoted
Value added or Industrial Origin approach
ITEM VALUE
Agriculture, Fishery and 519,400
Forestry
Industry 1,307,400
Services 2,123,900
Gross Domestic Product 4,022,700
The distinction between GDP and
GNP
QUANTITY
Nominal GDP
Real GDP 100.
GDP deflator
Calculation of Real GDP
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
18.0
16.0
14.0
12.0
percent per year
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
GNP for cross country comparisons