|
 




Economics 11-
11- UPLB
Department of Economics, CEM
|
 
 
 
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ï is the measurement of indicators of
national output/income; .e.g. GDP,
GNP
  

ï summarizes the transactions between

the different economic agents

ï agents: households, firms (business),

government, and foreigners (rest of
the world)
  

ï Ôssumption: The economy composed of

Ôssumption:
households and firms only
ï Households:: own factors of production,
Households
consume goods and service
ï Firms:: hire factors of production to produce
Firms
goods and services
 
   




  




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THE CIRCULÔR FLOW DIÔGRÔM

  

ï Ôssumption: The economy composed

of households and firms only
ï Households: own factors of
production, consume goods and
service
ï Firms: hire factors of production to
produce goods and services
  

ï Upper loop of the circular flow

diagram: transactions in the goods
and services markets

ï Lower loop: transactions in the factor

markets
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ï |


 


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.
m 
 



ï Transfer payments ƛ are transactions

wherein one party is not obliged to
deliver a good or service in return for
the payment.
ï Examples: retirement benefits,
unemployment benefits, scholarships,
and donationsë
donationsë
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ï Includes sales of goods and services,
assets, and transfers
ï Exports - sales of domestically
produced goods to other countries
ï Imports - goods bought from other
countries
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ï The GDP measures the market value of all  

goods and services produced within an economy in
a given period.
ï GDP only measures current production. Transfer
payments and transactions involving goods
produced in other periods are not included in the
calculation of GDP.
ï GDP is usually expressed in the currency of a
particular country, e.g., Philippine pesoƦ.indicates
the market value of the goods and services




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ï Final goods - goods and services that are
not purchased for the purpose of producing
other goods and services or for resale
ƛ Eg. Rice (final) and palay or unhusked rice
(intermediate product)

ï Including intermediate goods and final

goods will result in Ơdouble countingơ.
"
 


 
1. Expenditure Ôpproach (upper loop) ƛ
measures GDP as the sum of expenditures
on final goods and services.
2. Income Ôpproach (lower loop) ƛ measures
GDP as the sum of incomes of factors of
production (wages, rent, interest and
profit.
3. Value
Value--added Ôpproach ƛ measures GDP as
the sum of value added at each stage of
production (from initial to final stage)
2 


 
ï Uses the upper loop of the circular flow
diagram.
ï Example: Suppose the economy has
only one product, namely, rice.
 

 [ 2 





Rice 20 1000 20,000
GDP #$%$$$
 
 
ï Uses the lower loop of the circular flow diagram: sum of payments
to the various factors of production.
ï Suppose that in the production of rice the sales and expenses are as
follows:

Sales #$%$$$
Expenses:
Wages 8000
Rent 4000
Interest 2000
Total &'%$$$
Profit (%$$$
GDP=Sum of Payments to #$%$$$ #$%$$$
factors
  

 
ï Suppose that rice is the only final product of an
economy: It goes through several (3) stages of
production.
Value of
Stage of Prodƞn intermediate Value of Value--added
Value
good Sales
Farmer - Palay 12,000 12,000
Rice Miller -Milled 12,000 15,000 3,000
Rice
Retailers - Rice 15,000 #$%$$$ 5,000
GDP= Total Value #$%$$$
Ôdded
|



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ï The expenditure approach, income approach, and the value-value-
added approach all come up with the same estimate of the
GDP. They are equivalent approaches.
ï 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.
ï 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 Ơdouble-
Ơdouble-counting.ơ
ï Ôt each stage of production, the value-
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.

 m

ï GDP vs GNP
ï Real vs current GDP
ï Inter--country comparisons of GDP
Inter
ƛ Convert to international currency like US
dollars
ƛ Convert to per capita measures
THE NÔTIONÔL ÔCCOUNTS OF THE
PHILIPPINES

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 Table. Expenditures on GDP, 2002 in million pesos.

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ï  - spending of households and private non-
non-profit institutions on
goods and services
ƛ Non-
Non-durables - goods and services that are consumed rapidly
ƛ Durable goods - that last for a longer period of time
ï  - investment spending of domestic agents. Its major components
are Ơchanges inơ Fixed Capital and Changes in Stocks
ï  - governmentƞs payments for the salaries of its workforce as well as
purchases of goods and services O used for the governmentƞs day to
day operations and projects.
ï , - the spending of the rest of the world on goods and non non--factor
services produced in the country
ï r- the countryƞs purchases of goods and non-
non-factor services
from the rest of the world.
ï . - accounts for accounting and reporting errors in the accounts.
Needed to ensure that GDP value from all approaches are the same

