National Income Accounting

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

payments for goods and services goods and services

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 (=GDP) MARKETS FOR GOODS AND SERVICES

Spending (=GDP)

Good and services sold

Good and services bought

FIRMS

HOUSEHOLDS

Inputs for Production

MARKETS FOR FACTORS OF PRODUCTION

Land, labor and capital

Wages, rent, interest and profit (=GDP)

Income (=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

 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 economys 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 i i

GDP !

V ! P
i !1 i !1

Qi

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
 Uses the upper loop of the circular flow diagram.  Example: Suppose the economy has only one product, namely, rice.
Good Rice Price per unit 20 Q sold 1000 GDP Expenditure 20,000 20,000

Income Approach
  Uses the lower loop of the circular flow diagram: sum of payments to the various factors of production. Suppose that in the production of rice the sales and expenses are as follows: Sales Expenses: Wages Rent Interest Total Profit GDP=Sum of Payments to factors 8000 4000 2000 14,000 6,000 20,000 P 20,000 P 20,000

Value Added Approach

 Suppose that rice is the only final product of an economy: It goes through several (3) stages of production.
Value of intermediate good 12,000 15,000

Stage of Prodn Farmer - Palay Rice Miller -Milled Rice Retailers - Rice GDP= Total Value Added

Value of Sales 12,000 15,000 20,000

Value-added 12,000 3,000 5,000 20,000

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

 

same principles as above but need to make adjustments in order to accommodate the realities in modern economies Expenditure approach
 GDP = C + G + I + X M+ SD

Table. Expenditures on GDP, 2002 in million pesos.

Item Personal Consumption Expenditure Government Consumption Expenditure Gross Domestic Capital Formation Exports of Goods and Services Less: Imports of Goods and Services Statistical Discrepancy Gross Domestic Product

Symbol C G I X M SD GDP

Value 2,750,9000 488,700 776,200 1,968,500 1,989,100 27,500 4,022,700

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 G - governments payments for the salaries of its workforce as well as purchases of goods and services p used for the governments 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 Mthe countrys purchases of goods and non-factor services from the rest of the world. SD - accounts for accounting and reporting errors in the accounts. Needed to ensure that GDP value from all approaches are the same

    

Income Approach
ITEMS Compensation of Employees Net Operating Surplus Depreciation Indirect Business Taxes less Subsidies Gross Domestic Product SYMBOLS COE NOS D IBTS GDP VALUE 1,093,800 2,215,100 357,200 356,600 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 p 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

 GDP = value added of different activities (sectors)

ITEM Agriculture, Fishery and Forestry Industry Services Gross Domestic Product

VALUE 519,400 1,307,400 2,123,900 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 Net Factor Income from the Rest of the World Gross National Product

GDP NFIRW

4,022,700 267,500

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 QUANTITY Ice Cream Buko Pie PRICE Ice Cream Buko Pie VALUE Ice Cream Buko Pie NOMINAL GDP 5,000 10,000 15,000 10,000 20,000 30,000 50 100 100 200 100 100 100 100 YEAR 2

  

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 GDP at current prices (million PhP) GDP deflator (base year 1985) GDP at constant prices (million PhP) 1990 1,072,000 149.5 720,700 1998 2,665,100 300.1 888,000 2002 4,022,700 384.6 1,046,100

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 p ercent 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) 55.1 3.7 14.7 5.7 12.3 8.5 100.0

Food, Beverages and tobacco Clothing Housing and Repairs Fuel, Light and Water Services Miscellaneous items All Items

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 (CPI) 62.7 75.6 83.8 91.6 100.0 108.2 117.3 125.1 137.9

Inflation rate (in percent) -20.6 10.8 9.3 9,2 8.2 8.4 6.6 10.2

1990 1991 1992 1993 1994 1995 1996 1997 1998

Real GDP at 1985 prices

GDP (at 1985 Prices), Philippines
1300.0 1200.0 1100.0 1000.0 B illions 900.0 800.0 700.0 600.0 500.0 400.0 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 countrys 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 mil lion 50.0 40.0 30.0 20.0 10.0 0.0 88 89 90 91 92 93 94 95 96 97 Year 98 99 00 01 02 03 04 05

Per capita GDP

Item GDP at constant (million pesos) Population (millions) Per capita GDP at constant prices 1990 720,700 62.0 1998 888,000 75.2 2002 1,046,100 81.8

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 (1) GDP at current prices (million pesos) (2) GDP deflator (base year -1985) (3) GDP at constant prices (million pesos) (4) Per capita GDP at current prices (pesos) (5) Per capita GOP at constant prices (pesos) (6) Population (million persons) 1984 524,481 1985 571,883 1995 608,887 1996 2,171,922 1997 2.423.640

85.01

100.00

102.95

255.78

271.40

616,964

571,883

591,440

849,137

893,014

9,890

10,524

10,935

30,208

32,961

11,634

10,524

10,662

11,810

12,145

53.03

54.34

55.68

71.90

73.53

Source: NSCB (1998), Philippine Statistical Yearbook.

