NATIONAL INCOME

ACCOUNTING
WHAT ARE THE MEANING OF
THE ACRONYMS?

GDP GNP
NI
CPI NFIA
 NATIONAL INCOME ACCOUNTING
• A system of statistics and accounts that keep
tracks of production, consumption, savings and
investment – to track overall economic
performance.

• A system to track
the overall
economic
performance of
a country
 RELEVANCE OF
NIA

Government Business Firms

Households
Policy Makers

Initiate policies to Make better life For sound business planning

Achieve sustainable decisions and sales forecasting
Economic growth
CIRCULAR FLOW OF GOODS AND
SERVICES
Rent, wages, INVESTMENT
interest
Business Firms
Products,
services

TAX = GOV’T EXPEDITURES

Market for Factors Market for Finished

of production GOVERNMENT Products

TAX = GOV’T EXPEDITURES

Land,
labor,
capital

INCOME Household CONSUMPTION

SAVINGS
 ECONOMIC
INDICATORS
 DIFFERENCE OF GNP AND GDP
• Gross Domestic Product (GDP) – the total
market value of all final goods and services
produced within a country’s national borders in a
year
• Gross National Product (GNP) – the total
market value of all final goods and services that
the country's citizens produced regardless of
their location
 Definition of Terms
• “Market value of all final goods and services
produced

(a)Within a country - GDP or GNP?

(b)By permanent residents of a nation – GDP or
GNP?

in a given period of time…”

 Definition of Terms
• “Market value” - refers to the current market price
of goods and services. It is expressed in money
terms.

• “of all” - includes all items produced in the

economy and sold legally in markets. It does not
include those items sold illegally or those produced
and consumed at home.
 Definition of Terms
• “final goods and services” - includes both
tangible goods and intangible services (doctor
visits, house cleaning, etc). Whey you buy a
CD, it is a good and its purchasing price is part
of the GNP. When you hear a concert and you
paid for the ticket, it is also counted in the GNP.
 Definition of Terms

• “produced” - as explained in the difference

between GNP and GDP, the word will refer to all
the productivity of a country’s residents or
nations, wherever he may be in the world.

• “In a given time” – usually measured quarterly,

semi-annually or annually.
 Definition of Terms
“ The total market value
of all
final goods and services
produced
in a given period of time…”
 NOMINAL AND REAL GNP
• NOMINAL GNP = based on prevailing price in
the market
• REAL GNP = based on the price in a given base
year (as determined by NEDA)
• Note: Nominal GNP is always higher than Real
GNP because prices are always increasing

Previous GNP
 Nominal vs Real GNP
Base Year Real GNP Nominal GNP
• 2004 P12.5B
• 2005 P 12.50B
• 2006 12.95B
• 2007 13.36B
• 2008 13.73B

Nominal GNP is the sum value of all produced goods and

services at current prices.
Real GNP is the sum value of all produced goods and
services at constant prices.
 APPROCHES TO GNP/GDP
MEASUREMENT

1. FACTOR INCOME APPROACH

2. FINAL EXPENDITURE APPROACH
3. INDUSTRIAL ORIGIN APPROACH
FACTOR INCOME APPROACH
• To measure GNP, add nation’s income with
nation’s production expenses
GNP = NI + IBT + CCA
1. NATIONAL INCOME
All factors of production receives payment (ex.
Rent for land, wages for workers, interest for
capital, profit for entrepreneurs). All factor
incomes combined result to the National
Income (NI)
NI= CE + EI + CI + GI
 COMPONENTS OF NI
• Compensation of Employees (CE) = salaries,
allowances, benefits
• Entrepreneurial Income (EI) = payment received
by an owner of a business individual not
classified as salaries
• Corporate Income (CI) = income of corporations
intended for business expansion
• Government Income (GI) = taxes, income of
gov’t owned corporations, interest earned from
government loans
 Also included in the Income
Approach:
• Capital Consumption Allowance (CCA) =
fund intended for buying new machineries
and facilities
• Indirect Business Taxes (IBT) = indirect
taxes imposed on products and services
• Undistributed Corporate Profits
 Discussion

In what way can you, students, do now to

help in the increase of our GNP, if we
measure it using the income approach?
 Discussion

In what way can you do now to help in the

increase of our GNP, if we measure it
using the income approach, when you
become professionals?
 Any Reflections, Insights
in relating
what is happening in your own life, or
what is currently happening in our
country
to the topic of GNP?
 EXPENDITURE APPROACH
• Most common approach
• Adding all final expenditures on goods and
services, contributions of inventories, value of
exports, and deducting the value of imports.
• Exports are included in GDP because they are
part of Philippine production. Imports are
deducted because they are not part of
Philippine production.
• Formula: GDP = C+I+G+X-M
(See description of the components above in file National Income Accounting_hand-out.doc)
 GDP = C + I + G + NE
• C is private consumption in the economy.
(ex. Household expenditures on food, rent,
medical expenses and so on but does not
include new housing.