 
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ï GDP = COE + NOS + D + IBTS
ï In a simple world, GDP = COE + NOS. In practice,
require two adjustments (D and IBTS)
ï D - accounts for the wear and tear of physical capital
ï ƠDơ is treated as a business cost O not included in NOS.
However, ƠDơ is part of ƠIơ in the expenditure side of the
national accounts
ï IBTS - includes taxes on the use or purchase goods and
services and grants from government to firms. E. g
sales taxes, value added tax
ï 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

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The distinction between GDP and
GNP

ï GNP = GDP + Net Factor Income from

the Rest of the World (NFIRW)
ï 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

  
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1
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4
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Nominal and Real GDP
ï GDP at current prices or nominal GDP - GDP
measured using the prices of the year for which it is
calculated
ï 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.
ï Real GDP or GDP at constant prices ' measures the
total value of output using the prices of a selected
year (the base year).
ï Real GDP better for analysis overtime because it
eliminates the effects of price changes
 Table 8.5
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ï GDPyear 1 = (100) (50) + (100) (100) = 15,000
ï GDPyear 2 = (100) (50) + (100) (100) = 15,000
ï 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.
ï GDP deflator - a price index that allows us to
convert nominal GDP into real GDP. (note: price
index to be defined later)
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 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

In f la t io n Ra t e , P h ilip p in e s

18.0

16.0

14.0
O
 O
 

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
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GDP per capita
ï Measures how much output or income was
produced or received, on the average, by an
individual in an economy
ï Useful for comparing the performance of a country
overtime and a countryƞs performance relative to its
neighbors

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Year

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TÔBLE 8.7. Selected output Indicators for the Philippines, selected years

Item 1984 1985 1995 1996 1997

(1) GDP at current
prices (million 524,481 571,883 608,887 2,171,922 2.423.640
pesos)
(2) GDP deflator (base
85.01 100.00 102.95 255.78 271.40
year -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 prices 11,634 10,524 10,662 11,810 12,145
(pesos)
(6) Population (million
53.03 54.34 55.68 71.90 73.53
persons)
 
)|01 223& 
4
 5
GNP for cross country comparisons

ï Convert a countryƞs GNP to US dollars,

or some common currency, by using
the countryƞs exchange rate
ï When comparing income across
countries, it also makes sense to use
per capita estimates O eliminates
differences in population size. E.g.
(data is for 1998)
PPP Ôdjusted GNP

ï PPP ƛ purchasing power parity

ï 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
ƛ E.g. Philippines, 1998 per capita GNP (in
USD) = 1050
ƛ per capita GNP (PPP adjusted, in USD) =
3,540
 2  
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 GNP Per C it (i US$), 1998 2003

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&  % &  # '  (  & < 
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  3%  %  
'
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!'+223

Country Population GNP1 Per capita GNP1 PPP adjusted per capita
(in millions) (in billions) In US Dollars 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

 
)' 1 5 222' !

 
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 40|2.5
2 
%#$$"
Per Capita Composition of GRDP(%) GRDP Growth
Region GRDP Index Rates, (1985-
(1985-
Ôgriculture Industry Services
Phil=100 -2003 (%)

 &$$ë$ &
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§28| &26

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331
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332

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3
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 2.5 2.5 3.9 3.2
07 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
   2.4 2.1 4.0 3.2
Central 2.7 2.6 4.8 3.7
Visavas
Other Visayas 2.3 1.7 3.4 2.8
r   2.2 1.7 3.6 2.6
    7)
! % 


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331
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 100 100 100 100
07 (#ë( ('ë1 ((ë' ('ë

NCR 28.8 31.6 34.4 31.5
Central Luzon & 23.3 23.2 21.9 22.8
S.Tagalog
Other Luzon 10.5 10.0 10.1 10.2
   &(ë6 &(ë" &
ë1 &(ë#
Central 6.4 6.5 6.7 6.5
Visavas
Other Visayas 10.3 9.8 9.1 9.7
r   #$ë1 &2ë$ &6ë# &2ë&

  )


ï iersonal disposable income represents the

income that households are free to spend or
save.
ï It excludes the components of national
income that do not accrue directly to
households.
ï It also includes a few items that are not part
of national income but nonetheless
influence the amount of income that
households can spend.
m
32&
 ! 
  
& 
 223  
 
Item Number Item Ômount

1 Net operating surplus of households and unincorporated business 1,062,091

2 Compensation of employees, net 910,259
" m


& # &%26#%"
$
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
2 m


'
1 "6&%#$#
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
&6 m


&$
&
 #&(%626
18 Disposable Income (Item 3 +Item - Item 17) 2,126,755
.
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| 

 


ï Ignores income distribution

ï Ignores environmental degradation
ï Does not include activities that do not
go through the formal markets sectors
ï Does not include Ơillegalơ activities like
drug trafficking, prostitution,
moonlighting