GNP for cross country comparisons

 Convert a countrys GNP to US dollars, or some common currency, by using the countrys exchange rate  When comparing income across countries, it also makes sense to use per capita estimates p 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 P e s o s p e r d o lla r 40.00 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
217 250 350 390 440 540 600 620 1010 1140 1170 1500 2490 4520 14000 14770 24760

Per Capita GNI

Myanmar b Nepal Cambodia Lao PDR Bangladesh Viet Nam Pakistan India Sri Lanka Indonesia Philippines China Thailand Malaysia Korea, Rep. of Taiwan Singapore

Poverty rate
26.6 30.9 34.7 33.5 49.8 19.5 32.6 26.1 22.7 18.2 30.0 3.1 9.8 7.5 3.6 0.8 0.0

GNP Per Capita (in US$), 1998 and 2003

4500 4000 3500 3000 2500 2000 1500 1000 500 0 China Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam 1998 2003

GDP Per Capita PPP$, 2000 prices

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1980 2005

In do ne sia

Ph ilip pi ne s

M al ay si a

Ko re a,

Vi et na m

Th ai la n

Ch in a

ep .

Annual Growth GDP, 1980-2005 (% per year)

9 8 7 6 Percent 5 4 3 2 1 0 Philippines Indonesia Malaysia Thailand Korea, Rep. Vietnam China 0.63 3.7 3.65 4.59 5.53 4.87 8.49

Annual Growth GDP, 2000-2005 (% per year)

9.0 8.0 7.0 6.0 Percent 5.0 4.0 3.0 2.0 1.0 0.0 Philippines Indonesia Malaysia Thailand Korea, Rep. Vietnam China 2.5 3.3 3.0 4.1 4.6 6.1 8.6

TABLE 8.8.

Economic indicators for selected countries, 1998.

Country

Population (in millions)

GNP1 (in billions)

Per capita GNP1 In US Dollars

PPP adjusted per capita GNP*

France Germany Indonesia Japan Malaysia Philippines Singapore Thailand United Kingdom United States

59 82 204 126 22 75 3 61 59 270

1,466.2 2,122.7 138.5 4,089.9 79.8 78.9 95.1 134.4 1,263.8 7,921.3

24,940 25.850 680 32,380 3,600 1,050 30,060 2.200 21.400 29.340

22,320 20,810 2,790 23,180 6,990 3,540 28,620 5,840 20.640 29.340

PHILIPPINES: Key Economic Indicators, 2003

Region Per Capita GRDP Index Phil=100
100.0 275.8 129.9 53.7 52.3 75.2 85.7 43.3 83.5 93.4 50.5 62.1 101.8 92.4 76.6 23.2 47.8

Composition of GRDP(%) Agriculture Industry Services

GRDP Growth Rates, (1985- -2003 (%)

3.1 3.4 6.4 2.5 2.8 3.0 3.5 22 2.9 3.7 2.0 2.4 2.7 1.7 3.4 2.5 2.1

Philippines NCR CAR Ilocos Cagayan Valley C. Luzon S. Tagalog Bicol W. Visayas C. Visayas E. Visayas W. Mindanao N. Mindanao S. Mindanao C. Mindanao ARMM Caraga

15.0 11.0 36.0 45.8 20.5 20.2 22.7 22.6 10.4 29.9 40.2 28.6 25.2 40.2 48.6 38.0

31.8 37.1 56.5 8.9 7.5 32.7 37.5 16.1 25.7 27.9 25.7 14.8 30.2 25.2 28.0 10.3 18.0

53.2 62.9 32.5 55.1 46.7 46.8 42.3 61.2 51.7 61.7 44.4 45.0 41.2 49.6 31.8 41.1 44.0

PHILIPPINES: Average growth of regional GDP (in 1985 prices)

REGION 1975-85 1985-95 1995-2003 1975-2003

Philippines Luzon NCR

Central Luzon & S. Tagalog Other Luzon

2.5 2.6 2.4 2.6 3.0 2.4 2.7 2.3 2.2

2.5 2.8 2.8 3.1 2.3 2.1 2.6 1.7 1.7

3.9 4.0 4.3 3.6 4.3 4.0 4.8 3.4 3.6

3.2 3.4 3.4 3.4 3.4 3.2 3.7 2.8 2.6

Visayas Central Visavas Other Visayas Mindanao

PHILIPPINES: Share of National GDP

REGION
Philippines Luzon NCR
Central Luzon & S.Tagalog Other Luzon

1975-85
100 62.6 28.8 23.3 10.5 16.7 6.4 10.3 20.8

1985-95
100 64.8 31.6 23.2 10.0 16.3 6.5 9.8 19.0

19952003
100 66.4 34.4 21.9 10.1 15.8 6.7 9.1 17.2

19752003
100 64.5 31.5 22.8 10.2 16.2 6.5 9.7 19.1

Visayas Central Visavas Other Visayas Mindanao

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 Number Item Amount

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Net operating surplus of households and unincorporated business Compensation of employees, net Total (Items 1 and 2) Interest on public debt from the general government Other property Income Social security benefits Casualty insurance claims Current transfers Total (Items 4 to 8) Interest payments on consumer debt Other payments Direct taxes Compulsory fees, fines and penalties Net casualty insurance premiums Social security contributions Other current transfers Total (Items 10 to 15) Disposable Income (Item 3 +Item - Item 17)

1,062,091 910,259 1,972,350 73,957 188,699 138,846 1,304 68.396 371,202 7,984 22,634 90.268 29,181 1304 53,629 11,797 216,797 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