• I is defined as business investments in

capital.
(ex. Investment by a business, purchase of
machinery and equipment, spending by
households on new houses)
 GDP = C + I + G + NE
• G is the sum of government expenditures on final
goods and services.

(ex. Salaries, purchase of weapons for the military,

and any investment expenditure by a government.

• NE are "net exports" in the economy: gross exports −

gross imports. There is a fixed relation: NE = X − M.
– X is gross exports. GDP captures the amount a
country produces, including goods and services
produced for overseas consumption
– M is gross imports.
 Example: Actual Data
GROSS DOMESTIC PRODUCT AND GROSS NATIONAL PRODUCT
BY EXPENDITURE SHARES:
IN MILLION PESOS
At Constant 1985 Prices

Growth Rate
TYPE OF EXPENDITURE Q2 2006 Q2 2007
(%)

1. Personal Consumption Expenditure 247,830 262,719 6.0

2. Government Consumption 22,488 25,535 13.5

3. Capital Formation 53,233 57,575 8.2

4. Exports 162,595 169,420 4.2

5. Less : Imports 173,684 154,160 -11.2

6. Statistical Discrepancy 893 -24,242  

       

GROSS DOMESTIC PRODUCT 313,355 336,846 7.5

Net factor income from the rest of the world 31,946 37,247  

GROSS NATIONAL PRODUCT 345,301 374,093 8.3

 Any Reflections, Insights
in relating
what is happening in your own life, or
what is currently happening in our
country
to the topic of GNP?
EXCLUSIONS AND LIMITATIONS
OF GDP
Exclusions in GNP measurement
• Doesn't count unpaid labor, especially
women's care work

• Doesn't count externalities - costs that are

passed on to someone else. (Ex. polluting
factory are able to pass on the cost of
damage to health and the environment)
Exclusions in GNP measurement
• Does count negative goods (Ex. clean up of
a toxic waste dump is counted in GNP)

• Ignores distribution, quality of life, equality,

sustainability

• Ignores the depletion of non-renewable

resources and environmental damage
 GROSS NATIONAL PRODUCT
• The market value of all final goods,
services and structures produced in a year
by a country’s residents
• Measures the income of all
Filipino
• In a closed economy
(NO foreign sector)
GDP = GNP
CONCLUSION

RELEVANCE OF
NIA

Government Business Firms

Households
Policy Makers

Initiate policies to Make better life For sound business planning

Achieve sustainable decisions and sales forecasting
Economic growth
 REVIEW
1. What is National Income Accounting?
What is National Income Accounting?

A system
to track
the overall economic performance
of a country
 REVIEW
1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
 DIFFERENCE OF GNP AND GDP
• Gross Domestic Product (GDP) – the total
market value of all final goods and services
produced within a country’s national borders in a
year
• Gross National Product (GNP) – the total
market value of all final goods and services that
the country's citizens produced regardless of
their location
 REVIEW
1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
What is Real GNP?

Real GNP is the

sum value of all produced
goods and services
at constant prices.
 REVIEW
1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
What is Nominal GNP?
Nominal GNP is the
sum value of all
produced goods and services
at current prices.
 REVIEW
1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
5. What are the 2 approaches in measuring GNP?
What are the two approaches in
measuring the GNP?

• INCOME APPROACH
measures by summing the income from
production and adding production
expenses

GNP = NI + IBT + CCA

What are the two approaches in
measuring the GNP?

• EXPENDITURE APPROACH
measures by summing all final expenditures
on goods and services

GNP= G + P + B + (X – M) + NFIA + SD
 REVIEW
1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
5. What are the 3 approaches in measuring GNP?
What approach is used here?
What approach is used here?

Compensation Income 110 M

Entrepreneurial Income 50 M
Corporate Income 15 M
Government Income 22 M
National Income 197 M
Indirect Business Taxes 5 M
Capital Consumption Allowance 12 M
GNP 214 M
THINK!
Does a higher GDP
mean
a better
standard of living?
 REVIEW
1. What is National Income Accounting?
2. What is the difference of GNP from GDP?
3. What is GNP computed at Real value?
4. What is GNP computed at Nominal value?
5. What are the 3 approaches in measuring GNP?
6. What are the exclusions in measuring GNP?
EXCLUSIONS AND LIMITATIONS
OF GDP
• Intermediate products
• Secondhand sales
• Non-market transactions

• Quality of life
• Composition of output
What values do we need in order
for our country to develop?
 ASSIGNMENT
Copy and Answer on a whole sheet of paper.
Due next meeting.
Part II: Essay “ What values do we need in
order for our country to develop?” (not less
than 10 sentences)